ABIL trading update eases fears

Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E. There must be some folks that have itchy fingers out there, four days in a row of no direction from the Americans in what is a huge week, data wise. Today we have ADP data, I am presuming that it will still happen. Friday there is supposed to be the non-farm payroll number, again, I am presuming that will still happen. If it doesn't happen Jack Welch might very well have a complete meltdown, we would not want that to happen. There were still some company results, not all companies are headquartered in the North East of the US. Wow, but that was still the biggest story by a long, long way. Power is a problem, fires were a problem along with the obvious flooding issues. Fires in the floods, that destroyed around 80 homes in Queens. The water is dropping back, but the damage will now have to be tallied up. I have seen pictures of cabs in New Jersey submerged in water.

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The transport systems are looking a fair way off being ready again, a WSJ titled Sandy Cuts Wide Swath of Damage suggests that 8.5 million folks rely on both the subway and the bus systems in New York. That means that even though Mr. Market is opened today, many folks are going to struggle to get there. And the cost? Well, that is tough, because some suggest a range as wide as 20 to 50 billion Dollars. That is a big number and it could get bigger, simply because the urban areas that have been hit are so dense. And of course the impact on GDP could be as much as 0.5 percent. I suspect that the GDP estimate is a little too aggressive. Some folks pointed out that housing starts after claims are settled could boost the local economies. CNBC suggests insured losses could be between 5 to 15 billion Dollars, whilst economic losses could be between 10 to 50 billion Dollars.

But this start is supposed to be about the Jozi markets. It is not, simply because there was an event of epic proportions, the first time in over 120 years that the markets have been closed in New York for two days because of weather related disasters. Locally we saw markets head higher through the day, partly because of the Italian treasury getting a 5 and 10 year auction away at the cheapest cost the country has seen since May 2011. That sounds like very good news to me. In case you missed it, the most handsome prime minister to have ever lived (Berlusconi) was convicted of tax evasion on Friday I think. One Italian fellow that I follow on twitter told everyone to relax, this was not the first time that this had happened. OK, gotcha. But at the same time, he lost all his support in Sicily (c'mon, you know that you can do your Vito Corleone impersonation), which was his main base. Ah well, I am pretty sure that it is not the end for Berlusconi. Meanwhile in strong Europe, German unemployment rose, which must be worrying for the "core", but a sign of the collective pain being felt no doubt.

Markets in Jozi closed around four tenths of a percent better than the prior session. Industrials added around half a percent, general retail around one quarter of a percent. As bad as all the news is, and you would swear that the Spanish economy was contracting at 3 percent per quarter rather than the 0.3 percent contraction. I am not downplaying the severity of the situation, but I would say that we are a quarter or two away from the bottom in Spain. And the problems in Europe? They would perhaps seem like a memory for some. In 2014 perhaps.

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Brait reported results for the six months to end September this morning. Brait. Registered in Malta as a European company. What? Well, Malta is tiny, but has a low corporate tax rate you see, that is why it is advantageous for companies to be "domiciled" there. Someone in my very extended family once told me that there was a connection of sorts with Malta. But you know how it goes, everyone tells everyone else that they have a connection, here check it out: Russian tradition of the Knights Hospitaller.

But Brait have nothing to do with Knights and others nobles who somehow plundered their way to titles, oops, I shouldn't have said that. Brait is a business that has transformed a lot. And when I mean a lot, I mean from a caterpillar to a butterfly. This used to be a company that talked about their private equity funds, and it was almost better to be in the funds as an investor, rather than a shareholder. In fact, if memory serves me right, the very smart management team used to have their money in the funds and not in the stock of the business. I think that has changed dramatically.

The 2012 annual report provides one with information of how the restructuring took place: "This has been a milestone year for the Group which saw a successful change in the business model from a leading traditional private equity fund manager to an investment holding company. ... During the year the Group acquired significant stakes in Pepkor, Premier Foods and Iceland Foods for a total of R6.4 billion."

Pepkor, as per their (Brait) NAV breakdown represents the 7.731 billion Rands of the 13.176 billion Rands worth of their investments, a 59 percent weighting. Premier Foods represents 10 percent of the investments, Iceland Foods 9 percent whilst the "Commercial loan to the investment team" is a whopping ten percent of the NAV too. That is basically the rump of the business, clothing and food retail to the middle to lower middle classes in South Africa, which represents 80 percent of their value. That translates to 23.01 Rands NAV, but the company seems to have rather low valuation metrics for Pepkor, Premier and Iceland Foods. That is why I think that the current share price trades at a premium to NAV, at 35 ZAR. The company reported a normalised earnings per share increase of nearly 15 percent to 240 cents. The dividend is modest.

The reason why I think that people low balled the valuations is simple, the new entity has a shareholder, Titan nominees which owns 13.65 percent of the company. That Titan nominees is none other than Christo Wiese. It is tough to find out how much of Pepkor he owns, outside of the Brait holding. See, that is a "problem" already for me. But hey, these guys have done exceptionally well. Well done to them! And still, the underlying assets and earnings still look like they trade at a discount to the rest of the retail sector, but you have to deal with the complicated structures here.

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African Bank have released a trading update this morning, and I am guessing that there will be a few relieved folks around. Consensus, at least the one that I can see, suggested that earnings were expected to show around 21 percent growth. ABIL advises "... that both headline earnings and earnings for the period are expected to increase by between 17% and 19% relative to the R2 339 million reported for the 2011 financial year. Similarly, headline earnings per share and earnings per share are expected to increase by between 17% and 19% relative to the 291,0 cents per share reported for the 2011 financial year." So, rough back of the matchbox calculations suggest that ABIL will make between 340 to 346 cents per share, let us call it 343 cents. That is almost an identical second half to the first half. I suspect that the full year dividend will be the same as last year, and the year before that, 185 cents.

Which means what? Which means at roughly 29 ZAR the stock trades on a historical multiple of less than 8.5 times, on a dividend yield of 6.4 percent at these current levels. Just yesterday Byron wrote about the company and the stock price, here is a refresher: African Bank update ahead of results. This part is quite important: "That puts the stock on forward multiples of 8 (2012), 6.7 (2013) and 5.5 (2014). Historically the company has a strong dividend policy which should see yields above 8% in years to come." The stock is off 28 percent and a bit since the beginning of April. Over five years the stock is down 19 percent. Now, since 2007 African Bank have paid 10.75 ZAR in dividends, that is one of the attractions of the stock, their very high yield relative to their peers.

But that means nothing, the current price is always a reflection of future earnings. The concerns lately and the reason for the share price falling is that there is a lot of chatter out there related to unsecured lending. The company says that they have a handle on this: "ABIL continues to be actively engaged in discussions with the various regulatory and industry bodies about a range of issues to strengthen the sustainability of the credit industry. We welcome this debate and wholeheartedly support initiatives that seek to protect the consumer while enabling responsible access to credit."

There is a conference call later this afternoon, at four thirty. Why this afternoon? Well, because they have lots of offshore investors, which might explain the aggressive selling. Full year numbers will come on the 19th of November, which is in three Mondays time. Until then, I think that this number will be favourably received. The stock has had a couple of good trading days, after having a really bad time for the last six months. We are recommending that you accumulate the stock here, it sure looks cheap.

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Byron's beats

There are many reasons we have chosen BHP as our preferred commodity stock. Sasha has mentioned this a lot lately, mostly in the wake of Anglo's issues and the resignation of Cynthia Carroll. So no, we are not perma-bulls on all commodities. We have been very selective in our mix. Gas, oil, copper, iron ore, coal, potash. All these commodities are vital in the in the development of a region going from an infrastructure boom all the way to a consumption based economy.

The last one I mentioned there, potash, is one I want to focus on today. If you are unaware of what potash is, here is an explanation from wiki: "Potash is the common name for various mined and manufactured salts that contain potassium in water-soluble form. Today, potash is produced worldwide at amounts exceeding 30 million tonnes per year, mostly for use in fertilizers. Various types of fertilizer-potash thus comprise the single largest global industrial use of the element potassium."

Basically it is a vital ingredient in modern day farming. Naturally, as populations increase and farmers adopt more commercial practices, the demand for potash will increase.

Potash does not actually form part of Billiton's production line yet. Not by a long way. But they do own potentially the biggest potash mine in the world known as the Jansen mine which is based in Saskatchewan. If that name rings a bell it is because BHP were bidding for separately listed Potash corp, 2 years ago who are also based in Saskatchewan. This dominated headlines for ages as the massive $40bn bid got rejected by Canadian authorities.

Back to Jansen. I stumbled across this article headed BHP Jansen mine full steam ahead which suggests that drilling of the mine will start in 2 weeks. But there is still a lot of hard work ahead. The article interviews Tim Cutt, BHP's president of speciality products.

"The mine has just received a massive piece of German equipment known as the Herrenknecht. It will drill the hole to create the mine. While drilling is due to start in the next couple of weeks, it will take the Herrenknecht a year to reach the potash supply about one kilometre underground. Then, it will be another two to three years before potash will make it above ground. We think by the end of 2015, we should be in the ore body and starting to build the production rooms."

Wow, quite a lengthy process. So far BHP have put $2bn into this project and certainly more to come. But this should all be worth the wait for a mine that is estimated to produce 8 to 10 million tons of potash a year, comfortably the biggest in the world. The commodity currently trades at $465 per tonne. If we assumed the mine was at full production today, sales of $4.5bn would rival their Aluminium division, will comfortably overtake diamonds and manganese and will fall 25% below energy coal.

I had a glimpse at Potash Corps latest quarterly results to get a better comparison. They produced 2.1 million tonnes with gross profits of $554 million for the quarter. $1.7bn has been made for the first nine months and $2.3bn is expected for the year. These production numbers for the entire company are similar to Jansen's production aspirations. The company who gets 85% of its earnings from Potash is afforded a market cap of $35bn and a PE of around 17. This shows you how big the Jansen mine could be, how strong the margins are and it is certainly a theme we like going forward.

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Crow's nest. US markets open again today, this is good news. ADP has been delayed until tomorrow. ADP of course is the precursor to non-farm payrolls on Friday. Fun!! So far US futures are higher, our market is sniffing at an all time high reached a matter of weeks ago.

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Sasha Naryshkine and Byron Lotter

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Anglo American. Not South African.

"I guess then it is easy for civil society and the employees to believe that the company is South African. But as you can see, 55 percent of the workforce is within a couple of hours drive from where we sit here. Check out the South Africa - Bushveld Complex map as per the Amplats website."

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Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E. Globally the itchy feeling of US markets being closed was taking its toll on the liquidity in markets, although that does not really impact. There is that old Warren Buffett quote that goes something like this: "I never attempt to make money in the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years." This is strange, because as much as he never attempts to make money in the stock market, he is the person who has made the most for himself and his shareholders. The translation of one person that I saw suggests that you must confuse the ticker with the company. And another piece that attempted to decipher what the Oracle of Omaha is saying: "Only in the stock market can one acquire a piece of a company for a price that one would never ever be able to negotiate in a private transaction." True. But I think all that Buffett is trying to say is that you must be sure that you can own this company for five years and never be able to sell it. Seeing as technology moves so fast, that explains his reluctance to invest in businesses that can change dramatically in five years. Got it!

Our market locally added one third of a percent collectively, financial services sank a percent and a bit, gold miners lost half a percent, mining stocks added nearly half a percent, whilst banks added one quarter of a percent. Platinum miners lost three quarters of a percent, Anglo American Platinum was offering returning to work once off payments, as well as loyalty payments to those that worked through the wildcat strike and a borrowing facility for those who wanted it, repayable over six months. And still, there is tension in Rustenburg, police are still maintaining their presence there. People try and predict who will be the next in line at Anglo American, Chris Griffiths was one name that I heard, Mick Davis was another. Although the chairman, John Parker, said outright that he is too expensive, and there is no love lost between the two as I understand it. I asked the question, do we need a South African to run what is essentially a non South African business.

What do I mean by that? A non South African company? Well, I am referring to the part that politicians miss more than anything else, who the owners of the business are. Quite quickly, as per the 2011 Anglo American annual report, the platinum segment (including minorities) is 20 percent of group revenue, but is only 4.5 percent of group EBIDTA. But wait, this is the most important part I think, South Africa represents 44.5 percent of 2011 underlying group earnings. But more importantly, out of roughly every 100 people that Anglo employs, 79 are employed in this country. It is there in the annual report. This is important, I hacked an image to show you, this is taken from page 143.

I guess then it is easy for civil society and the employees to believe that the company is South African. But as you can see, 55 percent of the workforce is within a couple of hours drive from where we sit here. Check out the South Africa - Bushveld Complex map as per the Amplats website. I promise that this piece has a conclusion. When I said non South African business, I meant that the shareholders were not mostly South African.

But that part is not as easy to find as I might have thought. On the Anglo American website, they list 5 shareholders as at Feb 2012 who own more than three percent of the company. BlackRock (an American investment company that operates globally) owns 5.97 percent of Anglo American. Black rock, as at 30 September, according to their website manages 3.67 trillion Dollars worth of assets globally. They are bound to own a little of all big companies. Legal and General Group Plc, a group which manages 388 billion Pounds worth of client assets as at 30 June 2012 (from their website) owned 4.03 percent of the company as at the end of Feb this year. Two entities, Tarl Investment holdings and Epoch Two Investment holdings hold 6.75 percent of the stock, but don't vote it. Why? Well, they are the entities that have bought back stock on behalf of the company. I also said, WHAT? The other significant shareholder is the PIC, which owns 5.86 percent. Add these five shareholders up and you get to 22.62 percent. Only one South African shareholder effectively? I finally got my old mate to find it, what a legend, he did. Drumroll:

See that!!! Nearly two thirds of Anglo American shareholders are either from the UK, North America and Europe. Those people actually own the business. As a business owner, you have a right to appoint the best person for the job. And if the best person happens to be South African, to take the business forward, then by all means, choose that person.

So, who should be the new CEO then? The rumour mills are already running at full steam. But as Ron Derby at BusinessDay points out: Platinum is the big problem for Carroll's successor. A note that I read this morning still suggested that the stock was expensive relative to their peers. In fact, the note said that the stock was a sell. These notes are always to be taken with a pinch of salt, but the suggestion is that the unbundling of Amplats is unlikely (too complicated really) and costs at Minas Rio are likely to be short of 7 billion Dollars and first ore shipped over two years behind schedule. As we have said many times, we prefer BHP Billiton.

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Staying with platinum and problems (sorry, I mean challenges), Lonmin have announced a rights issue this morning. The details of which are not available just as of yet, the company said that they would follow in due course. This announcement comes along with a quarterly production report and a medium term plan to get to 800 thousand ounces of production by 2016. Download the results here: Fourth Quarter 2012 Production Report and Update on Lonmin's Future Strategy. I did a simple calc, Lonmin has a market cap of 964.5 million pounds, which translates to nearly 1.55 billion US Dollars. 13.4 billion Rands. And the rights issue? 800 million Dollars. It is a whopper. I only want to know one thing. Xstrata, who potentially will have to pony up 200 million Dollars as a nearly 25 percent shareholder, what do they think of this?

Listen in closely here. How do you listen to a newsletter? I suppose you can if you get the software. 203 million shares in issue. I did a quick search and came across a Guardian article that suggested that Xstrata have an average entry price of 19.79 Pounds, for 440 million Pounds apiece for the second tranche. That was for the 22.2 million shares to increase the Xstrata stake from 10.7 percent to 24.9 percent. That second tranche was announced on the first of October 2008. The initial purchase was announced 6 August 2008. On the same day, Xstrata proposed that Lonmin shareholders take cash of 33 pounds a share (in Joburg it topped 500 ZAR on that day) and they could own the whole company, check it out: PROPOSED CASH OFFER FOR LONMIN PLC ("LONMIN") OF £33.00 PER SHARE.

Imagine what a colossal mistake that would have been, and what a gigantic score that might have been for Lonmin. My word, I found an old Lonmin SENS release from 2 September 2008: "Therefore, the Board has no hesitation in rejecting Xstrata's entirely unsatisfactory approach which fails to reflect a proper value for the assets and prospects of Lonmin and the synergies from which Xstrata's rather than Lonmin's shareholders would benefit. We continue to explore all options to maximise value for our shareholders."

I don't want to nitpick, BUT on the Lonmin website, those releases ARE NOT linked. Not at all. The telling of Xstrata to get stuffed has been documented in a dumbed down way. Try and click on the 2008 - Press Releases from 7 August, 13 August and 2 September. Yeah, I would also forget about those. Xstrata's stake is worth less than a quarter of what they bought it for. They could have turned a small fortune into an even smaller one. The share price is responding favourably, with the debt "issues" being sorted for now. That is another story entirely. The stock is below five pounds a share if you wanted to know!!!!

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Byron's beats

Everyone is talking about African Bank, well in my world anyhow. Clients, along with ourselves have had to be very patient with this one. Yesterday the share price had another tough day falling to 2835c, touching on levels it reached during the financial crisis. We have written extensively about this one. If your memory sometimes eludes you or you just happened to miss your favourite daily read due to some extreme circumstances, click on the link below which will steer you towards a whole host of links. Share reports for African Bank.

So far this year we have written six articles about Abil and have referred to the company on many other occasions. I spoke about them when I covered the Capitec Numbers and just yesterday Sasha alluded to the micro lending environment whilst covering Nedbank. He had deciphered that the entire Micro lending market in South Africa was equivalent to 71.4% of Nedbank's book (the smallest of the big four banks). Just to put things into perspective of how small micro lending still is in SA.

Fundamentally the stock looks ridiculously cheap. According to Sharedata who have pooled 6 analyst estimates, 2012 should see earnings around 354c, 2013 of 422c and 2014 of 511c. That puts the stock on forward multiples of 8 (2012), 6.7 (2013) and 5.5 (2014). Historically the company has a strong dividend policy which should see yields above 8% in years to come.

So why has the stock crashed while the fundamentals look so good? Sentiment beyond 2012 has decreased, especially from foreign investors who are/were big holders of the stock. The market does not believe the company will meet analyst expectations. Beyond the strikes, their exit from the top 40 and foreigners exiting, the biggest dampener is talk of a micro lending ''bubble''.

African Bank is the biggest micro lender in the country and is entirely reliant on micro lending for its earnings. Ellerines only contributes 12.5% to income from operations. So whether there is a micro lending bubble or not is the biggest question that needs to be asked.

As Sasha pointed out yesterday comparing the entire micro lending market to Nedbank's book, people underestimate how small the base we are coming off actually is. Our economy is very unique, mostly due to our political past. We have a massive informal sector who cannot obtain credit any other way. Before the country was liberalised more than 80% of our nation struggled to obtain any credit at all. The demand for credit, especially amongst the recently liberalised is way beyond the supply. These factors along with the implementation of the national credit act meant that the micro lending environment was abnormally small.

The massive uptick we have seen in recent years was purely due to banks increasing the supply, seeking higher returns due to increased regulations on secured lending following the financial crisis. Keith McLachlan, the renowned small caps analyst, suggests in this article titled Brief look at Unsecured Lending, that this uptick was in fact required in order to reach a sustainable equilibrium for micro lending in our credit market.

People are worried that there is a bubble because of the unnatural growth we have seen. But in my opinion this is because micro lending levels were unnaturally low. Yes this growth will slow and yes we will see a rise in defaults. More loans means more default risk. But at the end of the day it is all about earnings and return. African Bank are more than prepared for what the micro lending environment has in stall. Trust me, they know more than anyone else about this world and even have to share advice with the regulators on a regular basis. The share price has priced in an explosion which I think is over exaggerated. I'm not saying a rerating will happen tomorrow but for the patient investor like ourselves this is a strong buy.

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Digest these links.

Markets are closed again in New York for the day Tuesday, as the "Frakenstorm" passes over an enormous area on the East coast of the US. The size and scale of this storm is pretty mind blowing, I am a bit surprised that a storm came so late in the season, but then I checked Wiki and the suggestion was that storms can happen all the way through to the end of November. September is the most active month for the Atlantic hurricane season, May is the least active, reminder if you ever want to go to the Caribbean.

What I was surprised to hear was that this two day closure was the worst weather related close for the New York markets. In fact this is the first weather related close of the NYSE for 27 years. As far as I can tell from what I have read and seen, a blizzard back in 1885 stopped the financial centre for two days. Back then however, New York was not the financial capital of the known universe.

Name attributable to the late Mark Haines, who famously used to introduce the CNBC morning show, which starts half an hour before the bell as "Live, from the financial capital of the known universe" which was expanded on from "...financial capital of the world". I came across this piece from Forbes: 10 Memorable Events That Closed The NYSE. Last weather event, hurricane Gloria back in 1985. Don't tell anyone, but that is my mother in laws name. I never knew they named a hurricane after her.

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The census is out! This was quick, by South African census standards. If you want to read the whole thing, yes, the whole thing, download it: Census 2011, statistical release. Eskom need to change their 49 million line, the total number is 51,770,560 folks. That is an 11 million jump since 1996, wow that is pretty big. And where do those people want to live? Gauteng province. Which now has 12,272,263 people. In 1996, Gauteng had 18.8 percent of the countries population, in 2011, it had 23.7 percent. That number is ticking up all the time. Urbanisation at work here folks, because Gauteng is small, according to "Percentage distribution of land area by province, 2011, Figure 2.1" Gauteng has only 1.4 percent of all the physical land area in South Africa. So, 23.7 percent of South Africans live in 1.4 percent of all the space in our beautiful country. Haha!! Yes, we are pretty nuts here.

Paul said that the outcomes, bar for the growth in number of orphans, which is a direct result of HIV, is very good, he feel proud to be a South African. And of course too many poor immigrants, which is not exactly highlighted in this report. Those are the two noticeable problems. Hey, but it feels good to be a Gautenger, even if the Currie Cup went to some part of the country where they can't remember when last they won it. As someone said: Breaking, all flights to Cape Town cancelled for a week as massive dust storm from opening the trophy cabinet for first time in a decade.

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Crow's nest. Markets closed in New York again today. That sucks again. As Paul said however, expected spend on Halloween related paraphernalia is 8 billion Dollars. That takes place tomorrow.

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Sasha Naryshkine and Byron Lotter

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Sandy. Rainy. Windy.

"It is the end of the daylight savings in Europe, the clocks were turned back an hour over the weekend. The same happens in the US next weekend. Why does this suck? Because we effectively "lose" an hour of synchronised trade with Europe, they will now start an hour later than ourselves for roughly six months. The US one is worse, because instead of us starting at 15:30 alongside their markets, we effectively only get half an hour. The futures market of course keeps us in check and balance. That said, the US is closed today, Sandy has seen to that. I said to my daughter this morning, expect Patrick at some stage, but you are never going to see SpongeBob."

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Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E. It could have been worse, it could have been better on Friday, but I guess we were "saved" by a better than anticipated US GDP read that had a 2 at the front. 2 percent growth exactly is what the advance estimate for the third quarter presented Mr. Market, confounding a few folks no doubt. As the release said however: "The Bureau emphasized that the third-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency." So it may be those Chicago guys again I said, referring to the Jack Welch remark, perhaps the insinuations of which were not the most palatable comments ever made. Thanks Jack, but everything is not sooooo bad. Just worse than you would have hoped. Or perhaps ironically in his case, he would have hoped for poor economic data so that his fellow (Romney) could get elected. Because then Romney could put things right, at least in the mind of the republican faithful. Hey, we don't have to wait too long for the results to be in, around two weeks or so.

Markets trended higher through the afternoon, but we were unable to end in the green. Industrials, retailers and gold miners all sank over a percent, the platinum miners actually added half a percent. On our screens this morning are pictures of a London Based Bloomberg reporter, Olivia Sterns witnessing and reporting on workers at Rustenburg just yesterday taunting police. Just a few days after what seems a visit to Botswana where she was impressed with the De Beers mine there. These are the pictures that the world sees of us. Sad, but true. But don't get down on yourself, read Peter Bruce's "thick end of the wedge" column in BusinessDay this morning: The Publisher's Notebook. Keep calm and carry on, it seems. In the moment it is easy to feel beat up. But. But. Bruce's first love is sport, or seemingly so to me at least, which he gets too emotional about. Like most sports fans they can't understand why their team just can't win every weekend. Quite.

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Nedbank released a trading update this morning, at face value it all looks fine to me. The group points out that the operating environment is tough, European economies are still under pressure, and emerging markets are experiencing slower growth. No de-coupling, remember that? But they are still on track to meet their earnings growth targets for 2012. Net interest income grew 9.2 percent, net interest margins actually grew to 3.5 percent. Non-interest revenue actually grew 13.9 percent. Which is not always a good thing (penalties and fees), but they break it down, pointing out that trading income increased a whopping 28.3 percent. I shall have to dig a little further there.

It was not the actual trading update which looked just fine to me, but rather the muted outlook, which is a little clouded: "Given the prevailing economic slowdown and uncertainty combined with the effects of wage related strike actions, the group remains cautious on its outlook." Cautious, but that has been the watchword for a while in fact. But I want to make one last point, which I do make from time to time. Many folks stress about unsecured lending in South Africa. Nedbank total advances grew 6.8 percent to 521 billion Rands.

That is a big number, not so? But hear me out here, just last week the Reserve Bank said that unsecured lending had jumped a whopping 21 percent to 43 billion Dollars. At the current exchange rate of 8.66 ZAR to the USD that is 372.4 billion ZAR. Which is a monster number, but it is "only" 71.4 percent of the entire Nedbank loan book. So who is the unsecured lending going to? And make no mistake, Nedbank are in the business of unsecured lending themselves, it is a profitable business. I suspect that the businesses suffering the most are the folks that fall into the poorly regulated category. Perhaps I am being naive, but I suspect that the best systems are owned by the best businesses in the sector. But I am not trying to poo-poo the issues surrounding the sector, South Africans are under pressure, specifically the target markets for the unsecured lenders. But who is the target market? Ironically it can be almost anyone. In weeks from now we will see a trading update (maybe) and numbers from the biggest lender in that space, African Bank. They are of course a September year end.

Oh, my last observation was on the Nedbank deposit base, which grew by 8.6 percent to 555 billion Rands. Why? Well, Nedbank indicate that they have been working hard to build and enhance their deposit base, but so has everyone. I guess the issues around reluctance to invest, in light of a patchy outlook remains. What I would like to see, and we are only going to get a sense of this next year when all the banks report, is what are business deposits looking like? Are businesses borrowing less and saving more? I suspect that might well be the case.

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Mediclinic released a trading update on Friday afternoon. It is an investment theme that we like a lot, healthcare. The thinking is pretty simple, the richer people get, the longer they are inclined to live and spend on their health. The Americans on a per capita basis still spend the most on healthcare, the benefactors being big pharma, medical professionals and perhaps the "wrong" quarters. Mediclinic has a business in Switzerland, where on a per capita basis the country ranks third globally, at around 5200 USD per person. For perspective, we spend about the same amount as Turkey, Mexico and Brazil on healthcare. The further down the global list you go, unfortunately you see the familiar "faces", with Eritrea at the bottom, spending a mere 18 Dollars per annum per person. Population there is around 6.1 million folks. In Switzerland, there are roughly 8 million people living there. Yet in Switzerland, the average spend on healthcare is 290 times above that in Eritrea, on a per capita basis. Unfair I guess you could say, but that is the truth. Divergent histories and wealth creation over time I guess, using the resources available.

That is one of the reasons why healthcare is such an emotive issue, people will argue that one life is not worth more than another. It turns out that the truth is much uglier than that. What was not ugly however was the trading statement from the hospital group, that operates locally, in Dubai and in Switzerland. A few in Namibia too, three is a few, not so? The share price has gone bananas (which are good for you, full of potassium), over the last year the stock is up nearly 27 percent. Very good! Five years, a more modest 95 percent growth, which is also awesome. The earnings are expected (without the once offs which include currency translations) to be between 40 to 50 percent higher than the corresponding period. This is for the half year to end September. Excellent, well done chaps! We still have concerns about the hospital groups in South Africa, government is still very combative towards these businesses, which have done remarkably well. Results are expected late Tuesday or early Wednesday next week.

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When you look at it at face value, Shoprite sales for the first quarter of their financial year are on fire! The company had an operational update this morning, and the numbers don't quite take your breath away, but given the ropey looking outlook delivered by many retailers out there, this looks good. The group refers to depressed market conditions. Total group turnover increased by 15.6 percent, boosted somewhat by a weakening Rand. In their core business, in South Africa, sales grew 12.2 percent, internal inflation has softened to 3.6 percent when compared to the 4 percent for the corresponding three months. But listen to this, in constant currencies their African business grew sales 26.4 percent. In Rand terms, because of the weakening currency, sales increased a whopping 34.3 percent. As they say, the comparative quarter saw growth of only 12.7 percent. If you were looking for a reason why the stock trades on nearly 30 times earnings, here it is above you. Some would say that you are nuts to pay that for a retailer, but the base is low on Africa and there are not too many choices at this size and scale. So, regardless of what you think, this is what longer dated investors think. They should trade on higher multiples.

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Byron's beats

Here at Vestact we have four big investment themes namely aspirational consumers, commodities, technology and healthcare. Within the healthcare sphere we have Aspen and Discovery locally and predominantly Johnson & Johnson in New York. However we also have a couple of smaller companies with exciting prospects over in New York, the options there are endless. One of those is an $11bn market cap company who specialises in joint replacements called Zimmer Holdings. Here is a brief description from the company's website.

"Founded in 1927 and headquartered in Warsaw, Indiana, Zimmer designs, develops, manufactures and markets orthopaedic reconstructive, spinal and trauma devices, dental implants, and related surgical products. Zimmer has operations in more than 25 countries around the world and sells products in more than 100 countries. Zimmer's 2011 sales were approximately $4.5 billion. The Company is supported by the efforts of more than 8,500 employees worldwide."

To get an even better idea of what they do I have hacked a table from their 2011 annual report which segments sales by category.



Zimmer released 3rd quarter results on Friday which had earnings come in slightly above expectations. Let's look at the numbers first and then analyze how the company looks as an investment prospect.

Net sales for the quarter reached $1.026bn which was down slightly due to currency adjustments. Adjusted earnings per share came in at $1.15 vs estimates of $1.13 which was up 10.6% from this quarter last year. Estimates for the full year 2012 (these are usually quite accurate because we already know 3 quarters) are for around $5.27. Trading at $63.55 the stock trades on forward 2012 earnings of 12 and forward 2013 earnings estimates ($5.70) of 11.2.

As you can see growth is not expected to blow the lights out. That is because most of their products rely on elective procedures. When times are tough, especially in the likes of Europe (where 27% of sales come from) elective surgery is usually delayed. But we remain optimistic. 55% of sales come from the US which is an economy showing strong signs of growth. If your home is worth 15% more than last year you are going to have more of an incentive to splash out on that knee replacement you have been needing for years. And it literally changes lives.

Imagine how many bad hips and damaged knees there are in the developing countries. 18% of sales come from Asia Pacific and as these people become richer and older, life changing surgery will surely be prioritised. We continue to add to the stock. Not only does it look attractive at these levels but because of its size it presents itself as a potential takeover target in an industry where M&A activity has been fairly high.

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Digest these links.

You might have heard us beating on this drum that mobile markets are anything but mature, perhaps voice is, but data (which is lower margin) is a long, long way away from being anything that resembles mature. In fact, in an African sense it is almost Jurassic. Last week, if you recall when we saw the MTN subscriber release, there was talk about the 2G network in Nigeria. Here in South Africa, in the urban areas we are getting excited about the prospects of 4G/LTE coming in days that you can count on less than a families hands and toes. Even less than that! Well, then I guess that you wont be too surprised to read this: Angels in Lagos. It is small, laughably small in fact, the Lagos version of what is Silicon Valley will need a whole lot of luck. But cheaper smartphone adoption, improving network speeds and a hungry public mean that they have all the right ingredients. On the East Coast of Africa I saw an interview with a mobile guy on CNBC Africa in which he said that Africa did not have the same problem around getting users to adopt mobile, users in fact knew no different, the fixed line infrastructure was poor and outside of the urban areas generally unavailable.

OK, the news in, in the wee hours of Monday morning, late evening Sunday in New York, was that hurricane Sandy had struck a blow for socialism and had succeeded in persuading the NYSE to close up shop on Monday. Earlier the NYSE had agreed to just let the electronic trade take place, but on further consultation had decided to shut the whole lot down. Thanks hurricane Sandy. I have friends in New York, who are celebrating a birthday (a milestone), I am not too sure when they were supposed to come home, but that is a pretty poor showing for them. I quite liked this unusual post: The Subway Looks Kind of Creepy When It's Empty.

I am not one for charts. I believe that looking at something that has happened and trying to suggest that the same will happen is just plain stupid. A chart shows interesting historical information and gives you context. But that is about it. So that is why this post: P/E Level For S&P 500 Index At Level Not Seen Since 1990s should be seen in the light that perhaps investors have shifted their goal posts to reflect less certainty. In fact I am pretty sure that this is the case. Investors are not willing to pay more for equities, than in 1990 when most middle income families saw a personal computer as a luxury. My dad was perhaps by South African standards an early adopter, we had a Commodore 64. Remember those? The market was about as cheap back then as it is now, the late 80's, early 90's. And that was when the iron curtain still existed, even if it was showing signs of cracking. What does this mean? Nothing and something. Nothing to those burnt twice in the last decade. Something to longer dated investors. Price is what you pay, value is what you get, is that old Buffett quote.

So then, why is US consumer confidence at the highest levels in five years? Consumer sentiment at highest in five years in October. As the article does point out however, the clouds on the horizon could be the fiscal cliff, but at least every man and his dog is aware of that! Some are starting to even suggest that it would go a long way to lowering the debt to GDP outlook over the long run. All that matters to me is the growth rate. If that increases, the debt issues will take care of themselves.

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Crow's nest. Today sucks in one regard. It is the end of the daylight savings in Europe, the clocks were turned back an hour over the weekend. The same happens in the US next weekend. Why does this suck? Because we effectively "lose" an hour of synchronised trade with Europe, they will now start an hour later than ourselves for roughly six months. The US one is worse, because instead of us starting at 15:30 alongside their markets, we effectively only get half an hour. The futures market of course keeps us in check and balance. That said, the US is closed today, Sandy has seen to that. I said to my daughter this morning, expect Patrick at some stage, but you are never going to see SpongeBob. Hurricane SpongeBob, you would think that would be drier than most. For the time being our markets have started a little lower here today.

This is a huge week. Jobs week for starters, US presidential elections are close, as is the Chinese transfer of power internally in the Communist party. A once in a decade event in China. Added to that of course will be the disruptions caused by the "storm of the century". And, if that was not enough, PMI data starts on Thursday. A quick snap shot of global growth starts. And earnings continue. As I say every week, what a week to look forward to.

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Sasha Naryshkine and Byron Lotter

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Carroll gone ahead of Christmas

"I guess it is easy to blame mistakes on an individual and not the board as a whole, but some decisions are going to be remembered more than others. From their 2008 results the company bought back 1.7 billion Dollars worth of shares, out of the 4 billion Dollars proposed. Shareholders would have voted on that. There was a previous buyback program before Carroll arrived, where the company bought back 2 billion Dollars worth of shares."

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Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E. Locally we were watching the Medium Term Budget Speech, although not giving it our complete attention. I did however give it more attention a little later in the day and read through most of the document titled: Medium Term Budget Policy Statement. Moneyweb traditionally always do a good job of the budget, check out the lead in that segment: This is not an austerity budget.

I guess the most important thing from where I sit is that the folks in this country that advocate fiscal discipline were the people that heaved a sigh of relief. And some folks of a bearish nature said, that is very nice, but implementing this will be the harder part. But like most things in life, I suspect that a little direction pointing can be achieved if you have the will. I am still always amazed that education and health get such a high allocation of the budget, but yet we seemingly are not making progress in those critical areas.

Check this out though. Here is a table hacked from the above download. It is possibly the most important thing about this budget for me.

If you add those three allocations up, the ones that I have circled, health, social protection and Education and related functions, you will be quite astounded. Before servicing debt, as a percentage of the overall allocation, those three (critical to our future) departments account for 48.8 percent expenditure. Nearly half. And if you Google South African Education, you come across articles like this one: SA education a sinking ship - Ramphele. And when you Google South African health care, you come across articles like this, from the same publication: SA plans to cure sick health system.

So, we have the resources. We allocate them accordingly to the relevant departments. It is the management thereof that makes all the difference. I for one would like folks like Prof. Jonathan Jansen running the basic education department. I suspect that the incumbent, Dr Aaron Motsoaledi is very well intentioned and is the best man for the job. Some of the commentary that he makes about private healthcare I do not agree with. After all, private schools and private healthcare would cease to exist if the public version was up to scratch. Perhaps there is a lesson in that. Give Curro Holdings government money to run schools, some problem schools and see if they can get by and deliver on that budget. Get Netcare, Life Healthcare or Mediclinic to run government hospitals and see if they can do a better job. I suspect that they would. Would it happen? No ways. Refer to the conclusion of the Telkom piece below.

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Cynthia Carroll has decided enough is enough, and she is stepping down from Anglo American as CEO. The release is on the Anglo website, you can read the full announcement here: Cynthia Carroll to step down as Chief Executive of Anglo American. The response from twitter was, well that was about time, and at last. Not, she will be missed and what a loss for the company. Chairman John Parker was a little more flattering: "Cynthia's leadership has had a transformational impact on Anglo American. She developed a clear strategy, based on a highly attractive range of core commodities, and created a strong and unified culture and a streamlined organisation with a focus on operational performance."

I guess it is easy to blame mistakes on an individual and not the board as a whole, but some decisions are going to be remembered more than others. From their 2008 results the company bought back 1.7 billion Dollars worth of shares, out of the 4 billion Dollars proposed. Shareholders would have voted on that. There was a previous buyback program before Carroll arrived, where the company bought back 2 billion Dollars worth of shares, that was back in 2006: AA plc Share Buyback Programme 1. So perhaps it is not entirely fair to say that it was all her fault. But she drove the bus, when almost each and every day through 2008 all the way to October 3 2008, share buybacks were being announced and taking place. Blame everyone, including the shareholders that approved the buybacks.

But there are some specific projects that she can be "blamed" for. Minas Rio. Again, the board agreed and shareholders would have approved. With regards to safety, I suspect that this is probably something that she can be apportioned blame. Plus, the handling of the copper assets in South America, in Chile and the high profile fight with Chilean government copper company Codelco, that seemed just downright embarrassing at the time. Oh, and remember she was at the helm when Anglo American passed on the dividend for the first time since World War Two. Not anyone else, but her.

The job for the next person will be tough. There will be the same old issues around mining in South Africa. Will the next person be bold and cut, slice and dice! Different divisions would perhaps be given a higher valuation. Maybe. Well, let us not speculate. What Mr. Market does like, however, is that she is leaving. The stock is up two percent in London, to 1896 pence. From the beginning of March 2007 to yesterday, the stock is down one third in London. Thanks Cynthia. Over the same time frame BHP Billiton is up nearly 77 percent. Rio Tinto is up 5 percent. Xstrata, you could have done worse, is down 63 percent. The FTSE is down 5.5 percent. Yip, the Anglo share price has comfortably underperformed even the index. The CIO of the PIC (5.58 percent shareholder), Dan Matjila, was quoted by Bloomberg saying "The performance was more about poor decision making than it was about tough markets.". Check out the Bloomberg story: Anglo's Carroll Quits as First Woman CEO as Miner Lags

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OK I know that it is news from a couple of days ago, but it is worth pointing out. The Telkom AGM went, how should we say, more than a little badly for a few directors hoping to be re-elected. The circumstances were more than a little bizarre though, I was following Moneyweb journo Monique Vanek on Twitter, who was there, at the AGM. In a twist, it seems like government, through minister Pule, changed their vote and ousted four non-execs. Including Sibusiso Luthuli, who was supposed to assume the the chairman role, after current chairman Lazarus Zim had indicated he is out of there. Check out Vanek's updated story: Telkom board members ousted, government shows its hand.

Now I have no idea what the agenda is of the state, perhaps it is even a cost cutting exercise and the company does not need such a big board, but someone on twitter suggested that three of the four were chartered accountants. I checked this out, true, Luthuli, Waja, Mnxasana are all chartered accountants. And Sibisi (sorry, Dr. Sibisi) has a PhD from the Department of Applied Mathematics and Theoretical Physics (DAMTP), Cambridge University in 1983. Source -> Dr Sibusiso Sibisi. So I decided to look at the rest of the Telkom board, who was left behind. And you know what, all really qualified, you can check what board members remain by seeing who they are in the Telkom 2012 Annual report.

So it leads me to the same thing that I have been saying over and over again, the meddling of the main shareholder in the business has held the place back. Too much control by labour too. As we said here in the office yesterday, Telkom property, plant and equipment (their fixed assets) is valued at 36.155 billion Rands on their balance sheet. But yet Mr. Market values the company at 9.348 billion Rands, as at last evenings close. So clearly the company is more valuable than we think, but the earnings are not exactly there to justify a higher rating. If government ever got tired and threw in the towel (I doubt it) then someone would have to pay a (very hefty) premium on the current price to get government to change their mind. I for one would see MWeb doing a much better job of sweating these assets a lot more, but hey, I don't wear a little black cap and I don't carry a little red book. Plus I don't have a little Lenin's beard. So I think differently to people who embrace that appearance.

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Byron's beats

Yesterday Amazon reported its first loss for a quarter in 9 years as the company continues to invest in the future at the expense of current earnings. Net sales increased 27% to $13.81bn compared to $10.88bn this quarter last year. Because earnings have been scarce, sales have been the main gauge of growth for this company so this figure is important to note. The operating loss equated to $28 million compared to the $79 million profit made last quarter. This equated to 60c a share.

It is hard to value a company like this because it is so focused on growth. Which of course is a good thing as an investor of a specific kind. A good operator should not worry about a share price in the short term. Big spending was done this quarter with 2 new massive warehouses being built in Los Angeles and San Francisco. This was done with a goal of same day deliveries in mind. On top of that they are selling their signature product, the Kindle Fire at breakeven in order to lock in clients.

With that said analysts expect earnings to come in at a measly $1.86 in 2013. I say measly because the stock trades at $222. But expectations are for this year to be the absolute bottom of margins. Forecasts for 2014 see earnings coming in at around $5 a share, a huge jump from the year before.

For me, and I know its unconventional, I feel you need to get a feel for this company and without looking at the numbers, logically assess whether this company is going print money in a few years time. I am an Amazon customer, I love buying books from their site and reading it on my iPad via the Kindle app. Reading is never going to go out of fashion and the convenience of ebooks is a winning business model. Amazon have first mover advantage here with most publishers committed to their site. Even if they do take 70% of the sale price (I heard this from someone who researched selling his book on the site). Wow that is huge.

Online retailing is huge. As a South African who is fairly technology astute it is fast becoming a way of life. Judging by the stats I have read, in the US it already is. In a huge way. But it is a fickle business. Clients want trust and efficiency. On the day deliveries and a very sophisticated payment system will maintain Amazon's position here. I am not too worried about current earnings. Steve Bezos is very impressive. He reminds of Steve Jobs, passionate and not fazed by criticism from impatient investors. It is not for everyone though, doesn't expect dividends anytime soon and patience is needed. Coming from our fairly conservative approach, I would call it a hold.

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Apple missed expectations last evening, the company reported Fourth Quarter Results after the bell. A record September quarter, with revenue of 36 billion Dollars and profits of 8.2 billion Dollars, which in turn translated to basic earnings per share of 8.76 Dollars. A dividend of 2.65 Dollars per share was declared. Revenues were ahead of expectations, iPhone sales were ahead of expectations at 26.9 million units. That was an increase of 58 percent over the corresponding quarter last year. That is huge, but the shareholders expect that, huge increases. iPad sales on the other hand fell light of expectations. Some folks are saying that the iPad miss is more than just a little disappointing. And the mini, what does it mean for those sales when the pricing is quite aggressive. Mac sales, Paul got one the other day, also set a record meaning that the migration across to the laptop from more traditional places has happened too. Once people get used to the quality, they want Apple in all of their hardware.

Costs are an issue for the company, profit margins are lower than in previous years with heightened competition from the likes of Microsoft and Amazon. Perhaps, having seen Samsung results this morning, that is the one who is competing on price and product, Amazon you saw above are not exactly munching Apple to pieces. I saw a note the other day that suggested that Apple had quickened their product pipeline release to every six months from every year. So, perhaps the allure of the stock and product combined will not exist as it had before. Has the company really lost their mojo? Well, I suspect not for the time being, their products are still amazing. I own an iPad, an iPhone and recently Apple TV was an addition, I am getting close to completely figuring that one out. So far it has not received all of my time and effort.

On the conference call CEO Tim Cook and CFO Peter Oppenheimer spoke of 700,000 applications on the Apple iStore, of which one quarter of a million were for the iPad, or compliable with the iPad. Also, what we knew but what was confirmed was that demand currently outstripped supply for the newest Apple iPhone, the iPhone 5. That said, the iPhone 5 is going to be rolled out across 100 countries faster than any other iPhone release ever. Tim Cook said in the release: "We're entering this holiday season with the best iPhone, iPad, Mac and iPod products ever, and we remain very confident in our new product pipeline."

That is ultimately the "thing" that will drive Apple higher in the coming years, new product pipeline. People have gone to sleep on the whole idea of Apple iTV (not to be confused with the set top box), which was a big new wow product that was seemingly coming. Adoption by enterprise is important, most Fortune 500 companies are testing or using iPads across their business. And this was supposed to be a tool that would only "work" in the home. I didn't read the report and come away feeling disappointed. The fact that the company has had two quarters of missing expectations, that is an issue for the anxious. I suspect that in the coming years that Apple will continue to attract a wider fan base. The phone still is in part a fashion accessory. No really, people want to own the phone.

I suspect that this earnings report has highlighted that the company is not immune to supply chain disruptions (people at Foxconn want to earn more) and competition from their peers, who have closed the gap. Apple set the benchmark, everyone else wants to beat that. This is good news for innovation. I maintain that whilst the short term outlook has been clouded and questions have been asked about continuing Steve Jobs legacy at Apple, the stock is still a buy at current levels. We always said that this was a company and investment that you would have to watch closer than most. As the WSJ points out, their closest competitor is also feeling the heat after a record quarter: Samsung's Success Is Its Biggest Weakness. Most people I speak to want the new Galaxy or the new iPhone. I guess until that changes, times will be tough for Nokia, RIM and their competitors, Google has great aspirations here, they are the third competitor. Microsoft are the dark horse here too. Competition is good for innovation.

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Crow's nest. US GDP will be a huge number ahead of the election in less than two weeks time. I suppose that Jack Welch has his own ideas about that release, perhaps the Chicago "guys" will do something to juice it up. Until then, we are lower to start with!

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Sasha Naryshkine and Byron Lotter

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MTN raises subscriber guidance

"That being said, I am guessing that the Dollar ARPU's presented to us by MTN are at the official exchange rate and not at the deflated rate. Nigeria, Iran and then South Africa is how the pecking order goes, as far as subscribers are concerned. There is only one other country with over ten million subscribers and that is Ghana, with 11.270 million subscribers. Amazing. But that (in Ghana) is out of a total population of 24.3 million, so you can quite quickly see that MTN has a position of dominance in that geography, possibly one of the most exciting countries on our continent."

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Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E. We were driven higher yesterday by the broader resources sector, there was a giant jump in a second tier platinum producer, RB Plats, but that was right at the end of the day, the last trade! But it was for half of the volume of the day, a strange and rare occurrence. I can't say that I read anything untoward, perhaps the price will adjust back today. It has in fact, down 12 odd percent today. Over in the US there were company results again, this time marginally better than folks anticipated. Heavyweights Boeing crushed expectations, AT&T had a marginal beat, Kimberly-Clark was a slight miss.

Tupperware was a miss, or so the Bloomberg earnings calendar told me, that must mean that less people are taking lunch to work, they must be eating out! Ha-ha, that sounds like strange logic, or at least that was what I thought. Then I checked the conference call and they seemed to come out above the top end of the given range. Confused. And then I thought, well, I don't really care that much for Tupperware other than that I use the product, we have no investments there, explore no further. There was a slew of PMI data out of Europe, none of which I can say, bar for a French Services PMI read that beat expectations. As such the mood across the European financial journalists was a little glum.

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MTN released their quarterly subscriber numbers this morning, and they managed to increase subscribers by 3.8 percent quarter on quarter to 182.7 million folks. Due to a more solid than expected last quarter, the company has raised their subscriber guidance for the full year by nearly two and a half million subscribers to 23.7 million additions. A rather bland looking Official Announcement- Thursday, 25 October 2012, MTN quarterly update is available via their website. But I am a glass half full guy, rather some information than none at all, not so? Yes. I hacked the release and have posted this table, which I think provides you with all the information that you need:

The ARPU's continue to fall in Dollar terms, in Syria the impact of the civil war has had a monster negative impact, but strangely they still managed to add subscribers there. It feels just plain weird to talk about the impact of a civil war on a business, but this has always been the reality of investing in this company. Many of the places they operate are not places high up on your holiday destinations list. But, they are places that the company does business in. I have this long standing debate with my uncle on Facebook about MTN operating in Iran. My argument is that if it is emancipation that he wants, communication is the best way to bring about long lasting change. He says be careful, the company is going to feel the brunt of the US. What does help him making up his mind is that he is American you see, but I certainly hear his point of view.

That being said, I am guessing that the Dollar ARPU's presented to us by MTN are at the official exchange rate and not at the deflated rate. Nigeria, Iran and then South Africa is how the pecking order goes, as far as subscribers are concerned. There is only one other country with over ten million subscribers and that is Ghana, with 11.270 million subscribers. Amazing. But that (in Ghana) is out of a total population of 24.3 million, so you can quite quickly see that MTN has a position of dominance in that geography, possibly one of the most exciting countries on our continent. Political law and order, property rights and upholding the constitution has meant that by most global measures Ghana has made more progress than any of their African peers, bar for Mauritius. Arguably, you could say on the "mainland". More recently oil reserves, which are amongst the largest on the continent (fifth in fact) have been managed properly. Bright future I think for that country, still poor by global standards, which means that there are still many possibilities.

In their biggest geography, in terms of subscribers, Nigeria, MTN was able to maintain their market share whilst it seems like there is an aggressive pricing from all parties, most through promotions. Billable minutes, just for the month of September increased by 24 percent against the prior months. So what is happening here? More people are talking more at cheaper rates as the competition hots up. Data continues to grow, but feel for the mobile users up there, they still have to use 2G networks, which as MTN say are congested as a result of more folks making calls. MTN continues to improve and upgrade their existing infrastructure up there, imagine when the internet starved get real speeds and better handsets. We still maintain that data has a long way to go on our continent, and in MTN's territories.

We continue to buy the stock. The Iranian standoff with basically the rest of the developed world and their hostility towards many others does place MTN in more than just a little bit of a pickle. It is a very serious situation. I did read however that Iran was again ready to talk about their nuclear ambitions. This remains the only sore spot on what is a very bright future for this company still. I like them a lot and with Sub-Saharan African growth to top global growth for the foreseeable future, this is a luxury item spend in many emerging markets. Cheaper smartphones are already making their way into this market.

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Today is the medium term budget speech that will be presented by the minister of finance a little later today. You will be able to find it later on the Treasury website, not yet uploaded, but at this web destination: Medium Term Budget Policy Statements. I am pretty sure that your favourite stations will carry the broadcast. From what I have read, "investors" are looking for the same old prudence that the ministry has been hailed for, and guidance in reducing the budget deficit over the coming years. Both of these critical issues will be difficult to address, in light of a deteriorating economy locally and also that of our major trading partners. So, this is not going to be easy by any stretch. Secondly, there is pressure on government to ramp up social spend, I am all for that, the problem however is the resources to go around are scarce.

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Byron's beats

This morning Anglo American released their production report for the third quarter ended 30 September 2012. I promise I am not being lazy here but the overview from the release really does summarize it all very well so I will do a copy paste and then we can analyze it in more detail.

"Overview

Solid operational performance with production increases across five of the seven commodities

Kumba Iron Ore production increased by 14% to a record 12.5 million tonnes, driven by fasterthan planned ramp up of Kolomela mine. Kolomela is expected to produce at least 7 million tonnes in 2012

Export metallurgical coal production increased by 12% to 4.5 million tonnes

Export thermal coal production from South Africa increased by 10% to 4.6 million tonnes

Copper production increased by 12% to 157,300 tonnes, reflecting the full ramp up of the Los Bronces expansion project

Nickel production increased by 38% to 9,000 tonnes, with production from Barro Alto offsetting the lack of production from Loma de Níquel in Venezuela

Refined platinum production of 649,000 ounces was flat, while equivalent refined platinum production decreased by 6% to 626,300 ounces. Production and costs were adversely impacted by illegal industrial action which caused production loss of 42,000 ounces of equivalent refined platinum in the quarter

Diamond production decreased by 31% to 6.4 million carats, largely in response to market conditions and the Jwaneng slope failure

On 16 August 2012, Anglo American completed the acquisition of a 40% shareholding in De Beers from CHL Holdings Limited for a cash consideration of $5.2 billion

On 24 August 2012, Anglo American completed the sale of a 25.4% shareholding in Anglo American Sur to a Codelco and Mitsui joint venture company for a cash consideration of $2.0 billion

During the quarter, Anglo American issued corporate bonds with a US dollar equivalent value of $2.3 billion in the US and European markets"

In the latest results release the company made 50% of its profits from Iron Ore so let’s look at that one first. 14% is a solid increase bringing in 12.5 Million tonnes. Again the faster ramp up of Kumba’s Kolomela mine having a positive impact. In Fact Sishen production decreased 7% due to quality constraints which means Kolomela was vital in this growth. The strikes took place after the quarter end so we will see the 2.2Mt of lost production reflect in the next quarter. That is much bigger than I thought.

Minas Rio is still sucking cash. They say that production could begin in the second half of 2014 but the expected capex of $5.8bn is being revised for a further increase. Some analysts reckon the number could be close to $8bn. Ouch.

The better quality higher margin metallurgical coal grew 12% from this quarter last year. The Brownfield project in Queensland Australia is making good progress.

Copper which was responsible for 26% of profits in the first half showed some decent growth (12%) thanks to Los Broncos growing 84% off a low base.

Platinum decreased 6% to 626 thousand ounces which already saw the affects of the strike action which started on the 18th of September. Expect the numbers to be heavily hit in the next quarter. The company states that 96,300 ounces lost production is the figure for the next quarter. They also state that due to the strikes there will be an 8% increase in unit costs just for this quarter. It will probably be worse in the fourth.

The big dive in Diamond production is obviously not good, especially when they cite demand as one of the main reasons now and going forward. They have just forked out $5.2bn to buy the rest of De Beers.

This production report again reminds me why we buy BHP Billiton. There are so many issues here. Especially with the iron ore asset in Brazil. They have long ago reached a point of no return there while it keeps on sucking money. Not to mention the strike issues in SA, a forced sale of a very good copper asset in Chile and no exposure to energy (other than coal). In a world of choices we will stick with BHP.

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Ben Bernanke and his merry band set about telling us the same stuff that we knew already in the FOMC statement yesterday, 2012 Monetary Policy Releases, October 24, 2012. Two lines to pick out immediately from the release: "economic activity has continued to expand at a moderate pace in recent months" and "the housing sector has shown some further signs of improvement, albeit from a depressed level" are encouraging. Inflation however recently has picked up, but long term inflation expectations remain stable. OK, so employment is not expanding at the rate that the Fed, or anyone for that matter would like either.

The Fed are going to continue their ultra low rates through to mid 2015 and continue their MBS buying programme, you know, the 40 billion Dollars per month in order to keep rates low for households, who can then refinance and have more spending money in their pockets. As they say, don't fight the Fed. I shan't. And you shouldn't either.

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I keep making the point that when top line growth resumes, then companies will possibly be in the best financial shape that they have ever been. Ever? Well yes, back after the US second quarter company profits had hit an all time high, on the best margins that companies had reported post world war two! BUT, wages as a percentage of the overall economy in the US had hit an all time low. All time means since world war two ended, that is since the measurement ended. As at the end of the June quarter, companies globally had nearly 5 trillion Dollars on their balance sheets. From this piece: What to do with all that cash? Nothing I am guessing that number continues to rise each and every quarter.

What also perked my ears up was that the state, the individual and federal government debt had fallen significantly. By ten percent since 2006. The numbers are eye popping, but the debt reduction overall has been nothing short of amazing. Check it out: Total US Debt at a Six-Year Low. So, whilst the central government continues to rack up debt, individuals and at a local government level and businesses de-lever. I still think that like Warren Buffett, on a five to ten year basis that there will be a stronger than anticipated recovery.

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Crow's nest. We are higher again here, having crushed it through 37 thousand points again. Locally, we know what to watch, from 2 to 4 pm. Across the globe, the results continue, none bigger than Apple. Apple reports after the market tonight, these are important results for the company that recently seems to have lost their mojo a little. And there is also the small matter of a US durable goods report.

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Sasha Naryshkine and Byron Lotter

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Facebook gets a big like

"That is the problem you see, the price of the stock is less predictable. Less predictable than friendships for instance, which are supposed to be enduring and everlasting. I said supposed to be! You would still say that with 60 cents of earnings pencilled in by the analyst community for next years earnings that a 36 times forward earnings multiple is VERY expensive. This stock is definitely not for everyone. But as I say often enough, I believe that they will change the world."

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Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E. The sellers stepped up the pace as a few worries about earnings season started to creep through and as such accelerated selling in the US. We of course were not immune in Jozi, resources were hardest hit, down a percent and a half. The platinum, gold, oil and copper prices all felt the brunt of those selling commodities, worries about companies pointing to a slowing global economy. Note that whilst I read the Caterpillar economic outlook as seeing things slowing, they do not see a recession in Europe, but growth is still going to be anaemic.

Locally we are waiting for the medium term budget speech tomorrow that is going to be very interesting. All that talk about cutting back on "vanity projects" from the minister will no doubt be revealed tomorrow. If not completely fleshed out, I suspect that the same old infrastructure projects and plans will be talked about. But I look forward to perhaps a much sterner Pravin Gordhan than in years gone by. This is going to be the ugly truth, we need to really spend less on wasteful spend. No more free lunches. BusinessDay has this story, which suggests "things" are getting harder: Ratings cut blow to SA's R1-trillion build plans.

At the same time, Eskom has asked the regulator for a big increase again. Often I wait for the initial outrage dust to settle and then to take a look at the practical side. I sense that almost all households are going to get themselves a solar powered geyser. It has to come at a far greater pace than in the past. Humans evolve relative to their surroundings and adapt accordingly, there will be more folks installing light savers too. I know that I have done whatever I can, I need to teach my family to switch off more lights though. Water is expensive too! We will adapt. Often the leftist elements in our government point out how wonderful Eskom is, but remember that there is no real competition. I suspect that is going to change at a retail level very soon, because as soon as the prices rise to a level that people notice, they do something about it. I wait for the energy regulator before making any commentary about the increases and what they mean to you and I. Not good.

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British American Tobacco released their interim management statement for the 9 months to end September this morning. These are usually very detailed and most useful for investors. It is not that surprising that the company says "The environment continues to be challenging, with industry volumes under pressure. In this environment the expansion of illicit trade remains a threat, driven by excise increases and pressure on consumers' disposable income." That part about people adapting, unfortunately that takes on illegal spins too when the price gets "too high". You can download the release Interim Management Statement for the nine months ended 30 September 2012 from their website.

OK, as Byron said, I love to write about this one. The main reason is that I feel this is an industry in decline. You see that in the stick volumes, which are not growing even in emerging markets anymore. The commentary around higher excise duties in Brazil leading to lower company sales and ironically resulting in a rise in illicit sales. So, their line, and I agree with BAT here, is that government is losing out on revenue. So for governments there has to be some sort of balance here. In life there are many products that are bad for you, and extended usage can of course kill you too, there is no escaping that. But the reason why I think that they can only battle for so long with cost cutting is that developed economies, who on a per capita basis still consume more units than in developing countries, usage is slowing quicker than you think. And levelling off across their faster growing regions, which were more than offsetting the decline of the developed markets.

As an investment the company has done marvellously well, since the beginning of 2010, in Pound Sterling the stock is up 54 percent. Yowsers. The stock yields just over four percent, for a blue chip in Sterling, this has to be near the top of the pile. The group continues to buy back stock aggressively, having bought back 30 million shares at 978 million pounds year to date. That is around 0.3 percent of all shares in issue. When you look at the company financially, they are in great shape. They have relatively low gearing, at the half year stage they had net debt of just less than 9.4 billion pounds, their market cap is around 60 billion pounds. Operational cash flows are strong. The company returned over 3.1 billion pounds to investors in the 2011 financial year via dividends and buybacks. Their operating margins continues to improve. I do however think that for a company that is seeing more regulation, higher excise duties and push back to their products that a 16 times forward multiple is a little aggressive, but I know that the dividend underpin will limit the downside.

There is no mention of a regulatory hurdle pending in Russia. A recent Bloomberg article titled Russia Accuses Tobacco Makers of Hooking Women, Children, reveals that Russian lawmakers are closer to clamping down. Those Russians are crazy when they start something. The enforcement inside of what is a smoking culture, that will be extremely difficult. But raising the price, that is one way of muscling the consumer into a corner. As far as I understand it, public healthcare in Russia is very average, but it exists. In a fortnight we will no doubt see the reaction.

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Byron's beats

Yesterday, as I am sure you have already heard, Apple released the iPad mini. Before I establish an opinion on these product releases based on what everyone else has to say I go straight to the Apple website and watch the clip explaining the new product. Then you can go ahead and read what everyone else has to say. Here is the clip so you can watch it before you read what I have to say. iPad mini overview.

As you can see the product looks amazing. That is to be expected from Apple these days and always. The biggest difference is of course the size which makes it more portable. It also becomes a direct competitor to some of the smaller tablets like the Kindle fire, Google's Nexus 7 and Samsung Tab 7.7. The biggest question to be answered from this release was pricing. Because the tablet is smaller and supposedly cheaper it should be more accessible to poorer developing markets where Apple products are often too expensive.

The price starts at $329 for a 16GB which is still well above its competitors. Apple is still very confident it can ask a premium for its products and in fact the margin per unit of the mini will be higher than the third generation iPad it released 7 months ago. I agree. The brand quality, access to the best and most established app store, iTunes and all things that have made Apple products so successful just in a smaller package and slightly cheaper.

Was the release a disappointment? For some I guess the answer is yes. For most this was expected. There are always high expectations when Apple release products and in my humble opinion the only releases that will really excite the market are the ones where a brand new product is introduced. Like the iPhone or the iPad or way back when the iPod was first released. But don't forget, there were lots of different versions of the iPod with different sizes and features for different preferences.

That is what is happening here. Yes there will be cannibalization with the mini stealing sales from the iPad 2 which is still being sold at a lower price, the third generation iPad and now the 4th generation iPad which is the same as the third but with a faster chip (also announced yesterday). But like the iPod these are just appealing to different preferences so I wouldn't make such a big deal of it.

From an investors point of view I like the product. I like that the margins are strong and I feel people will still be willing to pay the Apple premium. Like all the Apple nerds out there I still wait in anticipation for a brand new Apple product release but please don't think that this has been a quiet year for Apple. 2 new operating systems, iPad mini, new iPod nano and iPod touch, iPhone 5, several new MacBooks (also announced yesterday) and the 3rd and 4th generation iPads. Results are released tomorrow night which we will cover on Friday.

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US earnings yesterday, 3M was disappointing, Du Pont was really disappointing, Dow Chemicals had their results leaked early, those were disappointing too, but United Technologies was OK, that looked like a beat to me. The guidance is the part that most folks are worried about, expectations for next year needs to be lowered somewhat. Over in Europe I noticed that Philips Electronics beat, but warned on a weak consumer in their home markets and stodgy growth in the US. I guess this is telling us something that we all know already! Electrolux missed by a whisker and guess what, they also warned on the same things. SAP this morning reported a strong beat, which is in contrast to many of these businesses mentioned above. In this next piece someone has a decent enough go: Ain't Just Hamburgers: McDonald's Weakness a Warning for These Multinational Stocks and Others. Maybe, time will tell. What is another interesting phenomenon however is that UPS, Harley Davison and Whirlpool, all geared to the US consumers, those companies are doing really well! So, the US consumer is OK, but the rest of the globe, not so much.

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Facebook. The stock that folks loved to bash after their IPO, and perhaps for all the right reasons, the pricing was just downright wrong. What the IPO did coincide with however was a massive jump in mobile user patterns and hence lower mobile revenue streams for everyone in the industry. Facebook is not alone here, Google is also having the same problems, but they will adapt, as they have been.

The September quarter however revealed something very interesting. Having been negligible in the quarters past, mobile advertising revenue grew to 14 percent of total advertising sales. BUT, more importantly, mobile revenue has grown by a factor of six since the beginning of the last quarter. And they, Facebook, put a number to it, 3 million Dollars a day. The actually quote from the CFO, David Ebersman, who said that 4 million Dollars a day is coming from News Feed, three quarters from mobile. Which then translates to 270 million Dollars for the present quarter, that is if the growth rate tails off immediately. Which I suspect that it won't. So, having been basically nothing, expect mobile revenue to be nearly one third of total revenue by the end of the first quarter next year, those are my quick back of the matchbox calculations. The Zuck also weighed in and said that six months ago they were not trying to make money off of mobile revenue, now they are trying. So he wanted to dispel this myth, that is what he said!

And the good news for their customers is that Facebook suggest that in your mobile stream, the advert power to users are 10 times more than on a desktop. Because of course it (the advert) appears in your stream, you have to scroll through it. What is also interesting was what Sheryl Sandberg, the COO, said on the conference call when comparing Facebook to the Super Bowl. She said that Facebook has three times as many users as the Super Bowl, and that is daily. But Sheryl, for your daily Facebook browse you don't bust out the popcorn, crisps and beers. And when you check your Facebook page, you don't talk about it with your friends for days, buy memorabilia and the like. But I get your point Sheryl, you have many users who many advertisers can reach for a lower cost each and every day.

The stock soared in afterhours trade, up nearly 13 percent in afterhours trade to over 22 Dollars. BUT, check back and see that 38 was the IPO price. Check out the full numbers via their investor relations page: Facebook Reports Third Quarter 2012 Results. What struck me was that the market cap last evening, before the stock ran away in the aftermarket, was 41.78 billion Dollars. Cash and marketable securities were a whopping 10.5 billion Dollars, meaning that one quarter of the share price is cash alone. This is a phenomenon not uncommon for many tech stocks, but in Facebook's case you can't say that the rest is still cheap. That is the problem you see, the price of the stock is less predictable. Less predictable than friendships for instance, which are supposed to be enduring and everlasting. I said supposed to be! You would still say that with 60 cents of earnings pencilled in by the analyst community for next years earnings that a 36 times forward earnings multiple is VERY expensive. This stock is definitely not for everyone. But as I say often enough, I believe that they will change the world.

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Crow's nest. We are off again today, US markets sold off heavily overnight. PMI data across Europe has disappointed, as has a CPI release here this morning. This means Ms. Marcus, as Reserve Bank Governor has less wriggle room you would think. There is a small matter of the FOMC statement later this evening and New Home sales in the US too. With the poor German PMI data sloshing around, an interrogation of ECB president, Mario Draghi in front of German lawmakers couldn't come at a better time.

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Sasha Naryshkine and Byron Lotter

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Push, pull, stretch and squeeze

"Meanwhile, Americans' spending power is high. In the second quarter, according to Federal Reserve and Commerce Department figures, they devoted a combined 28.2% of their after-tax income to food, energy and financial obligations like mortgage payments and rent. That matched the fourth quarter of 1998 for the lowest share on record going back to 1980."

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Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E. We had US earnings to contend with and as I always say, this is my favourite season, earnings season. On Friday we had a McDonald's miss, a rare one, which we will discuss in detail later. GE was a meet on the bottom, but a miss on the top. We will also look at GE results a little later. Richemont has had a couple of poor days after what can only be described as the most amazing run I have seen for quite some time, mostly as a result of lower Swiss watch exports to Asia. But as a WSJ article pointed out, companies have been pointing out that sales to Asians are better, tourists have been buying the cheaper product in Europe. Reason being is that the taxes on luxury goods in Europe, which are manufactured locally (in Europe) have a cheaper price tag. And are therefore more attractive. We have heard stories from clients and I have seen with my own eyes the luxury branded stores that are full of Asian tourists, mostly Chinese folks. The Communist party crack down on heavy spending will undoubtedly throw the luxury brands a curveball. Or should I use the term reverse swing, that is more appropriate considering that the Wanderers is a whole 2km from where I sit.

All fall down for the indices across the board, the all share sank nearly three quarters of a percent to comfortably below that 37 thousand mark it had been clinging to. Banks lost a percent, gold miners fell the most amongst the resource majors, the bullion price was under some pressure. Platinum stocks actually went in the other direction. There was the story that Cynthia Carroll, the Anglo American CEO had met with both the ministers of Finance and the Mines and she had come away with a positive feeling about the country, but said that the government needs to have a firmer hand: Anglo boss urges tough line to halt mine unrest. I saw an analyst note about Anglo's iron ore project in Brazil, one of their four major growth projects reveal nothing flattering for the company. Yech! Over budget and nowhere near the original timeline, almost two years behind. The only fellow who scored big here was none other than Eike Batista. If you don't know what I am talking about, cast your mind back: MMX Minas-Rio and MMX Amapa. Phew, big price tag back then and lots of money spent so far in developing the asset.

Did you see the government response to the Economist article from last week? If not, then follow the link: South Africa is getting many things right. This is true, life for ordinary South Africans are much better than they were from 20 years ago. But what immediately struck me was that the response missed a key point made in the Economist about corruption amongst the ruling elite. Check out the original article from the Economist: Cry, the beloved country. I thought that the loss of the moral compass and corruption was a bigger issue which explained why the Economist thought we were on a slippery slope. So, I went to the government response and checked for the word corruption. Not once. Check it out:

Again, is it fair to point out the short comings when not pointing out all the good work that has been done? I think yes, we want excellence, not ordinary. And corruption is a massive problem, because once it is entrenched as common place in a society, it becomes incredibly hard to undo. Just ask the Greeks, yes, ask them! Paying to jump queues at the hospital. Amongst other things. But the commitment is there, I suspect that this is why you have seen the fall in sales in Italy, because of all the new legislation. So whilst we can agree that government has done lots to improve the lives of many, it is the current worry about corruption that weighs on us. The medium-term budgetary speech should be more than just interesting on Thursday. The sober truth.

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Digest these links..

Poor buggers in Greece, you might think that their problems are "rich people problems" but often the most vulnerable in society suffer. The suicide rate is up, people are genuinely suffering. This article paints a gloomy short term picture: On Greece: More Austerity, More Recession, More Extremism. I agree with that last piece. If there was just 18 months of sideways economic activity, that would bring about the stability that Greece so desperately needs. Much of these painful austerity measures are as a result of spending too much when times were wonderful, and the reason that they were wonderful was as a result of too much spending. By individuals, municipalities and governments. Greece's economy might have contracted roughly 15 percent from the 2008 high's but it is still three times bigger than it was 20 years ago. In percentage terms, the Greeks economic growth rate has crushed the Germans over two decades. I bet you didn't expect to hear that. All I am saying is that whilst they are going through an incredibly tough patch now, things are seemingly better than twenty years ago. Perhaps I am just thinking out loud with blinkers having seen the data Greece Gross Domestic Product.

Staying with austerity and humans adapting, I was pretty amazed with this story from Rome in the WSJ titled: Electric Bikes Go on a Roll in Rome. Humans adapt to the changing environment around them by looking for cheaper solutions. And that point again about Italy, 1000 Euros sales in Italy can no longer be cash sales. Much cheaper and better for folks to be on the roads using bicycles, that amazing figure of electric bicycle sales to top 50 thousand this year compared to NONE five years ago. Humans adapt, and the cost savings benefits (as well as health benefits) are huge.

Perhaps the French government should take a careful look at this little factoid, via the Carpe Diem blog Tax fact of the day. It is worth a copy paste: "In 1921, when the tax rate on people making over $100,000 a year was 73 percent, the federal government collected a little over $700 million in income taxes, of which 30 percent was paid by those making over $100,000. By 1929, after a series of tax rate reductions had cut the tax rate to 24 percent on those making over $100,000, the federal government collected more than a billion dollars in income taxes, of which 65 percent was collected from those making over $100,000. - Thomas Sowell" Now some context is needed, those were massive boom years for the US. But obviously a cut in tax rates led to higher collections for government, because people spent more, not less. And as we well know, private money sweats a lot harder than public money, no matter where you are in the world.

Remember just last week we were talking about the completely new Microsoft operating system, check this out: Windows 8 Is Really Confusing. That one line makes me a little worried for shareholders: "It feels like it's a tablet operating system that Microsoft managed to twist and shoehorn onto a desktop." We wait Friday, in what is already a very busy week earnings wise to see what the reception is to the latest and perhaps biggest change ever in Windows history.

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What is happening? Well, that is a question I ask my mum or dad every time I call them, what's happening in that sprawling metropolis? I think, and I stand corrected here that the little Klein Karoo town that they live in does not have a single traffic light. You could run around the small town in half an hour, which means that it is pretty small! But I am not talking about that "town", I am rather talking about the biggest stock market in the world and the most important consumers in the world. If you take a squiz at this article from the WSJ (subscription only, sorry): Falling Revenue Dings Stocks you might be forgiven for feeling a little glum. And then the associated headline from the same publication: Unhappy Anniversary, Dow. Sis.

But wait a second here, because if you look under the hood a little closer at the state of the consumer, you start to see signs that you would enjoy as an equity investor, again, same publication: The Once-Mighty U.S. Consumer Awakens. We have been pointing out for a few months now that the health of the housing market in the US is at the best levels for more than half a decade. This is starting to reveal that there is rising consumer confidence and more importantly, housing prices are starting to rise. In this last article, there is a very important point made, the share of after-tax income that is spent on food, financial obligations and energy has fallen to levels last seen in 1998. Pent up demand has seen motor vehicle sales surge to a four year high. Obviously people do not buy new cars unless they are more certain about the future.

See that one key paragraph in that story:

"Meanwhile, Americans' spending power is high. In the second quarter, according to Federal Reserve and Commerce Department figures, they devoted a combined 28.2% of their after-tax income to food, energy and financial obligations like mortgage payments and rent. That matched the fourth quarter of 1998 for the lowest share on record going back to 1980."

I wait with bated breath to see whether I am right or wrong, but I suspect that whilst people might be looking at companies and saying that "things" are awful and we are seeing no top line growth, I suspect that they might be looking in the wrong direction.

There is a lot of evidence to corroborate the recent uptick in housing and the consumer improving, and these links were all via Mark J. Perry in his weekend links, firstly: California Foreclosure Activity Lowest Since Early 2007. Yes. And, a strange measure indeed but: St. Louis Fed Financial Stress Index (STLFSI) is at pre recessionary levels. Indicating exactly what the release is, lower financial stress on all parties since before there was an economic downturn. Which explains why the consumer is less anxious and is buying more houses and more cars than at any time in the last five years. And I am guessing that if you have a look at credit extension in the US, you no doubt will see that rising. Of course it is not all sweet fresh cream, but I suspect that when sales start rising, businesses are in an extraordinary space to start dominating with all the serious cost cutting having been done already.

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Byron's beats

On Friday we received third quarter numbers from one of our biggest holdings in New York, the massive conglomerate General Electric. This company who has businesses all over the world breaks up their interests into two main categories, Infrastructure and Finance. Infrastructure includes GE's involvement in manufacturing equipment for energy, health, transportation and technology. The finance division works like a bank with a more focused structure helping GE as a whole capitalise on market specific opportunities, according to their website.

Of their $36.3bn revenue for the quarter, $24.7bn came from industrial sales while $11.4bn came from capital revenue from the financial division. This was up 3% from last year thanks to 7% growth from industrial sales despite a 5% decrease in their financial division. That is because they are trying to decrease their reliance on this division going forward. It is a strategy we are happy with as you will know our long term positivity on the big banks is very muted mainly due to risks and regulations.

The infrastructure division is of course further broken down. Here is the revenue breakdown. Energy $12.1bn, aviation $4.8bn, healthcare $4.3bn, transport $1.4bn, Home & Business Solutions $2.2bn. All this revenue amounted to $3.8bn of operating earnings which was up 10% from last year thanks to efficient cost cutting. Per share this equated to 33c which was below expectations of 36c. The stock is expected to make $1.55 for the full year. Currently at $22 they are trading on forward 2012 earnings of 14.3. For a company looking to grow earnings around 12% next year I would say that is fair.

We feel the company is exposed to the right sectors. As the global economy grows the demand for energy, healthcare and transport will certainly increase. They have a massive alternative energy division so if you are looking for a green investment GE fits the requirements. They have been focusing heavily on developing markets which is now responsible for $8.9bn of their industrial revenue. Like I mentioned earlier, we are happy with their strategy to become less reliant on GE capital. This also has a negative impact on current growth with the future in mind.

Earnings were a miss which caused the stock to fall over 3%. It is however up 27% so far this year so the market had high expectations. Sales targets were trimmed which is a theme we have seen this earnings season as top line growth slows down. There is only so much cost cutting a company can do but we are positive this will turn for GE and the whole US economy as the housing market starts pushing confidence. We will carry on adding to this stock, especially when it pulls back like Friday.

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Mr. Market was certainly not lovin' it, when it came to the McDonald's numbers on Friday. That jingle might be simple, but it certainly sticks. The currency had quite a big impact, and earnings were dampened by as much as a 8 cents per share. But a miss is a miss, the stock sold off aggressively Friday, down 4.46 percent to 88.72 Dollars. The stock is down over five percent in the last month.

Why is this company important to get a handle on global growth though? Well, as per the Morningstar description, it is easy to see why: "McDonald's generates revenue through company-owned restaurants, franchise royalties, and licensing pacts. Restaurants offer a uniform value-priced menu, with some regional variations. As of March 2012, there were 33,500 locations in 119 countries, including 27,100 franchisees/affiliates units and 6,400 company units." So, they employ a lot of people across most of the world and most people with franchise agreements would be feeling how good and or otherwise the global consumer is feeling. As the chief, Don Thompson said on the conference call: "McDonald's is a destination for more than 69 million customers every day because we are for great tasting high quality goods and an increasingly more modern and contemporary restaurants.". 69 million folks a day eat at the company.

Sales were flat when compared to the corresponding quarter this time last year, but when measured in constant currencies (a Mac is sold in Euros in Paris, Berlin and Rome of course) sales rose 4 percent. Operating income sank four percent, earnings per share sank a percent to 1.43 Dollars a share for the third quarter. So far for the year (three quarters) currency headwinds have amounted to 16 US cents, half of that in the last quarter. BUT, and this is a big but too, whilst recently the currency would have been positive for them, the Euro has weakened against the Dollar, McDonald's chief revealed on the conference call that currently October same store sales were "trending negative." That does not exactly sound appealing, now does it? If the expectations are for a flat, or marginally better year, why would you want to pay more than the 16 times current earnings?

What do I like about the company? Well, there is one thing that will always underpin the price, especially in the current environment and that is the dividend. In September the quarterly dividend was upped a whopping ten percent to 77 US cents per quarter which translates to 3.08 USD a year or a yield just shy of 3.5 percent at the current share price. So, as per the note I read, this should provide a floor. But that means nothing to those people who want to buy this company looking for a superior return, better than they can get elsewhere in the market. This company is never going to explode with growth in sales of twenty percent. Nope. But, at current levels it is definitely a buy. An unbroken 36 years of increasing their dividend makes the company attractive as an investment proposition. Their grand plan is to have a store in each neighbourhood. I would say that they are a long way away from that!

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Crows nest. It is a huge week. No really. 140 S&P 500 companies report this week. Which mean that this time next week we would be half way through earnings season. Apple this week, Facebook, Amazon, Caterpillar, it is going to be awesome.

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Sasha Naryshkine and Byron Lotter

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