Bad. Moody's.

"People who buy South African government bonds surely do their homework enough to know the balance between risk and the potential rewards. Our bonds yields compensate the folks chasing yields enough to know that they are assuming risks, the above risks that Moody's have already outlined. But there is absolutely no ways that this is a positive event. Perception is reality, and unless we change our ways."

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Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E. We closed better yesterday, having traded higher through much of the day. The same sector that had been trounced Wednesday, resources, bounced back strongly in Thursday's session. The underlying commodities all helped enormously, I suspect that the anticipation is growing out there that the Chinese authorities are going to "do something" and that might involve the triple R again. As I read it, Beijing HQ are reluctant to do anything aggressive as a result of the property market still being an inflationary concern.

The Shanghai composite on the other hand has possibly been the worst equity markets out of the majors. Year to date, the Shanghai Composite is down nearly 6 percent. The expectations for a Chinese stimulus package has been raised, and just this morning I am reading headlines like: Asian Currencies Gain With Oil on Stimulus Bets; Copper Advances. What did the character, portrayed by Morgan Freeman say about hope being a terrible thing? I for one am optimistic, I suspect that in our industry you have to be.

Session end the Jozi all share index had tacked on 200 points, or 0.57 percent to end at 35616 points, now over 1000 points away from the all time highs. Collectively the resource shares added one and a half percent. Amplats caught a serious bid and traded up three and three quarters of a percent. But the fact remains, around 20 percent of the work force turned up for work yesterday, and now the company will proceed with firing more than 20 thousand workers. Check this MiningMx story out, we will deal with the second part straight after this: Implats chases peace in 4.8% wage hike. See that, Implats are desperate to avoid the same issues that Lonmin had. And if you read the transcript of the Moneyweb interview last evening with Nick Holland, it does not make for good reading. And that leads us to perhaps the biggest issue about our country, the ratings downgrade.

In case you missed it: Moody's downgrades South Africa's government bond rating to Baa1; outlook remains negative. These are the points that matter, that are at the start of the release:

"The key drivers for the downgrade include:

1. Moody's reassessment of a decline in the government's institutional strength amidst increased socio-economic stresses and the resulting diminished capacity to manage the growth and competitiveness risks.

2. Shrinking headroom for counter-cyclical policy actions, given the deterioration in the government's debt metrics since 2008, the uncertain revenue prospects and the already-low level of interest rates.

3. The challenges posed by a negative investment climate in light of infrastructure shortfalls, relatively high labour costs despite high unemployment, and increased concerns about South Africa's future political stability.

The rating outlook remains negative because of the uncertainty surrounding critical policy decisions that will be made at the upcoming National General Conference of the ruling African National Congress (ANC) party in December. The ANC's National Policy Conference at the end of June left many such discussion topics unresolved. South Africa's medium- to long-term political and economic stability depends crucially upon how well the party is able to coalesce the ongoing policy discussions into concrete and effective decisions by that time."

So what do we think about this? People who buy South African government bonds surely do their homework enough to know the balance between risk and the potential rewards. Our bonds yields compensate the folks chasing yields enough to know that they are assuming risks, the above risks that Moody's have already outlined. But there is absolutely no ways that this is a positive event. Perception is reality, and unless we change our ways. Big government, you know my views on that. Whilst politicians dither around concentrating on issues around who is going to succeed who, our borrowing costs are going to rise. Or so Moody's think. And that figure of 40 percent government debt to GDP excludes of course parastatal debt, which government effectively backstops. I remember seeing a number closer to 80 percent. Possibly the biggest issue is that government is stuck in this mindset that they must be the main job creator. Think about how poorly Telkom have done, Vodacom are announcing just this morning that should be looking forward to 4G speeds at the end of the year. At the same time Telkom are increasing their ADSL speeds prices. Excuse me for being grumpy on this point.

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People on the streets said no. But the government pushed through further austerity measures in Spain. People on the street were visibly upset, venting their anger in running street battles with the police. The only silver lining is that the banks might need less than initially thought to shore up reserves. Check out the WSJ piece: Focus Turns to Spanish Budget Plan. With borrowing costs rising, and one checkbox ticked off, the Spanish budget, all eyes turn to what the conditionality would be for Spain to accept the European funds. I found this via my Atlantic Wire RSS feed, and then suddenly thought, where are all the haters now? Still, Facebook might have overpaid for Instagram now, but this suggests that they are moving in the right direction: Instagram Beats Twitter in Daily Mobile Users for the First Time, Data Says. Makes for interesting reading, maybe the Zuck is not such a schmuck you see. Anyhow, I back them all. I honestly think that Facebook is going to be an integral part of your life in the same way that mobile phones and then smart phones exploded. You want to be able to show people what you are doing, and interact with them. Some people really like that (excuse the pun) and others not so much. Keeping Facebook shareholders awake at night is the monetization of this fantastic resource. The minute I saw this article at the beginning of the week I knew that it had been written by Joe Weisenthal. He gets very excited about speed and news, but this guy is in a league of his own. The story is titled Meet Kevin Reynolds, The Man Behind The Most Mindblowing News Service In The World. He does look like a gold bull. In this office when someone comes on the screen with long hair, an earring and normally very animated, or just plain weird looking, we normally identify that fellow as a gold bug. Reynolds looks like a gold bug. But for all the traders out there who rely on the speed, he might well just be the most important guy at Bloomberg, for them. Other than Michael Bloomberg himself of course. Also via the Atlantic Wire, the story of the Renoir found at W.Va. flea market (that is) likely to fetch $100,000 at auction. The woman stuck the painting in a shed after having bought it for 7 bucks, thinking that it is a fake. But that is the point, right. The fake was sold for 7 bucks, the real deal might fetch 100,000 Dollars. All because it is supposedly the real deal. Not the quality of the painting, but rather the authenticity increased the value. Imagine if the same held true for the house that you lived in? Imagine finding out that Herbert Baker had drawn up the plans of your house, I suspect that this is the same thing more or less.

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Byron's beats

After the market closed in the US last night Nike, one of our favourite aspirational consumer stocks reported first quarter earnings which again disappointed the market. Revenues were up 10% to $6.7bn while earnings per share were down 10% to $1.23 beating estimates of $1.13. Earnings decreased from last year because of a decrease in margins, higher selling costs and an increase in the tax rate. Future orders were up 6% which was less than expected, this is why the stock is down premarket. Inventories increased 10%.

Analysts reckon earnings will be around $5.26 for the full year so trading at $96 the stock is priced for some strong growth. Let's look at the concerns from this announcement and then discuss the positives.

The fact that margins are decreasing is an issue but not unexpected. Materials are getting more expensive while labour in China is not as cheap as it used to be. Ironically increasing wages in China will benefit Nike from a sales point of view. Although this is declining, the margins at 43.5% are still fantastic and as the brand continues to grow their pricing power should strengthen.

Inventories have also been an issue. The company has experienced less demand, especially from China, than expected which means they are sitting on too much stock. This is something which will take time to offload and why the Nike share price has underperformed of late.

So what of this lack of demand from China? To put things into perspective China is responsible for 17.5% of their earnings mix and much of their growth over the last few years. We all know that China have hit a bit of a speed bump but I really don't think Nike should be too worried. The Chinese consumer is going to be the countries next growth spurt.

On the positive side North America who are responsible for a whopping 67% of profits grew earnings by 17%. Remember my article yesterday which spoke about the US consumer who was showing good signs of growth? Nike, with such big exposure to the area will certainly benefit. In the other regions Europe and Japan saw some hefty declines while emerging markets grew 17%.

When you look at these valuations you also need to note cycles amongst big sporting events and spend on R&D. Nike have been at the forefront of innovation in the industry when it comes to products, advertising and sponsorships. This company sits at the forefront of aspirational consumption whether it is their fantastic brands or peoples drive to get more active and healthy. The share price has pulled back and we will use this opportunity to add.

I'll leave you with a statement from CEO Mark Parker concerning Nike's strategy going forward.

"We had a strong first quarter and a great start to the fiscal year. NIKE, Inc. delivered an amazing array of innovation across some of the biggest moments in sport. Innovation is how great companies sustain growth and build competitive separation. We'll continue to make strategic investments across our portfolio of businesses to capture our full potential over the long term and drive shareholder value."

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Currencies and commodities corner. Dr. Copper is higher at 375 US cents per pound, the gold price is higher at 1777 Dollars per fine ounce. The platinum price is also higher at 1665 Dollars per fine ounce. The oil price is marginally better after a strong run last evening, 91.98 Dollars per barrel is where the price was last quoted. The Rand is slightly weaker. Perhaps the ratings downgrade is starting to have some impact. Time will tell. The weighing machines never lies, even when you stare at the scale hoping you will weigh less. The only positive struggle in life that goes in the wrong direction is your weight. The market, well, that almost never lies. The balance of the market might get (very) hot headed, but it never lies. Have a good weekend.

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Sasha Naryshkine and Byron Lotter

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Nationalization is not just dumb but expensive too.

"Mining is a high risk, capital intensive industry that requires access to large numbers of highly skilled people, most of whom are motivated by personal gain. There are very few examples of efficiently run state-owned mines that make a positive contribution to their country's economy."

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Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E. Whilst some fellow who seems to capture all of our imagination was appearing in court up the drag in Polokwane, the markets were taking a serious drubbing here. Again, with all the unrest in the local mining industry, the local miners led the way south again. Gold miners lost over four percent, the platinum stocks collectively got thumped three and two thirds of a percent. I saw another analyst report on one of the majors suggesting that it was a conviction sell. Yuck. Session end the all share had sold off a whopping one and three quarters of a percent to 35415 points. And we have waved cheers to three and one quarter of a percent in the last eight or so trading sessions.

OK, not all of the blame can be pointed at the local miners and the unrest for having a negative impact on our markets since last Monday or so. Much of the finger pointing can be in the direction of the Spanish government dragging their heels. Or at least that is what Mr. Market thinks. In fairness to the Spanish they have been preparing for this point, as per the Reuters report: Spain to pass reforms, budget cuts with eye on aid. Last night was the second evening, where protestors who are obviously opposed to more cuts, took to the streets to vent their anger towards the government on all the spending cuts.

To be a politician in Southern Europe is probably akin to flying a Zero on behalf of your political party on a Kamikaze mission of cutting benefits. How can you possibly expect to be re-elected? Perhaps I am being very dramatic, but the last lot were booted as a result of perceived poor economic planning (we are all to blame, right?), how much of a chance do the current crop have? I suspect they are all one term leaders. Perhaps Hollande will last of the current crowd, but maybe that is just because he was elected "last" in the cycle.

Whatever the case, markets have pulled back a little in recent days. We always consider these to be buying opportunities, there have been a whole lot of dividends that have accrued lately, over the last week. Opportunities are there for the brave, but as an investor you should always be looking for opportunities. Email us, reply to this message as a full account holder. Of course, if you want an account with us too, let us know, we can facilitate all transactions for you.

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I think that whilst the debate around nationalisation of the mining sector in South Africa is not front and centre of the conversation, it is always "trending" beneath the surface. An avid reader sent us a piece that was published over a year ago, BUT is still relevant. Why? Because not only does the author Daniel Limpitlaw point out how production falls, but he points out how expensive it is to revitalise the sector once the long period of under development and under investment have passed. Two graphs that I have hacked from the piece titled: Nationalization and Mining: Lessons from Zambia. I hacked these two graphs.

It suddenly struck me that perhaps the global demand picture did have something to do with the copper price. Which, as per this graph below shows you that for a couple of decades almost nothing (price wise) was happening:

But the key to the piece that Daniel has written is that once nationalised, mines chase away all the skills required to build the mines effectively. Why? Well, here are some reasons, an excerpt from the piece:

"Mining is a high risk, capital intensive industry that requires access to large numbers of highly skilled people, most of whom are motivated by personal gain. There are very few examples of efficiently run state-owned mines that make a positive contribution to their country's economy, the copper operations of Chile's Codelco being the exception. Chile's success in running nationalized mines is in no small part due to the fact that Chilean mining schools have historically produced more than double South Africa's number of mining engineering graduates. These Spanish-speaking engineers are also less mobile than South African graduates in the English language dominated world of mining."

If you remove the personal incentives for the stakeholders, productivity falls. Without a doubt. And then another telling half a paragraph should seriously be governments mantra on this issue, putting to rest the debate once and for all.

"Removal of the risk/reward profit motive will accelerate the current flight of skills to other mining locations—already the Australians pay a substantial premium over local salaries for mining engineers. This will leave South Africa unskilled, uncompetitive, and begging for international buyers for the now rundown mines, with nothing but ruined assets to sell."

Do you honestly think that Chinese capital would be the White Knights in the event of a mining disaster in South Africa? I doubt it, money knows one colour and that is green. If the shortish piece written by Daniel is the only other thing that you read today, do it. And as ever, if you have "stuff" to share that you think other people will enjoy, send it onwards to us.

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Digest these links.

There are many things that intellectuals cannot understand. Perhaps those folks are way too analytical. One of those things is the human element. A couple of days ago a surprise US Consumer confidence (read) at seven-month high in September. These are real humans making assumptions on how they feel currently and this always has a marked impact on the economy. As one fellow on the box said yesterday, the US does not need to do much to start addressing the debt issues, all they have to do is to grow their economy by more than 3.5 percent per annum. Yes. This is true. How to get there, well, that is another debate entirely. A debate that culminates in presidential elections in around 40 days. Gosh the US presidential debates are actually going to be exciting! You might have heard the Mitt Romney gaffe around the 47 percent, so this is a good post to read: Who really benefits from big (US) government?

The unintended consequences of your actions possibly mean that people do not think the implementation of something new in the first place. I am talking about this, from the FT: L'Oreal chief hits out at 75% income tax. Look, the French plan is to tax the Über wealthy for a couple of years, just so that the rich can pull their weight too. This issue is a global one, obviously people with more resources will be able to sail through a financial crisis easier. This line of thinking is very popular, but there are unintended consequences. The rich have more choices than the middle classes. The rich are mobile and can move almost anywhere. Luxembourg, Cyprus and Malta must be looking attractive. Dare I say it, even places like Serbia.

Forget Apple, Howard Lindzon had a compelling argument for why Google will be the First Trillion Dollar Company. All points are good points. They do make some sizeable and quality acquisitions. Perhaps Twitter is next, says Lindzon. And just two days ago: Driverless Cars: Now Street-Legal in California. I for one would prefer to be driven around and get work done in the back seat.

I always say that communication is hard coded in each and every one of us. That is why I am not too surprised to see this WSJ article suggest Cellphones Are Eating the Family Budget. So people spend more on their phones on average than they do on cable. Perhaps the Emmy's in years to come will be replaced by the Youtube's and nerds will rule! I am not too worried about the Americans cutting back on food, if you know what I mean. This is a preview into the world of MTN and Vodacom, the fact that people are spending on their mobile bills over their traditional forms of entertainment, such as visiting movies or going shopping leads me to believe that will start to happen here too. It is of course going to have to take some time.

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Byron's beats

Last night I came across this WSJ article titled Consumer Rebound Based on Solid Foundations which gave some interesting stats on the US housing market. It is subscription only so I will summarise it and add a few of my own thoughts.

It seems like the US housing market is the only shining light amongst a whole slew of negative economic data reads. But how significant is it and does it have the shoulders to carry us through these tough times? According to the article, housing prices have increased 5.9% so far this year up until July. In 2010 68.6% of US families owned a home compared to 49.9% who owned stocks. The average value of each home was $209,500 while the average value of stockholdings was $29000.

What does this mean? When the stock market picks up people often refer to the wealth affect on consumer patterns. Because ones share portfolio has picked up they feel more confident to consume. Looking at the stats above you can see that the housing market is a much more significant asset to most consumers and should therefore have an even bigger wealth affect.

This is why Warren Buffet says that when the housing market turns, that is when the US economy will be in full recovery. And we have already seen signs of the US consumer showing more confidence. The article also elaborates on the affects of the financial crisis on confidence. Ever since the crash there has been a standoff between companies and consumers. Will they spend? Should we invest? Should we save? Fingers were burnt and trust was lost in a matter of days. It has taken years to build up that trust again. And with the emergence of the European Sovereign Debt Crisis in recent years the process has been even slower.

So does the US housing market have what it takes? The US consumer is integral to global growth as demand for Chinese and many of the big European exporter goods starts to pick up. Mario Draghi said that Europe will start seeing growth as early as next year. The Fed is also on board pushing that US housing market and trying to install that much needed confidence. Once these things start to take its toll on top of the emergence of the Chinese consumer, global growth should get out of this rut. That is why we should be buying assets now for our own personal gain and to add our little bit to the confidence index.

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New York, New York. 40^o 43' 0" N, 74^o 0' 0" W Stocks across the board took some tap as the "issues" in Europe once again came to the fore. I suppose the stone throwing, the clashes with police in both Madrid and Athens do little for confidence. The odd Molotov cocktail here or there do very little to calm the nerves about Europe. When I heard some fellow say something to this effect "We all thought that the problems of Europe were solved, but clearly when we see the visuals of today, that is clearly not the case" I fell on the floor laughing and gripping my belly. What I thought? I was completely gob smacked, some fellow on the floor at the NYSE was changing his mind again.

But, this is the reality, the hypersensitivity of markets and the skittishness of all involved means that the rally we saw recently still is being questioned by many. I think that again this is a good thing. As buyers of quality stocks, we view this as a positive. Why? Because if there are loads of people who are unconvinced about a specific asset class, and one has long term conviction about a specific company, then the balance of probabilities is weighted towards you. Does that make sense to you? Session end stocks sank, blue chips ended one third of a percent worse, whilst tech stocks lost over three quarters of a percent with the broader market S&P 500 somewhere in-between that.

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Currencies and commodities corner. Dr. Copper is last at 372 US cents per pound, higher on the session. The gold price is flat at 1755 Dollars per fine ounce. The platinum price is also flat at 1635 Dollars per fine ounce. We were just wondering here what Amplats line was with their labour force this morning. 90.24 Dollars will buy you a barrel of WTI oil as per the last traded price on NYMEX. Except one contract is 1000 barrels. So in order to get that price you will have to buy 1 contract. The Rand is steady. There is of course the inclusion into the Citi World Government Bond Index of South African government bonds. As such people would be natural buyers of our bonds. And I guess, although much of the buying has probably been done, this is good news! And the equities market has also bounced back today, which is also pleasing.

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Sasha Naryshkine and Byron Lotter

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Local is not that lekker

"David McKay has written a really good piece this morning in MiningMx, titled Strike contagion shuts down 40% of SA gold. 40 percent? Wow, that is almost tragic. And as the quoted source suggests, this is going to be an opportune time for the South African miners to reflect on their growth plans. If any. Time to rethink those, time to reflect on costs and dare I say it, this no doubt will lead to job losses."

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Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E. When you take a public holiday your equity markets are not going to trade in the same fashion as global markets. Resources took another pasting here yesterday, the Chinese infrastructural plan and the Fed open ended Mortgage backed securities buying programs gave a temporary boost to the sector, but there has been pain since then. Collectively the sector was down nearly two percent. The pain continues for the local miners, Coal of Africa mine workers went on a protected strike, sending the share price down nearly 15 percent.

It was not only the strikes, South African coal prices fell to a two year low according to a Reuters article that I read. AND, there were no bids in sight, on Monday that was, I guess no real surprises there. I could not find a longer dated graph, but saw that Australian thermal coal prices were down over 26 percent over the last year. But still, the price of thermal coal is up 25 percent over five years, not bad considering that we had the deepest global recession of our time. But as per Bryon's beats yesterday, the debate exists over commodity prices and the Chinese demand picture going forward.

I hate saying that, going forward..... Super cycle sustainability, that is the debate that is doing the rounds, I suspect that 300 odd million Chinese that need urbanising over the next 15 years are definitely going to require places to live and related infrastructure. Perhaps those apartments do not need to be built, and have been built already. I remember reading that there were around 60 million empty apartments. I must have been reading some Hugh Hendry or Jim Chanos propaganda pieces. Although as someone pointed out, 300 million new folks to the cities means 100 million new jobs, more or less. Forget the apartments, think about the jobs. Manufacturing jobs? Manufacturing what and for whom? All the new consumers in the world I guess.

At the beginning of next week we will be more than 75 percent of the way through the year. Only 25 percent left to go. Our market is up 12 percent year to date. Stinking up the joint are the platinum stocks, down 21 percent year to date (following a 28 percent drop in 2011), worse than the gold stocks which are down 17 percent year to date. The sectors to have been in have been property, retail, industrials and financials, in that order. Resources and construction have been the sectors to avoid. Some, like Bill Miller, might argue that you ignore the cyclicality of those sectors, your returns will almost always beat the market. It worked for him and his Legg Mason Capital Management Value Trust, which he managed. Although Miller suggested that being measured on a year to year basis gave him some lucky breaks now and again. Such is life. The right place at the right time.

I think that the strikes issue deserves more than our full attention. It deserves the attention. David McKay has written a really good piece this morning in MiningMx, titled Strike contagion shuts down 40% of SA gold. 40 percent? Wow, that is almost tragic. And as the quoted source suggests, this is going to be an opportune time for the South African miners to reflect on their growth plans. If any. Time to rethink those, time to reflect on costs and dare I say it, this no doubt will lead to job losses.

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Tiger Brands, that purchase announcement from yesterday, the purchase consideration is even higher than I initially thought. The total purchase consideration by Tiger of Dangote Flour Mills shall not exceed 4.1 billion Rands. That is the maximum that they are going to pay. The initial 1.5 billion Rands stands, and THEN on top of that, Tiger are going to pay 14 times the current years adjusted profits after tax (according to a pre determined formula) for the current financial year for DFM which ends on the last day of the year. Their share at least, 63.35 percent.

All you need to understand is that they will not pay more than 4.1 billion Rands, which in itself is a hefty amount, whichever way that you look at it. But it turns out that the chances of them paying that much are remote, in order for Tiger to start paying Dangote Industries more money (than the 1.5 billion Rands), Dangote Flour Mills would have to increase their "audited profits after tax" by more than 73 percent. And in order to get to the 4.1 billion Rand mark, on the same measurement, profits after tax would have to increase by 374 percent on last year, 2011. Seems funny, but I guess all parties have had a chance to check this out and would be comfortable with this agreed formula.

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Digest these links.

I have heard this idea a lot, the Germans, you know, need to exit the Euro zone. What? Really? Whatever for? Now these are articles written by really smart people. Martin Wolf from the FT (subscription only) has written Why exit is an option for Germany. Paul reckons that the fellow is overrated by the community. He writes well. But I agree, what kind of an idea is that? Especially when I read in the WSJ (also subscription only sadly), in this article, State of Europe's Banks: Safe and Stressed that German lenders have nearly 140 billion Dollars worth of exposure to Spain, I can see the need for closer ties. Not further away. So whilst we continue to muddle through the European sovereign debt issues, we will continue to see stories about what is best for Europe. Written by Americans and English people.

Meanwhile, IMF Managing Director Christine Lagarde Calls for Action Now to Secure Global Recovery. All this against the backdrop of anti-austerity protests in Madrid last evening, or perhaps these are just people demanding that their beloved football team should be doing better. But just this morning the boxes in front of me suggested that Spain may ask for 60 billion Euros. And now Catalonia is apparently seeking independence from Spain. Wow. All 7.565 million of them want to be somewhere else, having their own football team, seeing as the Spanish national team never gets to show their skills in Barcelona. The Basque region also wants autonomy and they have a superior economy at least. Sigh.

Well I never. When I read this headline from a post Astrology guides some financial traders, you would excuse me for giggling out loud. No, you would excuse me from snorting my drink through my nose. Sis. If you read the post you see all the suckers out there looking in the wrong place for the edge. Financial astrologist? I think that I have read everything useless now.

You must have read about that crazy dance and YouTube sensation PSY who has that block buster video Gangnam Style. That video has actually been nominated by MTV Europe as one of five videos in the category music video of the year. The first K-pop to "make it" globally. There are in fact two financial elements here, first: 'Gangnam Style' Has Been Good News for Psy's Dad's Semiconductor Company. No really. And the stock is up another eight percent plus today, check it out: D.I Corp. PSY's dad looks like he has been at D.I. Corp for 22 years, according to the company's website. But has probably seen the best run ever in the stock in two months. The 2nd financial element is that the song is satirical in nature, read this piece: The Wholesome Hidden Message of 'Gangnam Style'. Korean credit card debt issues look more serious than the silly dance.

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Byron's beats

This morning we received a very detailed 6 month earnings report from Capitec which, as expected from the trading update, showed very good growth. After reading it and their explanations of the unsecured lending market I again feel reassured that the banks are paying a lot of attention to the potentials of a bubble.

"The continued growth in the unsecured lending market should be considered against the background of the restructuring of the market that occurred with the introduction of the National Credit Act (NCA) in 2007. The NCA restricts the interest rates and fees that may be charged on unsecured loans. The resulting reduction in the cost of credit makes unsecured credit available to a wider market. Higher income clients, with monthly income in excess of R15 000, have progressively accounted for an increased portion of unsecured credit granted. These clients carry a lower risk. Our analysis also indicates that increased affordability, together with growth in disposable income has meant that the growth in unsecured lending has not resulted in borrowers becoming over-indebted."

When you look at the numbers however you realise that the company is far from just an unsecured lender. Of their 4.2 million clients, 3.1 million use the retail bank, lending only clients equates to 1.1 million. They clearly saw a gap in the market for low cost retail banking and took it with both hands.

Headline earnings per share were up 35% to 702c, the interim dividend increased 35% to 169c while return on equity came in at 28%. The company is expected to make 1440c for the full year as we finally see the earnings grow into the share price. That is also because the share price, at R205, has not done anything for 6 months. Trading on a forward multiple of 14.2 this is the first time in a while Capitec has not looked ridiculously expensive, but why?

Interest income is still the biggest profit driver which means the company is very much exposed to the concerns of an unsecured credit bubble. Even though the companies seem to be in control, the market is still uncertain. African Bank is now trading well below 10 forward earnings after pulling back over 20% since April. They of course are all unsecured lending so you can see what kind of multiple would be given to that segment of Capitec's business.

I still feel confident that the unsecured lending growth we have witnessed has been sustainable and very much needed in a nation where credit was very hard to come by for the masses. We prefer African Bank in the sector and will continue to add especially at these low prices but Capitec also presents a good opportunity with a bit more diversification.

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New York, New York. 40^o 43' 0" N, 74^o 0' 0" W All fall tumbling down. That is what my eldest daughter used to say when she was small. She is still small, but she is not that small anymore, grade 1 means she is growing up. Not growing up were the indices yesterday on Wall Street, all sliding into the close and ending the session at the lowest points. Still, stocks have had a great run over the last 90 days, the S&P is up nearly eight percent since the end of June.

I have become fascinated with the housing recovery in the US. As we know, a man (or womans) home is their castle, or so the old English saying goes. If the value of your house increases, then I guess you feel better about the future, I guess that is right. But when I read Housing Market Displays New Vigor as Prices Rise from the WSJ and this then I guess translates to Consumers Back to Feeling Flush, from the same publication the WSJ. One of my favourite bloggers, Prof Mark J Perry, who has moved publishing platforms has the following to say: 2012: The year of the housing recovery, updated.

The conclusion is telling: "The ongoing monthly and annual increases in the FHFA's House Price Index at a consistent pace over the last six months that hasn’t happened since 2006 for consecutive monthly increases and 2007 for consecutive annual increases provide more support to the growing consensus that 2012 will mark the year of the U.S. housing recovery." I guess today we get new home sales data, which will either disappoint or no doubt confirm that the US housing market is on the right track. I suspect that we might be in for another upside surprise, which will be good.

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Currencies and commodities corner. Dr. Copper last traded a smidgen shy of 370 US cents per pound. The gold price remains at elevated levels, up at 1763 Dollars per fine ounce. The platinum price is also gaining some traction, slightly better on the session at 1627 Dollars per fine ounce. The oil price is lower at 90.55 Dollars per fine ounce. The Rand is surprisingly steady for all the noise around the mining sector. The Rand was last quoted at 8.22 to the US Dollar, 13.33 to the Pound Sterling and 10.58 to the Euro. We are starting off the day with a bloodied nose here. Stocks have sold off nearly a percent so far today. Spain and pain again. Yields on the 10yr above 6 percent. Not good.

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Sasha Naryshkine and Byron Lotter

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Caterpillar's chrysalis ball

"There is a huge debate going on about whether the commodities boom is still sustainable or whether we are going to see a collapse. To add fuel to the fire Caterpillar, a massive proxy for the commodity market, cut back earnings estimates for 2015."

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Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E. Friday was such a long time ago. So long ago that I could even have a couple of swims on the weekend, it certainly was warm enough. I was eying the screens out from time to time, but family time was top of the agenda. On Friday however, resources were thrashed, platinum and gold stocks were taking pain, a lot of that had also to do with the Rand having firmed up significantly, post the interest rate decision on Thursday last week. Yesterday whilst we were lazing around and revelling in our heritage, wearing whatever attire we thought fit, the Germans were reporting lower confidence numbers, released by the IFO institute. That sent markets yesterday lower, not great news, but I suspect that the Europeans muddle through all of this, worrying German numbers will do more to draw them all closer together.

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The WSJ reported on Friday afternoon, Anglo Struggles to Extract Itself From Deep Hole. The story is short, but it highlights what we have said all along, the Brazilian iron ore project (which was supposed to have started already) is not turning out the way that the business wanted. As we understand it, Carroll brought the project to the board. And if that is the case, when the project eventually comes online in a couple of years time, at what cost? And where will the price be? When will the price of iron ore be at that time? And what will the demand picture look like? The more burning questions are closer to home however, what will Anglo American do with their stake in Anglo American Platinum? As the article points out, only two percent of Anglo American EBIT is contributed by Amplats. But as much as 25 percent of the parents value is made up by the number one platinum producer.

Meanwhile the problems persist at Amplats operations, the company is still hit by no shows. The company is threatening legal action against their employees. There are more reports on the wires that suggest that there are more talks around wages today. Whilst I agree that the jobs that the rock drill operators do are very dangerous, how much should that skill set get paid? Seemingly nursing is a dangerous job too, but in order to qualify for the profession, nurses have to study post school. I stumbled across this list: Average years of schooling of adults (most recent) by country. The USA is top of the list, with 12 years. That is the average. We are in 50th place, with 6.1 years. I was amazed that Portugal is less than us. But richer, for historic reason. Our 6.1 years average adult education is below the global average of 6.2 years. If we want to earn more, we should earn the right to earn more. By furthering our own educations.

I wonder what implications this is going to have in South Africa, the higher wage settlements in the mining sector. I suspect that we will see this spread to other parts of the economy, which could mean that retail could continue to do well. We are of course all watching this very closely.

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Tiger Brands have announced this morning that they have effectively concluded their purchase of 63.35 percent of Dangote Flour Mills, purchasing the equity stake from the parent company, Dangote Industries. Dangote Industries will continue to hold a ten percent holding in Dangote Flour Mills. You will recall that we wrote this up at the time, in early July when the announcement was first made: Tiger Brands close to acquiring stake in Nigerian company. As we wrote at the time, whilst Nigeria is an exciting market for many companies globally, the purchase consideration (which we calculated at the time) was around 2 percent of Tiger's market cap.

Now that we have some more concrete numbers, in terms of the purchase consideration, we can run those numbers again. I remember just after the announcement was made I sent our Nigerian Brokerage connection a couple of questions, which were answered. My concerns were about a huge debt ramp up by Dangote flour mills. Or DFM as the company calls it in the Tiger Brands press release.

I said to Jimi, the analyst in Nigeria who covers the sector: "The simple question that I have is that there is a creaking debt load, and a big jump in short term borrowings from 2010 to 2011, what is this? I cannot find any extra reference on the internet sadly." And then I asked another question: "And secondly at what rates was this funding obtained?"

Jimi then said to me: "Dangote Flour has piled up some huge debts in the last year. Unfortunately its pretty difficult to trace these borrowings to an expansion in production capacity or other capital expenditure. In addition to the increase in the short term borrowing, we also see an increase in other short term liabilities. Has management has piled up debt ahead of a sell-out?" That last question is pretty telling, but it stares at you in the face. Jimi also told me that lots of the Dangote subsidiary companies borrow from the parent, which wields far greater power I assume in terms of funding rates.

But if you were worried, fear not, because of course, as Jimi points out: "I'm sure Tiger Brands will have done their due diligence on these issues because through their acquisition of UAC Foods and Deli Foods, they have been able to deepen their knowledge of the Nigerian market. The deal may have been attractive to Tiger Brands because of Dangote Flour's market share of the food business in Nigeria." Local knowledge is power you see. And talking to people who consume the products, that is quite fun too. That was my interaction with the fellow at the time.

So what did Tiger end up paying? More than I thought initially. 1.5 billion Rands, in local currency that is 30.093 billion Naira. Tiger suggests that they are getting a good deal, as all parties would when you do a deal. "The Purchase Price represents a Transaction Enterprise Value to EBITDA ratio of 8.5x based on DFM's published unaudited annual financial results for the year ended 31 December 2011." Not cheap, but not a crazy purchase price, I would have hoped that they would have paid a little less.

Tiger of course give the rationale for the purchase, we know well that quicker to prepare foods, that are cheap enough to compete with traditional fare are more attractive to the locals. Should we be eating bread down here? That is a separate question, pasta and bread are filling and cheap, and attract almost everyone. Who doesn't enjoy a nice slice of warm bread or fresh pasta? I make my own pasta, really, it is very quick and very easy to prepare and even quicker to eat.

The key paragraph for me in the rationale follows a generic Mark Mobius style explanation, but it makes sense: "Nigeria is a key strategic growth market in West Africa, the second largest African economy and one of the fastest growing economies in subSaharan Africa. With an estimated population in excess of 160 million and projected average real GDP growth forecast over the next three years of approximately 7% per annum, Tiger Brands believes, particularly for consumer goods, that the potential of the Nigerian market is significant. The Transaction will substantially add scale to Tiger Brands' existing Nigerian businesses and strategically positions Tiger Brands to take advantage of the market opportunities within the Nigerian milling sector and related essential food categories."

The market has responded favourably to the deal this morning, the stock is up nearly a percent. We will continue to filter this recent news, but we are still at these levels a buyer of the shares.

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What? You want more? Over the first weekend of sales of the iPhone 5 there were "only" five million. People were expecting closer to six million, even though the phone itself was the single biggest weekend for Apple ever. I even heard about a scuffle outside the Apple flagship store in New York. That was not good. What was good however is that the phone sold out completely. Not one left. Apple spent a month building the phone en masse. So we are going to have loads more, right? Well, not so fast, we might have a slight delay, when I read Foxconn China plant closed after 2,000 riot. This is just one Foxconn factory, the Taiwanese company employs one million people in China. So perhaps whilst this continues to highlight the concerns of the working conditions (this is a global thing you see) the roll out for richer consumers of their favourite product might be stalled for a while. Either way I guess this is not the best news for Apple the company. Related, the WSJ reports New iPhone Sellout Tests Apple Supply.

This I guess is fairly typical. Government always tend to think that revenue collections are going to improve as time progresses. The reality of course is that deep economic contractions expose their, well, non budgeting. Check the chart of the day from the Atantic wire: Countries Tend to Be Too Optimistic About Their Budget Forecasts. As the author says: "The seven most optimistic countries include a who's who of the European debt crisis: Greece, Ireland, Portugal, Spain, and Italy all were among the most optimistic." Governments? Over promising? Well I never. Still, this hardly makes the lives of ordinary citizens any easier, as you can see from this slideshow from the New York Times: In Spain, Austerity and Hunger.

Wow, I thought that this story was worth a look at. It is titled Weapons of Mass Urban Destruction. No, it is not about insect repellents and sprays, but rather about Chinese motor vehicle consumption. 1 million people at a motor show? That line "China's urban population is projected to grow by 350 million people by 2020, effectively adding today's entire U.S. population to its cities in less than a decade." is still difficult to digest. I think that this still bodes well for infrastructure development, not only in China, but in India too. Do you remember when you got your first motor vehicle? How did you feel? Empowered. You now could move around. If you think our traffic here in Jozi is bad, it is only going to get worse. According to the piece, 64 percent of all people will be in urban areas by 2025. Time to live at work, or work at live (home) more now than ever before I guess.

Staying with Motor vehicle sales, surely "things" can't be so bad if U.S. cars sales (are) expected to reach a 54-month high this month. I guess the bears will say that we are still around 3 million away from the highs. But still, that graph looks good to me.

This Bob McTeer post Will The Banker Bashing Never End? asks some important questions about society. We need a scapegoat. And we lump all institutions together. Read it, it will enlighten you no doubt.

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Byron's beats

There is a huge debate going on about whether the commodities boom is still sustainable or whether we are going to see a collapse. To add fuel to the fire Caterpillar, a massive proxy for the commodity market, cut back earnings estimates for 2015. Yes you read that right, they have estimates going that far forward. The company said it is expected to earn between $12-$18 compared to previous forecasts of $15-$20 a share.

Before we look at the commodities debate lets first look at the Caterpillar statement. To be honest I wouldn't look too much into these numbers. There are still so many uncertainties ahead and 2015 is still 3 years away. On top of that, the earnings range is huge, $12-$18 leaves a lot of room for error. This year the company is expected to make $9.62 so even at the bottom of this estimate range we see earnings growth of 25% per annum, which at current interest rates is not bad.

So the specific numbers should not give you sleepless nights, what it does do however is give you an indication of Caterpillars long term sentiment and that has clearly been downgraded. It is to be expected however. BHP have already announced holding back on billions of dollars of capex over the next few years. Waning demand from China on top of over capacity caused by the boom have meant commodity prices have fallen hard over the last few months.

So do we carry on banking on the commodity cycle by buying Vestact recommended stocks BHP Billiton and Caterpillar? The short answer is yes. At the moment sentiment in the sector is weak and that has already reflected in the share prices. The Miners are trading well below 10 historic multiples and even CAT who are trading at $90 look cheap. We believe that growth in China will be more than expected and that talk of a hard landing is ludicrous. When you look at the size and scale of that nation you will realise that the base is still very low compared to any developed nation.

When buying BHP shares you must also realise that they are very well diversified. Developed nations use more energy and copper and less Iron ore as their infrastructure spend plateaus. Billiton are well covered in these areas. So yes, infrastructure spend may be slowing as Beijing shifts its focus but that does not mean that consumption of other commodities will cease. Let's not forget that both India and Africa are still heavily underdeveloped as far as infrastructure is concerned. To conclude, sentiment is low thanks to a fall in commodity prices but we believe that this is a good opportunity to buy while everyone else is fearful.

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Currencies and commodities corner. Dr. Copper is last at 372 US cents per pound steady for the time being. The gold price is higher at 1766 Dollars per fine ounce, the platinum price is also marginally better at 1621 Dollars per fine ounce. The oil price is also slightly higher on the session, last at 92.36 Dollars per barrel. The Rand is last at 8.21 to the US Dollar, 13.32 to the Pound Sterling and 10.58 to the Euro. We have started the day in catch up mode, and are lower to begin with.

Sasha Naryshkine and Byron Lotter

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Non event

"The consumer seems OK. Unsecured lending has eased off the record levels seen a year ago, but higher wage settlements means that the means to service debt improves. And then the two issues that impact inflation the most. Food and energy. The MPC expects ANOTHER increase in petrol prices. Time to get a hybrid. Or a scooter like my mate Howie. Demand is still weak. Which means the risks are balanced and as such, rates were kept on hold."

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Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E. Platinum stocks took another pasting, Impala and Amplats have had a recent run, but Lonmin fell back again. People are starting to come to terms with higher costs for the platinum miners and lower production. I want to hear what the auto makers are thinking about the supply. Industrials as well as retailers had a very decent day, the main event of course was the Reserve bank conclusion of their meeting. After all was said and done the broader market, the Jozi all share index slipped 100 odd points to end at 36360.

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So we had the MPC (Monetary Policy Committee) deliver their rates verdict yesterday. If you want to read the transcript, follow the link STATEMENT OF THE MONETARY POLICY COMMITTEE. During the course of the speech Reserve Bank Governor Gill Marcus was lining us up for what I thought might be an unlikely cut. In fact the first line said it all: "Since the previous meeting of the Monetary Policy Committee, the global growth outlook has weakened further." Maybe.

The outlook for inflation is mixed, and although it has deteriorated somewhat, the MPC expect CPI to stay in the "safe" zone (3-6 percent) all the way through to 2014. Core inflation however is expected to be lower. But I don't like the idea of not being able to consume food and energy. Although the Reserve Bank had noted that both business and labour unions inflation outlook was higher than the analyst community. Well, well.

The all volatile Rand. Wow. How do you take a view on the currency? It is hard. Whilst we have benefited to the tune of 74.5 billion ZAR of inflows to our bond market this year, as a result of inclusion into the Citibank World Government Bond Index or WGBI, the events of Marikana have taken their toll. Plus the deficit has widened as a result of weaker exports and increased imports and service payments. Weaker exports as a result of lower commodity prices, these are factors that we have very little sway over.

And then when she (Marcus, not the cats mother as my mum used to scold me) lined up with a lower growth outlook, I thought, this might be it. And saying that despite these revisions downwards, there could be further downside risk, that was more evidence of slower growth. Nooooooo. Say it aint so. Civil construction seems to be improving whilst residential construction remains weak. There is a glaring gap between government and private sector investment, government is comfortably ahead.

The consumer seems OK. Unsecured lending has eased off the record levels seen a year ago, but higher wage settlements means that the means to service debt improves. And then the two issues that impact inflation the most. Food and energy. The MPC expects ANOTHER increase in petrol prices. Time to get a hybrid. Or a scooter like my mate Howie. Demand is still weak. Which means the risks are balanced and as such, rates were kept on hold. No change. You cost of servicing that debt remains the same. And 19 out of 20 economists polled were right, not too sure where that one put themselves out on a limb.

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Lonmin yesterday suggested that there are going to be job losses, as we suspected. I read in a number of online sources that Amplats and Implats workers are already looking for increases. On top of increases that both sets of workers have already received. But the whole issue of what is a living wage and what is not is definitely been brought front and centre. But the profitability of the business is also as important, there are no private companies that lose money year after year and are still operational. No business equals no jobs. And if I need to remind you, if mining were so easy, there would be a lot more people who are able to do it. Unions would mobilise their own capital and share the spoils. I wonder why they don't? Too expensive to start?

It is not often that one gets a chance to be on the box with two well know folks in South Africa, but that is what happened to me this morning. On Etv, the free to air channel, I was invited as a guest to talk mining from an investment point of view alongside none other than Bheki Sibiya, the CEO of the chamber of mines representing the businesses and Frans Baleni, who is the General Secretary of the National Union of Mineworkers. Some heavy hitters. Issues such as inequality, are the mines doing enough to build the infrastructure and whose responsibility that is, executive pay, worker pay, mineral wealth. The chat was facilitated by host Sindy Mabe, who is one of the anchors of Etv's sunrise. It was interesting for me, because I do not move in the same circles as the other two guests. They seemed gravely concerned, but at the same time both recognise that they are making progress, ironically as a result of violence.

Today, as I understood it from both Baleni and Sibiya, there is a meeting between all the mining companies and all the unions facilitated by the Chamber. I desperately hope that they meet some sort of common ground. Afterwards I managed to get a picture of me snapped with the host, Sindy and with Frans, check it out below, captions added by me. Darn, I should not have worn red!!!

I left feeling worried. But it is human nature to worry. I worry that the demand side for commodities is not always going to look like it has over the last ten years. But I am sure that increased consumption patterns in China, and across the rest of the Asian continent bode well for the platinum industry and perhaps the gold industry. But what about the bulk products? Should there not be a big push towards manufacturing, or am I dreaming right now. I wish I knew what the solutions will be. It is tough. Miningmx had this to say, which makes me hopeful again: Panel appointed to drive platinum labour debate. Yes, more talking, less fighting.

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Telkom. Whoa. I better be nice, I am meeting my mate tomorrow who works there. Perhaps he won't read this, and we must be fearless here, we are not trying to do anyone any favours. Byron often says to me, why do you bother covering Telkom? None of our clients hold them through our recommendation. But then I remember the time that people used to say, but Telkom for the yield, MTN have a very slim yield. We always were comfortable that MTN could continue the growth whilst Telkom had a business in decline. And they are struggling.

Yesterday the company released a profit warning. I needed to find the exact wording, so I thought I must visit the Telkom Investor relations website, but all I got was the image below:

Meh. Enough Telkom bashing, here is the release which I found elsewhere: "Shareholders are advised that basic earnings per share from continuing operations for the six months ending 30 September 2012 is expected to be at least 45% lower than the comparative period in the prior year. Headline earnings per share from continuing operations for the six months ending 30 September 2012 are expected to be at least 65% lower than the comparative period in the prior year. The lower earnings are mainly attributable to an increase in the provision for Competition Commission fines relating to transgressions of the company dating back approximately 10 years."

Earnings per share for the 6 months to end September 2011 clocked 32.5 cents. Headline earnings per share from continuing ops for the same period was just 191.7 cents per share. So, for the half expect EPS to be around 18 cents per share and HEPS from continuing ops to be around 67 cents. Beware the company that continues to provision, Telkom have had too many as a listed entity. That implies poor decision making. You know the story. The assets that Telkom have are far more valuable than the share price implies. But the management continue to muck it up. I blame the main shareholder as fiddling too much in the business. But this is why I continue to pay attention here, you must watch the companies that you do not choose either. Continue to avoid.

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Digest these links.

The iPhone 5 goes on sale today. Not here of course, but elsewhere, in Aussie, the UK, selected European countries, Hong Kong and Japan. I have seen the queues and I have seen people saying that they have been waiting for a few days already. How Apple does it, I am not too sure, the allure of the product to ordinary people is currently not replicated elsewhere. The only other time that I see crowds that hungry for retail products like this is on Black Friday, the day after Thanksgiving in the US. The magic of the iPhone though is that fans are universal. Check out the FT review: Crowds queue to snap up latest iPhone. The maps so far are the only issue that I have come across.

I cannot stress how much I enjoyed this blog entry specifically. Because in light of this mornings TV debate, this piece titled Quotation of the Day: The Fallacy of Redistribution deals with a lot of populist issues. The conclusion is key for me, I often say to folks, if I could change only one thing, it would be education in this country. Check this out and nod: "If the redistributionists were serious, what they would want to distribute is the ability to fish, or to be productive in other ways. Knowledge is one of the few things that can be distributed to people without reducing the amount held by others. That would better serve the interests of the poor, but it would not serve the interests of politicians who want to exercise power, and to get the votes of people who are dependent on them." Quite true, but then again this resonates with me.

Sometimes you just make an acquisition which at the time seems like a good idea, but turns out not that great. This is again not a good outcome for Adidas, who have lowered their 2015 sales guidance for their Reebok brand. Personally I had a pair of Asics when I started, then Nike, then I had a pair of Reebok's but settled back with Nike Air Pegasus. So personally I prefer Nike, but Adidas are a great brand too. Sadly Reebok seem to be struggling. As per the release, adidas Group reinforces confidence in Route 2015 targets: "Following the strategic decision not to renew the previous NFL licence, a change in reporting of NHL-related licence sales and the Group's focus on margin and operational efficiency, Reebok's 2015 sales target is now reduced to € 2 billion from € 3 billion (about one third of the reduction relates to NFL- and NHL-related sales)." That amazes me. One third of Reebok revenue comes from NFL and NHL. The National Football League is now sponsored by Nike. What a twist!

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New York, New York. 40^o 43' 0" N, 74^o 0' 0" W After a poor showing stocks rallied all the way through to the close to end flat on the session, at least in the case of blue chips and the broader market. Transportation stocks got crushed, UPS, FedEx and Union Pacific, the heavyweights taking some tap. Microsoft announced another increase in their quarterly dividend, that was pleasing for their shareholders, the stock was up one and a quarter percent. JC Penney and Bed, Bath and Beyond got carried out the back door and whacked with pillows full of lead. I guess the Amazon impact is weighing heavily on these retailers, time will tell whether Amazon.com will rule the retail world.

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Currencies and commodities corner. Dr. Copper last traded at 375 US cents per pound, the gold price is higher at 1773 Dollars per fine ounce. The platinum price is higher at 1631 Dollars per fine ounce. The oil price is higher at 93.07 Dollars per barrel. After a few days of taking a beating, I am sure that the oil pits are a little more settled. The Rand is a little firmer, 8.27 to the US Dollar, 13.46 to the Pound and 10.75 to the Euro. The market is lower to start with, ahead of a long weekend here in Joburg.

Sasha Naryshkine

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Reflection as the dust settles

"Yesterday I had the opportunity to get feedback from a few business folks who thought that the Lonmin wage settlement was a very bad thing for South Africa. Yes, higher wages continue to make us less competitive. First, don't get me wrong, if people work harder and their performance exceeds expectations, then they must get paid more. Productivity is a major issue."

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Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E. After all was said and done I guess it was a disappointing end to the days trade, the all share barely budged from where we had started off. Banks had a good day, remember that there is an MPC meeting today, the Reserve Bank is expected to keep rates on hold. In large part due to rising CPI, which you can read here via the StatsSA website: Consumer Price Index - August 2012. Both Food and Transport, as a result of rising energy costs hit the CPI basket hard. At the same time I guess that would have translated to lower retail sales, although these are for the July 2012. But still, the headline number missed the estimates, some might say that was a sizeable miss. This is as people cut back on discretionary spend. This graph from the release shows you that retail sales have continued to climb and recover:

What did interest us however was that retail sales had slowed quite significantly, earlier in the cycle than you might have expected. Consumers became stretched earlier in the cycle. The Mooi River index for the month of August showed a four percent drop when compared to the prior August. So what does that mean? Well, quite clearly it is not as good as late last year, it is tougher out there.

However, in a series of nine reads for the month of August, this is the second best. But, 158 thousand passes through the Mooi River toll plaza of trucks with five axles or more compares very favourably with 87 thousand trucks passing through in August 2004. It all makes for rather interesting reading though. Clearly, although we are still at historically elevated levels, we are seeing a flattening as the overall economy splutters.

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Yesterday I had the opportunity to get feedback from a few business folks who thought that the Lonmin wage settlement was a very bad thing for South Africa. Yes, higher wages continue to make us less competitive. First, don't get me wrong, if people work harder and their performance exceeds expectations, then they must get paid more. Productivity is a major issue. I was not surprised then to come across this Economist article: Could the deal be contagious? This line I guess is what we know already: "Looking at Lonmin, other miners may conclude that militancy is the best way to squeeze more money out of their employers."

That is not so great I guess for wage settlement and negotiations in our country. There was union scrambling yesterday. TimesLive is running the story: Vavi rejects 'dangerous' Lonmin wage deal. And then an interesting interview on Moneyweb involving Peter Major, I really like that guy, but it starts with Simon Scott, the acting CEO of Lonmin. I snarkily made a comment yesterday which suggested that now that the wage negotiations are over, Ian Farmer (the sick CEO) might come back to work. That was unfair, I have no idea about his personal circumstances.

But you should read the transcript: The costs of Lonmin's 'historic' wage agreement. 192 million Rands extra added to their yearly costs. The second half of the conversation is with Major, who has, as Al Pacino (Lt. Col. Frank Slade) in Scent of a Woman says: "I've been around, ya know?" Major has been around. And he says, from the interview: "We can, but we've got to be more productive, we've got to be more efficient and unfortunately we've got to be more educated, harder working as well, and we can move up the curve. But you can't move up the curve if the industry is going broke and costing jobs year after year. And that's what's happened here. So it's a good place for us to be aiming to get to, but there's a lot more countries that are making a lot less than us that are just about as productive."

Like I said, people must get paid more, but the company paying them more must be getting more too from the employees. I suspect that this is only the beginning of what is becoming a tougher environment for companies to operate. The government, for their part have threatened to charge anyone who incites violence. I guess companies might feel that this approach could somewhat neutralize what could become an explosive situation. Think about it, what would you be feeling if you were a rock drill operator at Impala Platinum and you are earning a whole lot less than the Lonmin employees? You are doing the same job, getting paid less.

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Byron's beats

Yesterday Japan, the world's 3rd largest economy, announced a programme to ease monetary policy in order to stimulate their economy which has been in a decline for decades. Let's just say that this is not their first stimulus plan announced. What surprised the market was the extent of the stimulus with an increase of its asset buying program to 80 trillion yen ($1 trillion) and a 6 month extension of the program to the end of 2013.

This was on top of the Fed's program to buy $40bn a month of mortgage backed securities and the ECB's willingness to buy debt from Euro-Zone countries who are struggling with lending rates. So are we having central bank wars or to simplify it, currency wars yet again? Remember that if a country prints money it lowers rates and increases the supply of their currency. This should decrease the value of that currency as supply increases and locals search for higher yields elsewhere. Countries like Japan, The US, many Euro-Zone countries and China prefer weaker currency's because they are big exporters.

But if all of them put more money into the system it will cancel out their attempts to weaken currencies, much like the prisoners dilemma. Central banks have to print money just remain neutral. What are the negative repercussions here? People immediately assume negative connotations to this type of behaviour. The biggest risks of too much money in the system are asset bubbles and inflation. So is this going to happen?

It's a bit of a catch 22. Inflation is low because there is not enough demand out there which means companies have little pricing power. People are deleveraging after getting burnt in 2008 and banks are still very risk averse. But the whole reason for the stimulus is to create demand which in turn will bring about inflation. For central banks it is about managing this and being a buffer for the cycles. That is why mandates are to keep inflation rates within a band and if demand were to increase then mission accomplished with a new mission to curb inflation arising.

I feel that at this stage there is enough room for all this stimulus. Right now growth is the priority. I also think that the negative connotations that come with 'printing money' are unwarranted. Every man on the street who has very little knowledge of the topic immediately criticizes central banks without much substance. Printing money can be sustainable if there are enough assets to act as collateral. That is the case, populations are growing and assets are being created all the time. Innovation.

But most importantly, central banks best tool is to create confidence. It gives businesses and individuals that little nudge needed to get the ball rolling. That, for me is the best news from all of these announcements.

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Digest these links.

What? This is a crazy story, but then again the Russians are about the right people for this. Russia reveals shiny state secret: It's awash in diamonds The Russians have been hiding the biggest stash of diamonds. But don't stress, this is not going to smash Anglo, these are industrial grade diamonds. But how do you hide this for so many years? I guess location is key, the site of the impact crate is an hour and a half flight from a town, Khatanga, that is one of the most northern Russian inhabited places. I guess this is hardly anything other than a hamlet with a population of around 3500. Russians. Amazing and hardy people. Nuts though.

Is the housing market starting to take off? Yes or no? Well, now I am starting to see the mainstream stories titled Housing Takes a Leap Ahead. Most of this comes after some very pleasing housing data yesterday. Still, I am mindful that we are a LONG way from where we ought to be on housing in the US. But with the program from the Fed, who knows, perhaps this time next year the picture will look very different.

Lies, damned lies, and Argentina's inflation statistics. The suggestion is that nobody believes the statistics coming from Argentina. I guess this is not new. But what did strike me is how inflation seems to strike. Because the other day, running on the BusinessInsider was a slideshow titled How 9 Countries Completely Lost Control Of Inflation. War and dumb economic decisions including nationalisation of key resources. Yip. That is why I think Argentina is running a higher than reported inflationary figure. Another reason to believe that state intervention in the economy should be limited to collection of taxes to run the various social programs.

Hmmm... I could see this job coming. The WSJ had this story from two days ago, Baxter Robot Heads to Work. It is subscription only, but the story is simple. For 22 thousand Dollars you can replace humans with a robot. Of course the tasks performed are pretty low key tasks. You can watch this Rethink Robotics: Meet Baxter. Like I said on Twitter, this Robot is counter revolutionary. Any factory owners out there who think that they could improve productivity with this device, let me know what you think!

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New York, New York. 40^o 43' 0" N, 74^o 0' 0" W Markets were buoyed by the better than anticipated housing data, existing home sales were a really big beat, housing starts were a narrow miss, whilst building permits were a marginal beat. All these indicators are pointing towards a steadily improving market. And like I said above, the Fed is also going to be key to all of this. Driving rates down, refinancing, more money in the pockets of consumers and rising housing prices might be just the start that the housing sector needs in the US. Oh, and fiscal cliff. Possibly the one serious issue that could derail confidence for half a year or so, I suspect that post the US elections that the folks in the US will get cracking. Or at least I hope so, not too many people have the same amount of confidence that I do, and I guess rightfully so.

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Currencies and commodities corner. Dr. Copper is last at 370 US cents per pound, lower on the session. The gold price is also lower on the day, last at 1757 Dollars per fine ounce. The platinum price is also lower at 1602 Dollars per fine ounce. I guess it is fair to say now that the production is coming back on line, the price should be lower. The whole of the resources complex is lower as the Chinese manufacturing data looks feeble again, even though it is higher than last month. The oil price is getting crushed as the Saudi's decided that this was the time to act. 91.48 Dollars per barrel, the move up and down in recent days has been eye popping. The Rand is weaker. Risk is off, thanks to the aforementioned HSBC flash Chinese PMI data. And stocks are slightly lower to start with.

Sasha Naryshkine and Byron LotterEmail usFollow Sasha and Byron on Twitter011 022 5440

Lonmin and workers reach agreement

"So who wins and who loses? 45 people have lost their lives. These are workers, ex-workers, police men, security personal and a COSATU shop steward. They lose in the ultimate way, their families lose in the most unimaginable way. I suspect we lose jobs. The rest of the industry are going to have to agree to these hikes. The miners themselves become less profitable in time, as the cost base is set higher. Treasury then has less to gain, lower profitability will in turn mean lower tax collections."

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Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E. Retail and banks led us higher yesterday, gold stocks also benefitted from a higher bullion price. Resources as a whole continued to drag, Sasol in particular was hit with a lower oil price, remember we discussed the strange goings on in the pits. The Saudis have actually said that they are willing to supply the market more, perhaps in an attempt to drive the price lower. I know it sounds strange, but the Saudis are well aware of volatile prices and what it can do for the global economy. We have an interest rate decision a little later this week, the consensus is for no change in rates.

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So that is settled then, is it? Lonmin announced that they had reached a wage settlement with their employees last evening. I read the Miningmx story that was quoting SAPA titled Lonmin strike over - report.

The Lonmin release from this morning makes it official, Marikana Agreement Signed. The news however broke just after 7 in the evening and Joe Weisenthal tweeted an interesting price graph, where he said, try spotting the moment where the Lonmin agreement was reached pointing to this graph at Finviz: Platinum graph. I have hacked the graph and circled it, courtesy of FinFiz:

Reading the Lonmin agreement, I am left a little puzzled by the wording, because of course most of us would not know what the categories are: "The agreement includes a signing bonus of R2,000 and an average rise in wages of between 11 and 22% for all employees falling within the Category 3-8 bargaining units , effective from 1 October 2012. This includes the previously agreed 9-10% rises for these employees due to come into effect in October 2012. It also addresses issues of promotion for some categories of workers as well as other allowances."

Ok. The SAPA piece from Miningmx seems to shed more light on it, with a quote from an employee to put it into Rands and cents: "rock drill operators would now get R11,078 a month before deductions, production team leaders R13,022 and operators R9,883. Workers would receive a further once-off bonus of R2,000." The once-off bonus would of course help the strikers with pay day looming and no work having been done.

Our initial thoughts are that this is going to lead to job losses amongst the contract workers. The precedent has been set for violence translating to demands being met. And the higher cost base will make the businesses a whole lot less profitable for their shareholders, someone will do the math soon. And hopefully costs in the upper echelons of the business will come under pressure too, i.e. the execs will be paid less because the business will be less profitable.

So who wins and who loses? 45 people have lost their lives. These are workers, ex-workers, police men, security personal and a COSATU shop steward. They lose in the ultimate way, their families lose in the most unimaginable way. I suspect we lose jobs, we mentioned that above. The rest of the industry are going to have to agree to these hikes. The miners themselves become less profitable in time, as the cost base is set higher. Treasury then has less to gain, lower profitability will in turn mean lower tax collections. I suspect that local businesses will benefit, as the miners have greater spending power. And lastly, I have no idea how this affects COSATU. I read on my Twitter stream that some miners had vowed to change their allegiance to AMCU. As one person pointed out, this is what happens when you have choices.

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Byron's beats

I've been following this one quite closely through its recent sales and trading updates but finally Cashbuild have released their full year earnings for the 53 week period ended 30 June 2012. The numbers came in line with the trading update as earnings were normalised from a big BEE transaction last year.

This meant that earnings were up 88% from last year but on a normalised basis which also excludes the 53rd week, earnings were up a healthy 26%. The final number came in at 1260c with a full year dividend of 569c being declared. The stock which now trades at R155 has an historic multiple of 12.3 with a dividend yield of 3.7% before taxes. Compare that to other retailers like Massmart (P/E 30), Shoprite (P/E 26), and Spar (P/E 22) who all have building divisions and you can see that Cashbuild offer some value. Of course these three are big businesses with lots of other divisions and aspirations but you get my point. For the record the whole retail index has a P/E of 18.63 (via Bloomberg).

So why is Cashbuild so cheap? It is a very competitive division with the likes of BuildersWarehouse, Builders Express, Build It, Mica and even Makros and big supermarkets competing for clients. They are also quite a conservative bunch with only 4 new stores being opened in the period. That is because their location has been so vital to the company's success in the past. You may not see many Cashbuilds in the traditional more affluent areas but nearly every township will have one. In their prospects column they say they have experienced a 5% growth for the first 9 weeks of the financial year which they are disappointed with. This is maybe why the stock has pulled back of late.

You will already know that I like the stock. Even though the environment is competitive I feel there is more than enough growth available in the sector. Look at all the strikes we have been seeing recently, many of which have focused on living conditions. One of the first things people prioritise when they get an increase is their living conditions. It also adds value to an asset which is sustainable and encouraged.

Even when times are tough people substitute buying new homes for home improvement. In a developing economy like ours with such a massive informal housing sector and at historically low interest rates, Cashbuild who are one of the first movers in this industry and have many of the best locations should find themselves in a long term sweet spot.

The balance sheet looks strong, they managed to grow margins from 22.5% to 23.3% in a tough environment, they pay a good dividend and we do not mind a conservative management team. This makes them a very attractive takeover target from the likes of a big retailer like Shoprite or JD Group or even a Micro lender like African Bank who are looking for sale points. We are happy to add at these levels.

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Simpson's shorts, digest these links.

This section confuses people. Bart Simpson is not a person, he is a fictional character in arguably the most successful animated series of all time. So from tomorrow this just becomes the linkfest. OK? And what I need from all of you readers out there is something interesting or juicy that you think that other people might want to see. Send these in and we can either attribute them to you or make them anonymous.

Do not get bulletproof. Ever. Just in the same way that people get bearish, be careful about sticking to hymnsheet all the time and being too optimistic. That is why I was fairly interested with this piece from the Business Insider. CHART OF THE DAY: Morgan Stanley Expects A Horrible Finish For The Market This Year. 1167 on the S&P 500 is the level Adam Parker set in December last year. And he is still looking for that this year. Wow. 300 points down from here. We will see I guess, it seems hard to see us losing that much, something really awful is going to have to happen. Fiscal cliff? As Paul said, one crisis normally replaces the previous one.

Are you still waiting? I mean, are you waiting for the perfect moment to get back into the market and are you a sceptic looking for the next big pull back in order to make further investments? Cullen Roche has written an interesting piece which is a question: "How Much Does the Market Have to Decline Before you Become Constructive?" Indeed, how much? Well, he answers it with a little bit of insight into human behaviour: "But it's a question that has been plaguing investors for years now as they wait for that perfect 2008 moment all over again. Many investors are convinced that if they just get one more crack at it they'll get it right next time and buy at the lows and it will be smooth sailing. It's a common bias that inflicts harm on many investors." Again, the next crisis is brewing somewhere. And waiting for it might require more than just a little patience. As a friend once said to me, when the next crisis hits, I will make sure that I have lots of cash to capitalise. The problem as ever is, how much cash? And how do you recognise quality companies that are cheap? Cool heads.

Who do you trust the most? It turns out that you trust your friends more than anybody else. I have seen on my Facebook stream people asking questions and getting answers. For that I use Google, but some folks are more likely to trust their friends than the internet. I get that. So then you would not be surprised to see The Chart That Shows Why Advertisers Won't Give Up on Facebook. I hacked the chart, courtesy of Neilsen, it makes for interesting viewing:

Does your football team make a good investment? Lots of me says no. And then I remembered this piece from earlier in the year, from two seasons back: Premier League clubs lost £361m last year despite record £2.3bn income. Yes. Only Newcastle made a handsome profit when they sold Andy Carroll. Manchester City FC suffered the biggest ever loss in football history, losing 197 million pounds for the 2010/2011 season. They did win the league a year later. Arsenal does a wonderful job with Wenger keeping the club in the black. Sir Alex does an awesome job with his team, and the company eked out a profit back then. But just yesterday the Red Devils reported a 24 million Dollar loss. Sis. And this WSJ piece about ManU leaves me leaving that when the fans vote with their hearts, leave the investment to someone else: Man United Needs a Team Effort. Oh, and good luck to them this evening!

This Felix Salmon piece titled Chart of the day, housing bubble edition, which does a great job of again exposing human nature. Like he says "I suspect the number of people answering 12% or more is going to be greater than the number of people who think the value of their home will quadruple in ten years." But yet they are the same thing. Nice piece suggesting that the housing market in the US remains on the mend.

And then I guess this Carpe Diem blog ties in nicely to the revealing piece above: Builder Confidence Index Rises in September to 6-Yr. High, With Largest 12-Month Gain in History. I am slowly starting to believe that even the housing bears are going to have a hard time with these recent releases.

Meanwhile, Inditex Profit Beats Estimates as Revenue Accelerates. Who? The holding company for Zara, amongst many others. Things are so bad that the company crushed estimates.

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New York, New York. 40^o 43' 0" N, 74^o 0' 0" W Half baked. It felt like a draw really for both the bulls and the bears, stocks gained a little for blue chips, whilst the broader market S&P 500 fell a couple of points. The nerds of NASDAQ ended flat, a little bit lower even as Apple continued to add, now through the 700 Dollar mark good and proper, see this WSJ article Apple Shares Top $700: iPhone 5 Euphoria Setting In. Apple is 2.8 times the size of Google, in terms of market capitalisation. In terms of historic market valuation, believe it or not, Google is more expensive. Google trades on a little over 21 times earnings, whilst Apple trades on 16.5 times, according to Google Finance. Heck, Lenovo trades on a more demanding multiple than Apple. But I am reminded that the biggest risks to Apple are of course their competitors.

One stock that took a clang to their heads was FedEx who lost three percent on the session. It was all about guidance for the coming quarter, which fell very short of expectations. Strangely however, the past quarter was a beat. There was loads on the go that the company could point fingers at. Exports are slowing from China as a result of lower demand in both Europe and also in their home base in the US. FedEx looking weak.

And then there was this news: Goldman names new CFO, heralding end of an era. The longest serving CFO on Wall Street is finally on his bicycle. David Viniar is giving way to the younger Harvey Schwartz, who himself comes with a good pedigree. I laughed when I read Viniar quoted in the WSJ saying that not a single day at Goldman Sachs was boring. Quite. Schwartz having been there basically his whole working career knows that too, the current landscape however is different from anything seen before.

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Currencies and commodities corner. Dr. Copper is last at 377 US cents per pound. The gold price is higher at 1773 Dollars per fine ounce, the platinum price is higher at 1635 Dollars per fine ounce. The oil price is a little lower at 95.07 Dollars per barrel. The Rand is steady, last trading at 8.20 to the US Dollar. The market is marginally higher here to start with.

Sasha Naryshkine and Byron LotterEmail usFollow Sasha and Byron on Twitter011 022 5440