Money with a dash of Funny: November 2012

Friday 30 November 2012

Fiscal cliff anxiety. Pfff....

"There is however something wrong with the American tax code, Buffett said that the tax that he has paid in the last decade is less than it was when he was in his 30's and 40's, surely there is something wrong with that? My absolute favourite part however was when Andrew Ross-Sorkin asks him about investing. The question goes along the line "what are you doing about the fiscal cliff". The answer after having first said, it doesn't change anything, is as expected: The fiscal cliff has nothing to do with long-term investment decisions."

To market, to market to buy a fat pig. Locally, here in Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E we had a cracking day. Stocks were up a percent and a quarter to an all time closing high of 37909 points. As I said, a whisper away from 38 thousand. We are possibly unlikely to see that early in the session today, we will have to wait a little bit longer. Leading the charge here locally were the resource stocks which rose two and one third of a percent. Gold stocks were buoyed by the Gold Fields news, another of the majors, AngloGold Ashanti rose nearly 4 percent. I am guessing that they are watching Gold Fields with much interest. Still, over the last five years AngloGold Ashanti is down 13.78 percent. Gold Fields is down 6.38 percent over the last five years. GLD, the Rand gold share price is up a whopping 169 percent over five years. This was Nick Holland's point yesterday, gold companies need their time in the sun again, relative to the price of bullion.

This WSJ article, titled Gold Fields Tries to Divide and Conquer makes a rather telling point: "Besides this year's violent labor unrest, that gap also reflects structurally higher costs for older, labor-intensive mines there. Wages account for 53% of South African cash costs, compared with a global average of 25%, according to Credit Suisse" The main reason must be because of two things, our mines are different from the rest. Deeper, more dangerous and more labour intensive, so hence the labour cost element is going to be higher. But I suspect that the point is worth noting too. Talk late yesterday however was the one also about consolidation in the South African mining industry: Sibanye Gold, Gold One deal 'on the cards'.

Over the seas and far away in New York, New York. 40^o 43' 0" N, 74^o 0' 0" W, there were some pleasing data points. One was GDP, which missed the expectations that had been revised higher. Bob McTeer had a good take on GDP in the US, here goes his piece: The Third Quarter GDP Revisions–Better, But Not By Much. Better is better is my sense, that is all that I care about. There was another housing read that was again a multiyear high, plus as Mark Perry points out, Lumber prices are up 35 percent this year: More signs of a housing recovery: Rising pending home sales and lumber prices. Nice. But, the naysayers will point to lower rates being the main drivers.

There was of course the fiscal cliff issues, a WSJ article from last evening showed us all that these negotiations are going to be more than prickly: Obama's Cliff Offer Spurned. The GOP said no and passed for the time being, without having presented the president a plan of their own. I am guessing that is imminent.

There was a wonderful interview with CNBC and Warren Buffett the other morning (their time) and Buffett made some great points. He was together with his old friend and longest serving Fortune employee, Carol Loomis. There are some juicy bits in the CNBC transcript, if you read further down, past the general banter you get to the meaty lines. Buffett weighs in with his lines about reducing the deficit:

"Well, the plan would have—would get us in the near future to having 18 1/2 percent of GDP as revenues and 21 percent of GDP as expenses. We've had that plan basically in effect since World War II. I mean, it's bounced around a little bit, but that—those two levels, 18 1/2 and 21 are sustainable in the sense that they will not increase the ratio of the national debt to GDP. They'll run a deficit every year, but because our economy grows, 18 1/2 and 21 is a—is a very sustainable figure. In fact, it'll probably bring down the debt to GDP over time."

There is however something wrong with the American tax code, Buffett said that the tax that he has paid in the last decade is less than it was when he was in his 30's and 40's, surely there is something wrong with that? My absolute favourite part however was when Andrew Ross-Sorkin asks him about investing. The question goes along the line "what are you doing about the fiscal cliff". The answer after having first said, it doesn't change anything, is as expected: "The fiscal cliff has nothing to do with long-term investment decisions." Thanks for telling everyone what they should know already, but for whatever reasons "investors" (no they are not) sell the market off on anxieties over the fiscal cliff is the dumb headlines that I read. All presenting opportunities I guess. And then Loomis says that she bought Berkshire Hathaway stock in the early 70's and never sold. See, you don't have to be incredible, you just have to be patient. Granted that the Berkshire has been an amazing investment, but you get what I am trying to say.

Byron's beats

Browsing through my daily market feed links this morning I came across this interesting article titled Mobile app sales exceed $30 billion by the end of the year. Wow that is a lot of money for an industry that is so young. That is already half the 2011 video gaming industry. It includes revenues from all the major app stores like iOS, Android, Windows and even Blackberry. Just a little off topic sideswipe at Blackberry, did you see this quote from Yahoo! CEO Marissa Meyer yesterday? "We literally are moving the company from BlackBerrys to smartphones. One of the really important things for Yahoo's strategy moving forward is mobile." Ouch, from the pioneer of the Smartphone to this, it's tough out there in the technology industry.

Back to the article, what's interesting is that figure is double what we saw in 2011 and as you can imagine, this growth is still going to be huge in the future. In case you were wondering, this revenue includes all app sales, subscriptions, in-app purchases and advertising revenue. It is an amazing business with so much potential. I use apps every single day and once you have those credit card details loaded it is so easy to carry on making purchases, whether it is new apps or in app purchase. Recently South African iOS users now get their app prices in Rands where it used to be Dollars. These things really are cheap and when buying an app for R7.99, one doesn't think twice. On my iPad I also buy all my magazines (R25 for the Getaway) whereby the app that provides that service will certainly take a cut. These are examples, the options are endless.

What really excited me about this article though is the emergence of a multibillion dollar industry that did not exist a few years ago. It's an industry that creates jobs, but you have to be proactive and entrepreneurial. Nothing wrong with working from your garage if you bring in the money. It is an industry that makes us as humans more efficient. Most apps are geared towards making life easier.

I guess what I am trying to get at is that people must stop complaining about mechanisation stealing jobs in the manufacturing and farming sectors because as one industry evolves to less labour intensive ways other industries pop up out of nowhere. And all with the goal to make our standards of living better. Humans are the most adaptable species on the planet so either you embrace it or fight a losing battle.

Digest this linkfest.

The headline says it all, this via my old favourite Mark J Perry: Energy facts of the week: oil production highest since 1994, oil imports lowest since 1992, and oil jobs highest since 1988. Why I think that this is important is because it goes a long way to addressing their (the USA's) trade deficit. If you look at the U.S. INTERNATIONAL TRADE IN GOODS AND SERVICES September 2012, scrolling down to Exhibit 8. Bear with me here, I have a point. Read the last item on the image that I hacked from the foreign trade table:

That is the single biggest reason why I think that the changing energy landscape in America is so very important for them, especially their trade deficit. But, with most things in life adoption of less expensive energy methods only comes when the alternative is cost effective, and this has taken some time. Now I wonder if we could present this evidence to the local lawmakers urging them to go ahead with hydraulic fracking. Provided the folks extracting the gas build both renewable power and desalinisation plants. Small scale of course, you can't expect the majors to do everything.

I found you might like this post, via Pragmatic Capitalism, a guest post from a website called Sober Look, which I also subscribe to the posts. The post is titled: How Spain Ended up With 25% Unemployment. The finding from the New York Fed was twofold, firstly the construction industry employed too many people and secondly, the lack of a flexible work force. The second one is very familiar back home, and I say that with a sweeping generalisation. What is of course unknown in South Africa is whether or not a free labour market would make a big difference to unemployment. As long as the labour unions are an integral part of government, it is not going to happen.

This is very useful commentary, but the conclusion leaves me believing that almost anything could happen in the next five years. Still, it is worth a read. China's Coming Growth Tests is written beautifully by Yu Yongding, who is a former insider at the People's Bank of China. Useful stuff like I said, conclusion, well, iffy. To me anyhow.

Crow's nest. We are slightly lower here today. What I do see however is some commentary from Mario Draghi, which suggests that things are getting better in the Euro zone. Who would have thought? That last comment is oozing with sarcasm. As I type that, some fellow on the screen says that fear is through the roof. Yeah, good luck with that buddy. Oh, and good luck to both Paul and Byron going to the Lady Gaga concert tonight. Me, not so much into that!

Sasha Naryshkine and Byron Lotter

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Thursday 29 November 2012

Gold Fields. Or is it Old Fields?

"It seems that they are proposing that the company split into two parts, an "international" business with the only South African asset being South Deep and then a purely South African business called Sibanye Gold (Xhosa for "We are one", I wonder if the SABC has dibs on that?), that will comprise of KDC and Beatrix. Subject to approval, the release says, Sibanye will be listed on both the NYSE and the JSE, with both primary listings remaining here."

Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E. We got trounced here yesterday, stocks lost nearly a percent in a pretty broad based selling exercise, with a slight beating on the resources front. The gold stocks in particular were hard hit. This morning there is however good news for the long suffering shareholders of Gold Fields, the company has decided to split the businesses into two. More on that a little later in this message, I think that this is the first of what might be many geographically diverse mining companies looking at making these types of decisions. We shall see, not everyone has the scale to be able to do such things.

I made a mistake yesterday, apologies. In my MTN piece I said that Shanduka had bought the stake in MTN Nigeria from MTN International, that was not the case. In fact Shanduka bought the stake from a private equity crowd called ACA that were exiting the investment. The annoyance was not that Shanduka had bought it, but that MTN International had not. Sorry for that, clarification! Now the one part that we are struggling with in the office is the part in which Phuti Mahanyele (she is the CEO of Shanduka) says that this transaction was done at an arms length from MTN. Implying that Chairperson of MTN, Cyril Ramaphosa, did not take part in the negotiations. MTN in fact had a pre-emptive right to buy that stake, but did not. I wonder why? That is still an irritation for us. And I suppose that Ramaphosa's family interests, his family trust which owns a little more than 30 percent of Shanduka must have known that this deal was taking place. Surely. But I am guessing that it is very plausible that Mahanyele could have briefed Ramaphosa after the deal had actually happened. No need to speculate. This is a massive deal for Shanduka, the WSJ suggests that their (Shanduka) enterprise value is 1.58 billion Dollars. So 335 million Dollars is a big deal.

There are some clues around valuations were given away by Mahanyele, where she says in this interview, Shanduka denies confict of interest in buying MTN Nigeria stake: Phuti Mahanyele - CEO, Shanduka, with Hilton Tarrant of Moneyweb that "We haven't disclosed that figure just because we don't want to give rise to an indication of what the entry price was, given that the group is listed. So ja, we deliberately left out that number. But we would become the third-largest shareholder in the business." That last sentence is the clue, the third largest shareholder. But for the life of me I can't seem to find that list. All I know is that MTN own more than 78 percent. And I did in my scouting come across a valuation at the height of the market of MTN Nigeria of around than 10 billion Dollars. So, you might well find that this 335 million Dollars might be for a stake of around 3 percent.

What exactly have Gold Fields announced this morning? Well, it seems that they are proposing that the company split into two parts, an "international" business with the only South African asset being South Deep and then a purely South African business called Sibanye Gold (Xhosa for "We are one", I wonder if the SABC has dibs on that?), that will comprise of KDC and Beatrix. Subject to approval, the release says, Sibanye will be listed on both the NYSE and the JSE, with both primary listings remaining here. Neal Froneman will run the business, that is a bit of a shock. The remaining executive team at Gold Fields will continue to run that business. The reason why South Deep is included in the business to be kept under the name Gold Fields is that it really is the swing mine.

Let me explain. According to the GOLD FIELDS UNBUNDLES GFIMSA release: "Gold Fields' production (excluding Sibanye Gold) for the 12 months ended December 2011 was 2.2 million gold-equivalent ounces and its mineral reserves, as at 31 December 2011, were 64 million ounces, comprising 40 million ounces at South Deep and 24 million ounces at the international operations." So, with regards to the reserves, South Deep represents 62.5 percent of the new Gold Fields which is ex Sibanye reserves. As for Sibanye: "The mineral reserve positions at 31 December 2011 were 22 million ounces for Sibanye Gold". You can quickly see how important South Deep actually is. So of the combined old Gold Fields as we knew it, South Deep was 46.5 percent of their mineral reserves. See, it was simple for Gold Fields.

OK, so what is the rationale of this deal? Will the new Gold Fields part get a higher valuation? Especially when you think that 62.5 percent of their reserves are still actually in South Africa. Well, I guess more clues could lie in the production numbers, I am going to jump back a quarter to the June quarter, because that excludes the recent strike action. KDC produced 279.6 thousand ounces of gold at a cash cost of 242.6 thousand ZAR per kg. Or 936 Dollars per fine ounce, much lower than the quarter prior to that. At Beatrix, gold production reached 79.2 thousand ounces for the quarter, with cash costs of 273.4 thousand ZAR per kg or 1342 Dollars per fine ounce. So the combined entity would be able to produce roughly 320 thousand ounces per quarter or somewhere close to 1.3 million ounces per annum. Operating costs for KDC are in the region of 2 billion ZAR a quarter, whilst at Beatrix that is closer to 675 million ZAR. Combined, operating costs for Sibanye will be roughly 10.7 billion Rands a year. Operating profit at Beatrix was 374 million Rand for the June quarter, and 1.59 billion ZAR at KDC over the same time frames. So, less than 8 billion Rands worth of operating profits for the year, that sounds decent.

I did not actually have to do the math, the second release, the SENS announcement had what I was looking for: "Based on the results for the 12 month period ended December 2011 Sibanye Gold's gold production was 1.4 million ounces making it one of the largest domestic gold producers in South Africa. Sibanye Gold's unaudited revenue for the 2011 financial year amounted to R16.6 billion with unaudited earnings before interest, tax, depreciation and amortisation ("EBITDA") of R6.8 billion ... "

And at Gold Fields? Well, again the SENS release spells it out: "Gold Fields' production (excluding Sibanye Gold) for the 12 months ended December 2011 was 2.2 million gold-equivalent ounces.... Gold Fields' unaudited revenue for the 2011 financial year (excluding Sibanye Gold) amounted to US$3.5 billion with unaudited EBITDA of US$2.0 billion ..." Notice how the numbers are displayed in Dollars, I think that the key lies in that presentation to their investors. The plan is actually quite simple, to ramp up South Deep production to 700 thousand ounces per annum, gold produced was only 77.8 thousand ounces for the June quarter. So, there has to be a ramp up of roughly 125 percent from these levels at South Deep. And the final Gold Fields after much of this expansion might have most of the reserves, but will only be around 30 percent of total production. That is the key I think for the new set of shareholders will be them knowing that they have divested from South African production by around 1.4 million ounces. Tarkwa in Ghana and St. Ives Down Under (where Ricky "Punter" just called it quits) are the most important international assets.

But don't let me tell you what it is, or isn't, see what Nick Holland in a Gold Fields explanation video says about the deal. He says that he wants people to return to the gold stocks, away from the metal, so that they can enjoy their "time in the sun". He calls Sibanye a "gold champion" and refers to the assets as mature. 70 years old is a little more than "mature". What he says is a little chilling, suggesting that gold production in South Africa has halved over the last seven years. Halved!!! From 360 tons per annum to 180 tons per annum. Well, good luck to the repackaged assets. Shareholders are cheering this, the stock is up nearly 7 percent. Am I excited? Well, in my mind very little changes rather than some shuffling. If production locally and productivity does actually improve, or stabilize, then perhaps this will work. There are some big plans afoot locally both at South Deep and then at Sibanye to be able to build sustainable living for their workers. Perhaps the better morale alone of the workforce will actually boost productivity. And perhaps this will become a model for South African mining. I wish them well. We will not be buying either the old version in anticipation of the unbundling or the two new versions, post the split.

The thoughts around this next piece were inspired by the piece that I read, that was hyped up: What the Greece Deal Means for German Finances. Eeek. 730 million Euros, that is awful. But then I thought to myself, well, what does that mean for every man, woman and child living in Germany. Well, it turns out that is 8.92 Euros per German, or per person living there. Is that a lot? Not really for a European I would think, for 4.99 Euros you can get a big Mac, medium fries and a medium soda in Germany. 'Tis true, I checked the McDonald's menu: McDeal Menu. I was just trying to quantify what the delayed payments from Greece to Germany was actually. Perhaps next time a German citizen is visiting Greece, they could get a discount on their coffee. And a lot of Germans actually do visit in Greece, as many as 2.2 million visited the country in 2011.

You have often heard me suggest that the problems of Europe are rich people problems. I struggle to try and quantify it, because it is not that easy to get across. So I tried to put together a list of little factoids of the European Union. 27 countries, 332.839 million people. Total GDP in 2011, 17,578 trillion US Dollars, total government debt at 82.5 percent is 14.501 trillion Dollars. OK, now you are frothing at the mouth, but before you get your blood pressure too high, just remember that a loan is also an asset in someone else's book. Even though the total debt outstanding exceeds the Maastricht treaty, which says it should not exceed 60 percent. Back to the loan part. Banks extend loans to their customers, that loan book then becomes their asset, that is the absolute simplest way of thinking of it. Therefore all the government debt outstanding, which is collectively owned by amongst others pension funds and financial institutions is an asset in their hand, and by extension to their retirees and the like. The chances of default in Europe are low. Although the Greek restructuring exercise did prove that it is not impossible.

The outstanding government debt has maturities of anywhere between 3 months to 30 years, perhaps even longer dated. According to this very useful page from Eurostat, Structure of government debt: "The outstanding debt issued on a long-term basis accounted for between 74.6 % and 98.9 % of the total in 23 EU Member States, revealing a common pattern." So, it is fair to say that there is time. But all of this has yet to answer my burning question, how rich are the Europeans actually?

From the same source, Eurostat, Household financial assets and liabilities presents us with a fairly good picture. But the one that I really like after having been trawling for this piece was this document, a real goodie: Global Wealth Report 2011. Wealth per adult in Western Europe exceeds 100,000 US Dollars. Check out this out, a pie graph that probably illustrates my points best of all:

The key part here is the absolute number, according to this report, it is 231 trillion Dollars in total as at the middle of last year. This is total global wealth. Let us presume that between now and then, the middle of last year, that there has been a modest five percent rise in global wealth. The number would be closer to 243 trillion Dollars. The European portion of that would be "only" 82.5 trillion Dollars. If "things" improve further, it is not too much to suggest that that in five years time, it might have increased by 15 percent. That would add 12.37 trillion Dollars worth of wealth. With outstanding debt of 14.5 trillion Dollars, the impact of increasing wealth could more than offset the problem. Rich peoples problems, I am still convinced.

Byron's beats

Here at Vestact we are forever looking for new opportunities, it's what makes this industry so exciting and by managing money in New York the avenues are endless. Over the last month or so I have been looking at a company which fits a massive growth theme around the world. The company is huge with 20.3billion Euro's in sales last year, this is certainly no secret but I think it is a great addition to our New York portfolios.

L'Oreal has a century of expertise in cosmetics, has 27 global brands in over 130 countries and filed 613 patents in 2011 alone. Brands which you may have heard of include L'Oreal, Garnier, Maybelline, Redken, Matrix and The Body Shop. These range from makeup to shampoos to anti aging creams. I can't say I am the biggest expert on the use of these products but I know that people love them. On top of these brands they also own the cosmetic rights to big global brands such as Giorgio Armani, Yves Saint Laurent, Ralph Lauren and Diesel. You can see how this company fits right in with our aspirational consumerism theme.

Looking at the financials from last year, as you can imagine, the margins in this business are huge. From sales of 20.3bn Euros operating profit of 3.3bn Euros was realised. The share trades at 104 Euro and earnings for this year are expected to come in around 4.88 Euro. A multiple of 21 certainly is not cheap but I never expected it to be. This company is experiencing double digit growth.

What I really like about this company is its growing exposure to the developing world. Last year North America was responsible for 23.3% of sales with 5.5% like for like sales growth. South America, which is a huge cosmetics market, was responsible for 8.9% of sales with 13.2% growth.

Africa and the Middle East saw 10.5% growth and is only responsible for 3.1% of sales, while Eastern Europe which is responsible for 7.1% of sales saw a slight decline of 2.8%. Western Europe is still its main market with 38.4% of sales, as expected sales were slow, only growing 0.6%. But Asia Pacific which is now 19.2% of sales saw massive growth, up 13% and becoming more and more significant.

That is L'Oreal's breakdown of sales but the breakdown of global sales for the entire industry is slightly different. I hacked this picture from the 2011 annual report which shows us where they can grow market share, which cosmetics are the biggest sellers and L'Oreal's biggest competitors.

So that was last year's figures, the big question is whether they can maintain this growth? As you can imagine, there is a lot of room for innovation in this industry. The company has 19 research centres, in 5 regions, 16 evaluation centres and 50 scientific and regulatory departments.

Last year they dedicated 721 million Euros to research and development. This gives me no doubt that they will carry on releasing products which they can successfully market to the public at a 65% mark up.

What most excites me though is the macro environment. People love to look good and hate to look bad. Aging is a reality that everyone has to face. As women become more liberalised in developing nations their demand for these products will fly. If your best friend starts attracting all the boys with her new look you are definitely going to follow suit, it is human nature.

Society is becoming more and more vain and from what I hear this materialistic culture in Asia is becoming huge. The industry is growing just as fast for men who have realised that it is not so bad to look after your self thanks to metros like David Beckham and George Clooney making it socially acceptable.

Because of all these factors mentioned above a think this is a great addition to any portfolio. If you have spare cash in your account give us a call and we will get you some. Because You Are Worth It! (sorry I had to throw that in somewhere).

Crow's nest. Markets are cooking, we are up a percent. It seems that all you have to do nowadays is replace the words in the following sentence. Markets (falls/rises) as Washington DC is (closer/further away) from deal on fiscal cliff. And another favourite, Markets (falls/rises) as fears (ease/rise) on next Greek bailout package. You can interchange those on a day to day basis. What nonsense. Buffett, bless him, the man said yesterday that come 2 January, if the "fiscal cliff" event had happened they would not be laying off a single employee. See.

Sasha Naryshkine and Byron Lotter

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Wednesday 28 November 2012

Local GDP smells off

"There is absolutely no doubt that this figure was so low because of the affects of illegal striking in South Africa. That is why expectations were so low. But clearly the impact was worse than expected. I guess the confidence impact is usually underestimated. Businesses and individuals, locally and internationally will hold back on investment if there is unrest in a country."

Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E. We went out the blocks like a house on fire and in fact we were only a whisper away from 38 thousand points. But as Peter Siddle and his mates found out on Monday, a whisper away can be too much. We managed to close in the green here locally, the Jozi ALSI up by one tenth of a percent. Later in the session there was pleasing US durable goods numbers and more than pleasing US housing data but unfortunately we had a local GDP read which was stinking up the joint. The fingers were being squarely pointed at the mining industry, for dragging us lower in the third quarter. Of course mining related activity declined as a result of industrial action.

We covered Omnia and Naspers results yesterday, but there was another major company, Adcock Ingram which reported rather disappointing numbers. Initially the stock sold off heavily, but recovered a little by late afternoon, still ending the day down two percent. In fact this is a 52 week low for the stock, Aspen on the other hand is a few percent away from their 52 week high. I guess it helps (for Aspen) when your biggest shareholder is Glaxo, at 18.6 percent and the next biggest shareholder is the chief executive, Stephen Saad owns 12.1 percent of the company. That now translates to an eye popping 8.85 billion Rand, or almost exactly one billion Dollars. Not bad for a boy from Durban, right?

But, as I always say, how many people has he made wealthy along the way? He deserves it, my intel tells me that he is amongst the finest South African businessmen ever. And a nice guy too, that is what I hear. I wonder how hard it is to maintain that entrepreneurial spirit when the company you knew and built has changed to something almost unrecognisable? In a good way of course. Aspen's divergence from Adcock has been nothing short of extraordinary. Aspen's market cap is now 7.5 times larger than Adcock Ingram, 7 or 8 years ago they were peers. Now, well, not so much. Most of the price divergence over the last five years only stems from around August last year. Since that time, Aspen's share price is up a whopping 95 percent, whilst Adcock has gone backwards to the tune of 10 percent. Eish. The problem is that Adcock's sales and profit growth has just been downright pedestrian at best.

Talking pedestrian and even in some cases a leash type mentality, there was a good interview with Koos Bekker at lunchtime yesterday on CNBC. To watch the interview, follow the ABNDigital link: Nasper H1 Results with CEO Koos Bekker. He talks about self inflicted wounds as a result of government interference in Telkom. Bekker reckons that governments policies, protecting Telkom have held South Africa back. I agree. And then he uses a football analogy, like we said yesterday, football is key to DStv. An absolute must for many people who buy the package is the football option. It is of course, whether you like it or not, the biggest sport in the world with more watchers than any other sport.

MTN Nigeria. There is a BusinessDay article by Sure Kamhunga this morning which is suggesting that MTN International are selling part of a stake in their business in Nigeria to the Shanduka group. I can't find anything on either the MTN Nigeria website, under press releases or the MTN group website either. Sure's article, which you can find here: Ramaphosa's Nigeria deal raises eyebrows, does not give the minority stake percentage, but does give the price, 335 million US dollars. Which is nearly three billion Rands at the current exchange rate, that is a lot of money. As Paul said in the office, he is a little disappointed that MTN are selling a stake in a very profitable and exciting business. Not so much the issues around whether or not the right partners are involved, just you would think that MTN should keep on the stake.

There is however a short piece on the Shanduka website: Shanduka Group advances African growth strategy through acquisition of a stake in MTN Nigeria. The only reason why I am as keen as beans to find out the percentage that Shanduka have bought, is that of course it would be nice to get a valuation of the business. The group itself, Shanduka is a little too diversified for my liking, but hey, what does my opinion matter, that is an issue for their shareholders. In fact you can see all the parts of Shanduka under their Our Business section. Shareholders, as per the Shanduka website include over 200 thousand historically disadvantaged individuals. I wonder when the entity will list, or will it take some time, perhaps another half a decade or so. I guess we have to be patient on the MTN stake, maybe we will get more clarity in the next annual report. Hopefully sooner.

Byron's beats

GDP figures released by Stats SA

There is absolutely no doubt that this figure was so low because of the affects of illegal striking in South Africa. That is why expectations were so low. But clearly the impact was worse than expected. I guess the confidence impact is usually underestimated. Businesses and individuals, locally and internationally will hold back on investment if there is unrest in a country.

By economic sector contributions here is what the release had to say:

"The most notable performances of industries in the third quarter of 2012 compared with the third quarter of 2011 were as follows:
The wholesale, retail and motor trade; catering and accommodation industry increased by 3,2 per cent;
Personal services and construction industry increased by 3,1 per cent each;
General government services increased by 2,9 per cent;
The manufacturing industry increased by 2,5 per cent;
Finance, real estate, and business services increased by 2,3 per cent;
The agriculture, forestry and fishing industry decreased by 2,5 per cent; and
The mining and quarrying industry decreased by 1,2 per cent."

Very interesting to see those trends. The service industry is becoming more and more important in the context of our economy. Also good to see the construction industry turning. It is a big employer and has lots of knock on effects. As we have seen amongst our retailers, the South African consumer is still strong while manufacturing grew nicely, probably on the back of the weaker rand. Finance, real estate and business services again falls under the services sector, we have seen property prices rise and banks recovering nicely this year so this is to be expected. Agriculture and mining are the two declining industries. Ironically but not coincidently these are the two sectors who have faced the biggest labour unrests.

It is certainly a worrying aspect. A country with our dynamics which includes high unemployment and big disparities should be growing at a faster rate than this. And the sad thing is we certainly have the potential and the resources to achieve much higher growth. My feeling is that this year, being a decisive one politics wise was especially bad and that things should stabilise next year. As investors we are still very much focused on companies with lots of international diversification. This has proved to be a winning formula with the likes of Aspen, Richemont, Naspers, Billiton, MTN and Bidvest.

Digest this.

I found this lengthy post via Cullen Roche, obviously this fellow is on his hit list. The post is titled A Critique of Grantham and Gordon The Prospects for Long-term Growth. It is a good piece, that contains some juicy stuff, the most important paragraph for me was this one:

"We have heard concerns about the permanent slowing or stopping of global growth after every depression or severe recession. In the 1890s, the idea was circulated that everything worth inventing had already been invented. In the 1930s, it was popular to say that capitalism had created the mechanism of its own destruction. In the 1970s, concerns focused on foreign competition and resource constraints, and some people forecast mass starvation. Today's concerns are no different in principle, and they are no more realistic."

That resonates positively with me, the fact that whenever someone thinks that nothing is going to change, it invariably changes a lot quicker than you think. The smartphone and tablet revolution is a great example. My advice is to always stay the course as an investor. Don't get spooked by the short term thinking out there. Remember that you own companies, not share prices.

The new governor of the Bank of England Mark Carney seems to be a fellow that everyone likes. Even the old bearish David Rosenberg wrote an excellent piece in the Globe and Mail titled: Carney: The Wayne Gretzky of Canadian finance. I stumbled across this piece via the Business Insider website.

The only negative that I can think of (for Carney's image) is that Carney's wife seems to be not exactly mainstream. Or that is what I see is being bandied around as a negative, personally I think it is awesome. She is what is termed an eco warrior. Someone who campaigns for the environment as well as having very progressive views. Check this out: Diana Fox Carney: the bank governor's wife with her own refreshing opinions. Together, Mark and Diana they have four daughters, which is actually two less than Stephen Roach. You know Stephen Roach, the Yale lecturer and Morgan Stanley exec. But I am getting off the subject here. I think that the poms have really gone out on a limb here and good for them. Whether or not, when he becomes a British citizen, he will be able to make personal progress (chancellor of the exchequer) remains to be seen. Good luck.

Crow's nest. Markets are lower by around three quarters of a percent as a result of the late selloff on Wall Street. Some folks are still struggling to come to an agreement in Washington around tax reform, entitlement reform and all the other "things" associated with the fiscal cliff. But I tell you, that provides us with many opportunities too.

Sasha Naryshkine and Byron Lotter

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Tuesday 27 November 2012

DSTV killed your video store

"Video might have killed the Radio Star, but it is almost certain that superior network and satellite speeds killed the DVD. The DVD of course was responsible for killing the video. And believe it or not, that song Video Killed the Radio Star is only 33 years old. Remember CD's? Remember DVD's? In the same way that we will remember Betamax and VHS, as well as the tape deck, DVD's are a dying business. Slowly of course."

Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E. We sank a little yesterday off record levels, I guess you could say that Mr. Market took a breather. I am surprised that there is not more anxiety about the fiscal cliff issues. There were issues around Greece to contend with yesterday, we deal with that in detail below. Again there were concerns around the gold mining sector in South Africa, recently we have seen less flattering numbers from the local producers. Just today, this morning, there is a piece in the BusinessDay that is titled "Five years" warning for South Africa's ailing gold sector. To think that a mere few decades ago we were top of the world.

Gold Fields CFO, Paul Schmidt is quoted in the article suggesting that there will be no gold industry in South Africa in five years time. That sounds pretty dramatic, but I know what he means and what businesses concerns are. Perhaps a shoddy looking local GDP number will crystallize the thought processes of the powers that be. And perhaps a little education around the revenue collection processes is needed for some of our government ministers. Especially the ones that wanted to block the WalMart/Massmart deal. Yes, try and block that deal in the interests of what you read in a little red book from 1880 something, but be sure to fly everyone on the governments tab. Oh, and stay at places like a rock star. I checked some fellow wearing a SACP cap and t-shirt at a Nando's last week, I felt like telling him this canteen was built on the back of capitalist tendencies. But I suspect that he would find that out at some stage. Or not.

I think that I am starting to come to the conclusion that both Carmen Reinhart and Kenneth Rogoff were right in their book, This time is different. I read that book two Decembers ago, it was fun, and challenging at the same time. A tough read, because of the detail. But simply what the book was trying to get across is that some of the trouble countries as far as debt is concerned repeat their mistakes. Although, if memory serves me right, Greece were put into a category of countries that were emerging from a bout of serial defaulting, the future was in fact going to be different because of the inclusion into the Euro zone.

Alas, they should have heeded their own advice. There is a spreadsheet which you can download from the Reinhart and Rogoff website, for data that is specific to Greece. On that page, choose the Debt_to_GDP_Ratios_Country_F-M.xls file and then once downloaded, click on the tab that says Greece. Right at the top of the spreadsheet, with a column titled Total (domestic plus external) gross central government debt/GDP. In 1848 that measure was a whopping 408.8 percent debt to GDP. Wow. In 2010, including private debt, that measure had risen to 171.5 percent of Greek GDP, the place is technically insolvent. This is not a new occurrence, it has happened many times before for Greece.

In the wee hours of this morning the third time lucky line paid off for the European negotiators working on a next tranche of funding for Greece to keep them alive, in the monetary sense that is. The IMF is not completely happy with their portion of the next funding tranche, but an agreement has been reached is perhaps the most important part for us. The agreement included lowering interest rates to Greece, which means that effectively the peripheral Euro funders could end up losing money in this deal. Both Italy and Spain, according to the FT borrow at costs higher than interest costs that Greece will have to service. The current trajectory suggests that Greece will reduce their debt burden to 120 percent of GDP by the year 2020. Maturities and interest of Greek debt have been lengthened and payments deferred. The first lot of 34.4 billion Euros will be released on Paul's birthday, 13 December, the next round of 9.3 billion Euros at some stage in the first quarter of next year. Provided that Greece meets some reform targets, but this has always been the strong arming tactics from the rest of the zone. See that, Greece is still in the Euro zone and getting their aid from the other members.

Last Monday we looked at the Naspers trading update, this morning the company has released their results for the six months to end September. Consolidated revenue for the first half grew 22 percent to 22.597 billion ZAR, EBITDA increased 8 percent to 4.208 billion ZAR, whilst "core headline earnings per share" grew 15 percent to 10.62 ZAR. As the company always says in their results, core earnings excludes once-offs and non operating items such as unrealised forex gains or losses. The results have been boosted by the fast growing internet segment as well as benefitting from the weaker currency in the period.

Since the beginning of the year the company has made acquisitions topping 4.5 billion Rands, most of the focus is on e-commerce businesses. Businesses that have been bought include Netretail and Flipkart, as well as eMag, mentioned below. Naspers has seen organic growth of 27 percent in their e-commerce businesses, but with all the strong acquisitive growth that has been boosted to 4 billion ZAR, an increase of 61 percent over this time last year. Most recently, since October, and Byron wrote about these events, the company has invested 120 million Dollars in buying a controlling stake in an online retailer in Romania, eMag as well as a minority stake in a smaller Dubai based online business, Souq.com. That has to be one of my most favourite names for a website.

In the pay TV segment Naspers managed to add 393 thousand subscribers, the total base across the continent (48 countries covered) now stands at 6 million. You could argue that is nowhere close to maturity. In fact, if this business was the life of a person I would not hesitate to suggest that this is just a child learning to speak. In South Africa the additions were 187 thousand, to bring the total subscriber base to 4.2 million households. 87 percent of the growth came through the Compact offering. It is absolutely no coincidence that the compact offering includes both local and international football. Live sport is something that you cannot watch tomorrow, your mates have already told you the score and results.

Talking, of devices that you can watch your favourite programs on tomorrow, PVR sales increased by 90,000 with the total base now at 747 thousand. Which meant of course that rentals have taken off as people become familiar with the process of downloading and paying for movies. BoxOffice monthly rentals topped 400 thousand for the first time. I commented to my wife that I can't believe that "Video" stores still have the same priced films as BoxOffice. If I rented DVD's, I would employ someone to drop them off and pick them up, plus sell them at a discount to the BoxOffice one, at least in the better to do areas. Video might have killed the Radio Star, but it is almost certain that superior network and satellite speeds killed the DVD. The DVD of course was responsible for killing the video. And believe it or not, that song Video Killed the Radio Star is only 33 years old. Remember CD's? Remember DVD's? In the same way that we will remember Betamax and VHS, as well as the tape deck, DVD's are a dying business. Slowly of course.

This might well be the first time that I have however seen the subscriber base in Africa grow at this cracking pace however, with total subscribers increasing more on the rest of the continent than at home. Pay television was added to 206 thousand new houses bringing the rest of sub Saharan Africa subscriber base to 1.8 million folks. And the growth, as Naspers points out in the commentary was across all bouquets and platforms. You can't quite compare the satellite TV revolution in Africa as the cell phone revolution, because satellite TV is more for the one percent. Perhaps not quite, but richer people with a proper formal dwelling, access to reliable electricity supply as well as the earnings power of the household are more likely to be looking for superior entertainment. And often entertainment is live sport and in particular, football or soccer as the Americans call it.

Revenues from this core pay TV business increased 19 percent to 14.4 billion ZAR, trading profits totalled 4 billion ZAR, up 18 percent from the prior reporting period. The important investment cycle in the infrastructure will continue to suck cash, but should pay off in the medium term. Naspers are developing their digital terrestrial television (DTT) network across Africa, this requires big spend.

The old print business chugged along, margins improved as a result of cost cutting exercises. Revenue growth in this "old" division increased, by what the group describes as a pedestrian pace of 5 percent.

Core earnings from their associate businesses, the old exciting ones, Tencent, Mail.ru and Abril increased a whopping 46 percent to 3.1 billion ZAR. As you can see, the satellite TV, upgraded and all is still their most important business. Tencent now attracts 784 million instant messaging accounts that are active monthly. Peak online simultaneous users increased to 167 million, or roughly the entire population of Nigeria. Tencent is investing in ecommerce opportunities, again, that shift is coming. Mail.ru attracts a more paltry 32 million unique Russian users, but that is still not to be sneezed at.

Both the financial director, Steve Pacak and long time CEO, Koos Bekker are making noises about stepping up the spend in their e-commerce businesses in emerging markets. That will result in increased development spend and lower margins. But this will result in a different business, less reliance on two specific parts, a more spread and stable business. I think that bodes really well for shareholders, the greater the mix from the company, the better for both the long term profitability of the company and by extension, the shareholders. There is a definite shift in focus towards ecommerce, strangely a decade and a half when people got very excited about it. Amazon is changing the world, but at a slower rate than people anticipated.

The good news for Naspers shareholders is that they own these core businesses that are still growing. The pay TV business still excites me, and should continue to grow strongly. Their internet businesses are still exciting too, the opportunities are many. We continue to buy Naspers, even though the stock on an earnings valuation has always looked expensive. But when you drill down and separate the parts, well, then not so much. Good results, the market has responded favourably.

Byron's beats

"Omnia Holdings Ltd. and its subsidiaries (together, "the group") distribute speciality, functional and effect chemicals and polymers, offer a broad spectrum of services to the mining industry and produce granular, liquid and speciality fertilizers. The group has a presence and operations throughout South Africa and Africa, as well as in New Zealand, Australia and Brazil."

Basically there are three main divisions, Mining, Agriculture and Chemicals. Let's look at the numbers and how the future looks for this company.

Group revenue rose 21.5% to R6bn on the back of strong volume growth in the mining division and price increases. Operating profit increased 55% to R547 million thanks to big margin growth in the mining and agricultural divisions. This equated to 546.3c a share. The stock, which has had a great year so far (up nearly 50%) is now trading at R130. Historically the second half is better than the first thanks to seasonal variations in demand from the agricultural division. This puts analyst expectations at around 1200c for the full year. Trading at 10.8 times full year earnings the stock looks very reasonable.

Let's look at the divisions. Mining (mostly bulk explosives and bulk emulsion) which contributes 34% of revenues and 61% of profits had a really good year. Surprising considering our tough mining environment but their presence north of our borders was their saving grace. With a weaker rand and lots of mining projects expanding in Africa this division grew its profits by 79%.

Agriculture (Omnia Fertilizer is the market leader in Southern Africa) contributed 35% to revenues and 34% to profits also had a good year coming off a low base. This part of the business is very exciting as Africa becomes more and more prominent in agriculture. We have the fertile land, a great climate and the expertise are growing. Africa is also coming off a very low base. Margins improved from replacing expensive inputs with lower cost nitric acid from the new nitric acid complex. We will talk about this development later though.

Chemicals contributes 31% to revenues but only 5% to profits. Margins are not great in this business, only 1.4% which is well below target of 4.5%-5.5%.

Where the kicker lies for this business is the big Nitric acid plant they have built in Sasolburg. Production began in March 2012 which is going to benefit all three divisions. The R1.4bn plant has 40% more capacity than the first nitric acid plant and is by far Omnia's biggest investment. Nitric Acid is a key material in both fertilisers and explosives which will drastically cut costs and improve margins in both the agricultural and mining divisions.

Soft commodity prices are booming, mining in Africa is rife and the company is very well positioned to benefit from these macro elements. At these prices I would be adding to the stock even after the share price has rallied.

Digest this.

I did not know whether to laugh, or whether to cry, when I read the headline from the WSJ piece titled: Facebook Shares Jump 8.1% After Former Naysayer Changes His Mind. What? Some analyst decided that Facebook was now a buy and not a sell anymore, so now the stock goes up. Believe it or not, the concerns around being able to monetize mobile and the share unlock overhang seems to have diminished for this guy. What? There is a favourite moment for me in the Josh Brown book I have just finished reading, when he talks about the analyst community covering a stock/company by the name of Jamba Juice. Which was on fire and then flops horribly. Josh spoke of an analyst, Nicole Regan is her name, who he suggested saved his career by continuing to call the stock a buy all the way down from 11 Dollars to 50 cents. That is the same point I am trying to make above. At least Regan had conviction, a very bad kind of conviction, but conviction nevertheless.

It is just not British really. Barmy, Bees Knees, Bob's your uncle and bollocks, but what was the Bank of England thinking when they had chosen Mark Carney as the new governor of the BOE as of next year July? Why? Because he is Canadian. And a former investment banker. I absolutely love it! This WSJ article does great justice to describe who the man is, and what he will inherit: Britain Picks Canadian To Head BOE. The greatest thing about this appointment is that the first non-pom and 120th governor of the Bank of England has been a sensible appointment. The right person for the job, regardless of creed or colour, that is refreshing thinking. But then I looked at it a little closer. His wife is a vegan and British economist and apparently he will seek British nationality as soon as he assumes the role. So it turns out that all's well that ends well.

Crow's nest. Markets are higher here, thanks to the Greek deal. Deal number many and something. Hey, we are within a whisper of 38 thousand points. Next stop 40.

Sasha Naryshkine and Byron Lotter

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Monday 26 November 2012

Famous Brands with more steamy deals

"You see we don't have that Starbucks culture which is very much based on people walking through the city streets. We have shopping malls and let's be honest, people love to sit, drink coffee and eat. Coffee is a great business with big margins and the growth in breakfast again underpins that thesis of faster lifestyles with less time for cooking."

Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E. Friday of course was the traditional start of the shopping frenzy in the US ahead of the holidays, but was a very slow day for markets. We still managed to eke out a gain here on Friday, the Jozi all share index added 21 points to now what is just one good day away from 38 thousand points, 37865 was the closing level on Friday. I suspect, judging from the futures market that we would not get that today. Maybe. There is a lot of data out this week, we even get some insight into third quarter GDP locally here. There is a second look at US GDP, the preliminary read, the final read for third quarter US GDP comes out on the 20th of December. But I see a couple are suggesting an upside surprise in the US, whilst in Europe the outlook remains grim.

The finance ministers in Europe meet today again to thrash out the Greek money, hopefully third time lucky. I genuinely believe that the Greeks have done everything in their power to reduce spending, the unfortunate truth is that unit labour costs in Greece, Spain, Ireland and Portugal will only converge with those of Germany in Q1 2015, Q3 2016, Q2 2015 and Q2 2018 respectively. According to this FT Alphaville article anyhow: Converging competitiveness and balance sheet recessions. So, this is being massaged in that direction, no wonder everything is moving in slow motion. To take the pain now and in a hurry would be more than devastating, but watching the mess in slow motion is no more appealing. I will still maintain that whilst there is genuine hardship in these places, they are still rich people problems. The sums of money that are being given to Greece and the forgiveness is and was huge. So, no more would be the word from the Germans, that would set too dangerous a precedent. Oh, and what do you make of the folks from Catalonia going more wild and less centre? Catalan election weakens bid for independence from Spain is what the headline reads.

The term Black Friday is used to describe a day when traditionally the American retailers would shift into profitability for the year. Everything after that, the next month and a week or so would be the profit period. An accounting term, moved into the black for the year. It is not completely clear where the term comes from, but according to Wikipedia the term originates from the early 60's. Unfortunately from a markets point of view there was a shortened session in the US, following a day of resting and reflection in the US. Thanksgiving. Most of the giving was on the part of the turkeys, the PETA website suggests that 45 million birds are slaughtered for the celebration. Wow, that is a lot of turkey.

So, the normal rule of thumb for some serious retail therapy post the turkey gorging would be to go and look for special deals at your local retailer, stand in the queue and make sure you get that deal. But, sales were not the same as last year, slightly lower actually. Online sales however, were not, topping one billion Dollars for the first time. And then I stumbled across this, what a hoot: Las Vegas: Visitor Traffic on pace for Record High, Convention Attendance Lags. See that, convention visits to Las Vegas are still 20 percent off the all time highs in 2006, but overall visits are at their all time highs. So, whilst people might have bought less (or paid less probably) at the physical infrastructure stores than last year on the actual day, they are certainly not visiting Vegas less. As long as what is happening there, stays there.

But that was the actual day, Friday. What has happened over the last few years is that the whole weekend becomes an event. Black weekend. Total sales for the weekend increased in the mid teens over the last year, according to the WSJ: Early Sales Pay Off, for Now. So online sales jumped, but the average size per user shrank. Which means that more people are shopping online, which is becoming a preferred method for many people. I know that if I am looking for something different, find it online first. I suspect in the coming years that more and more South Africans will become used to transacting this way. I am certainly comfortable transacting online. I buy ebooks and magazines electronically, and have done so for a number of years.

Today however is Cyber Monday. Each and every year the shopping "holiday" becomes more and more important for retail sales. The event was coined in 2005, according to Wiki, by Shop.org. Last year Cyber Monday sales topped one and one quarter of a billion dollars, double what it was in 2006. Americans are used to shopping online, but you certainly get the sense that more and more are getting used to it here. I mean, think about it, I know what I want when I go to the store, if there is no sales consultant, no parking fee, no time "wasted" (shopping is not an experience for me) and more importantly no retail space being rented, the product must be cheaper online. It still needs to be bought and shipped, and of course stored in-between. It needs all of those things, but it can be much cheaper. We shall see how it all ends for the online retailers.

Byron's beats

The first announcement was a relationship the company has struck up with Netcare.

"The Netcare Group, which operates South Africa's largest private hospital network, has awarded Creative Coffees franchising company, a division of Famous Brands, a contract to provide a branded restaurant and retail solution to the hospital group under the Net Cafe trademark."

It makes sense, numbers passing through our private hospitals are growing. Patients and their guests need refreshments. If the quality is good, which you would expect from Famous Brands, then it is a no brainer. And they are getting innovative, this from the Managing Executive of Creative Coffees, Brent Kairuz.

"The new Net Cafe outlets will be designed to deliver an exceptional experience to all Netcare customers. This will include customised offerings in certain retail environments such as on-site preparation of flowers and gifts. Within a hospital environment, retail is a significant component of the overall sales mix of a hospital coffee shop because there is a strong demand from consumers for convenience purchases."

And then today they announced the purchase of well known brands Europa and Fego Caffe'. The consideration is not material so no number was given but I'm sure management did their due diligence carefully. CEO Kevin Hedderwick made some interesting comments, the one that caught my eye the most was the following.

"Current trends clearly illustrate that the food service market is underpinned by four major growth sectors: breakfast, coffee, snacking and chicken, and both Europa and Fego Caffe extend our presence within those categories."

You see we don't have that Starbucks culture which is very much based on people walking through the city streets. We have shopping malls and let's be honest, people love to sit, drink coffee and eat. Coffee is a great business with big margins and the growth in breakfast again underpins that thesis of faster lifestyles with less time for cooking.

Famous Brands now really do dominate the coffee market in SA with House of Coffees, Mugg and Bean, Brazilian Cafe and Wimpy along with these new acquisitions. They have a knack for buying the right companies at the right time. I like the theme, i like the ambitious proactive management and I like their dominant position in the market. We continue to add to this one.

Digest this.

Unintended consequences. You saw the case of the hedge fund that managed to seize the Argentinean frigate in Ghana, well there was a court ruling in their favour. But this is even more serious than that, because this ruling in favour of the hedge fund is likely to be met with a blank stare and blank account from the Argentineans. Read the background here: Argentina nearing technical default. So if they do pay, they are damned and if they don't pay, they are damned. All I can say is that it wont be long before the IMF boot them out for lying about their inflation numbers and then they realise that perhaps it is them, and not the rest of the world. Try and come back from that guys. Some places unfortunately are too "smart" for their own good.

The Fiscal cliff event has dominated, last week there was talk that there would be Republicans that would agree to tax hikes and that toned down the pending showdown. This was quite a good post I came across which outlined both the positive and negative sentiments that are facing Mr. Market right now: Weekly Bull/Bear Recap: Turkey Week Edition. I suspect that in amongst the "frog like" market participants, the earnings picture is key for me. 111 odd Dollars on the S&P forward means the index is cheap by historical standards. Companies, I will still maintain are in far better shape now than at most times through the last few decades. They have used the process to prune the weeds, paint the walls, repair the broken windows. For this week however, Talks Over Fiscal Cliff Stay Stuck in Low Gear. Expectations are low this week for a deal.

Crow's nest. The market has sold off around one third of a percent today thus far. Perhaps issues around the fiscal cliff delayed might present the flip floppers with some opportunities to sell after the great rally last week.

Sasha Naryshkine and Byron Lotter

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Friday 16 November 2012

Anglo. A sprinkle of good news.

"Locally we see the Anglo American Platinum staff return to work, there was a press release: Anglo American update re. Anglo American Platinum which spelt out the details. I spoke to a very good friend of mine in Rustenburg yesterday, he works for one of the heavy duty equipment suppliers in the area and he says that activity on his front has been very low recently. Very low, everyone is differing purchases of heavy equipment and they are in a wait and see mode."

Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E. Resources bore the brunt of the selling again yesterday, down a percent as Anglo closed in on territory last seen in October of 2009. There was a brief swoon down to 233.75 at the beginning of September, unfortunately we are close to that now. Prior to the period of great pity in 2008 when the stock was absolutely crushed along with all other equities globally, these levels are the same as 7 odd years ago in London. The stock first crossed 17 pounds sterling in September of 2005. We are now at 1699 pence. Sad face. Year to date however Anglo is down nearly 29 percent in London, whilst the FTSE is barely higher, nearly 2 percent up in a very tough year. In the same market, over five years, the FTSE is down 10 percent whilst Anglo American has lost 51.5 percent of their value.

BHP Billiton is up a rather pitiful 16.7 percent over the same time, but hey, you would take that any day of the next year, not so? Especially when you look at their peers. Rio Tinto is down 46 percent over the last five years, so the Anglo problems are not unique. Xstrata are down 72 percent over the last half a decade, that has caused the biggest stink. So BHP Billiton wins, as a result of their geographical diversity and portfolio quality. Now you know why they, BHP Billiton always talk about their tier 1 assets.

Locally we see the Anglo American Platinum staff return to work, there was a press release: Anglo American update re. Anglo American Platinum which spelt out the details. I spoke to a very good friend of mine in Rustenburg yesterday, he works for one of the heavy duty equipment suppliers in the area and he says that activity on his front has been very low recently. Very low, everyone is differing purchases of heavy equipment and they are in a wait and see mode. And the obvious question that I asked him, what about mechanisation was met with a yes definitely reply. And looking at different ways to make sure that the businesses stay afloat in this tough environment. What he did say to me however was that if "things" came back to some level of normalisation quickly, there would be pent up buying. I hope that he is right! There is the mere matter of Anglo American Platinum to complete their platinum review you know! That would be coming in the next few weeks I would think.

In news just out this morning, Anglo American and Lafarge announce the sale of a portfolio of Tarmac and Lafarge construction materials operations in the UK to Mittal Investments generating cash of up to £285 million. Of up to 285 million Pounds. This is part of the continued divestment away from the non-core assets to the big expensive projects. No, that was not fair. Or maybe it is. Not too sure, all we know is that we are not buying them now.

Byron's beats

Yesterday Woolworths came out with a strong trading update. I guess we are starting to get very used to strong updates from the likes of Woolworths and the other retailers. Nevertheless it's a good indicator that even off what is continuously becoming a higher base the growth is still strong. Group sales for the first 20 weeks of the 2013 financial year increased by 15.9%. Sales in comparable stores grew 9.9%.

What is interesting to see was the different growth rates between the 3 big divisions. Food sales grew by 11.2% on the back of a price increase of 7.3%. I did notice those pre-roast chickens going up in price. Clothing in SA grew by an impressive 13.7% with prices increasing 5.8% while general merchandise grew 11.5%. Sales in Australia and New Zealand grew 36.9% on the back of the witchery acquisition which took affect September this year.

I must say I do like the mix of Woolworth's products. Clothing is higher margin, a lot easier to transport and does not go off. The acquisition of Witchery seems like a good one to me. Not necessarily because they have access to the Australian market but more because I think they are going to bring those brands to South Africa in the same way they have done with Country Road. This is why the clothing sales growth in SA of 13.7% is very impressive. They have managed to turn their clothing division around in the last 5 years, Ian Moir who came from Country Road really playing to his strengths.

The debtors book grew by 10.9% with impairments for the period of 1.8%. That is a good sustainable rate which shows their consumers are not under too much financial pressure.

The stock has had a whopping year, up over 70%! On the back of their ambitious growth in the clothing division and maintaining those extremely high standards in the food department I feel Woolworths will continue to attract the aspirational consumer, steal market share and grow on the back of a stronger consumer. Still a buy for me.

Digest this.

It was taking an age, but I guess it is finally out of the way. Remember when the world was fixated with that camera at the bottom of the sea bed relaying us pictures of the Deepwater Horizon oil spill, more commonly known as the BP oil spill? At Deepwater the thing was really deep. The deepest well ever drilled at the time was here, a vertical depth of 10,683 metres according to Wikipedia. Amazing. I have told you these things before, but if you invert Mt Everest (8,848 metres according to Wiki) you still have a mere 1835 metres to go to the deepest point ever drilled by humans. If you add the altitude of Jozi, our city here, 1753 metres above sea level you still have another 82 metres to go. I am hoping that we would be able to crack that distance in under 12 seconds. Hey, in the recent dads race at school I did alright. I can win that next year.

Not winning is BP though. Not the dads race, but this was coming, a monster fine: A Breakdown of the $4.5 Billion Worth of Crimes BP Committed. The stock rose a little. And the worst is now out of the way. The stock looks awfully cheap, but that was relative to an old business that people knew. But still, it is BP. Meanwhile, closer to the surface and mostly on land, this theme that we have been following has been happening: America's oil bonanza. I am not one for the projections and expectations, but this would be very good for the Dollar and more importantly the trade deficit for the USA.

This is a day or two old, but we need to take a look at the recent Starbucks transaction. They bought a tea company. You could have seen it coming with the company dropping the "coffee" part from their logo. In fact, if you read this Bloomberg piece: Starbucks With Teavana Moves Schultz Beyond Coffee Roots, you can see the diversification path was set out a long time ago. Tea shops? I suppose culturally there are as many people who enjoy tea as they do coffee. Tea is an art form in the East. In Japan, China and Korea there are all specifics with regards to the ins and outs of tea drinking and preparation. If I drink tea, it is normally Rooibos. At University though I drank tea. A lot of tea. Too much tea. Perhaps Starbucks can mesh the two cultures together, Tea seems so ballet whilst coffee seems heavy metal at times. Perhaps somewhere in the middle.

How are we doing thus far into earnings season? Turns out not that bad, about as well as people expected, a drop off in earnings. This of course is not surprising bearing in mind all the anxieties that we have had this year. Cullen Roche (I know, we have seen lots of him, but he does some good stuff) does a summary of someone else's summary: Key Points From the Q3 Earnings Season. The only thing that worries me about this earnings season past is that the top line beats were far and few between. The bottom line beats were around 2 out of 3 S&P 500 companies that reported, which means only one thing to me. When, (and there will be a when) companies see the benefits of increased consumer activity with a return of confidence, all the cost cutting exercises would have happened already. Companies have had four years to train and become the trimmest machines in decades. I mean, they are in far better shape now than back then, in 2008. More Brad Pitt and less Vince Vaughan. Ouch. Vince is funnier though. Oh, and whilst margins did not increase substantially, they were essentially flat. That is also a good thing.

Why oh why would you think that liking this observation is a good thing: Pessimism Surges to Highest Level Since August 2011. I will tell you why. Because in exactly the same way you remember my observations about the Sell Side Indicator I wrote back then, when I saw this piece in September: "that just before the Tech bubble exploded, analysts were even more positive than ever before. The reverse is true now." So, at the risk of sounding completely contrarian, the analyst community is useful and people feeling pessimistic are useful, but not the litmus test. Opportunities are here I suspect.

Lastly, who better than the Economist to do a job like this, covering what is "new" about the Chinese leaders: A change of style, but not of substance. I quite liked this NY Times article of the second in charge, Li Keqiang (pronounced, as per the article: lee ke chang) Liberal Background, but Limited Leeway, for a New Premier. That closing line is a bit of a hoot though: "Smart leaders will reform because they want to. Idiots will reform because they have to." Either way it sounds like reform to me.

Crow's nest. US futures are lower, stocks are trending lower, things feel soft and squidgy. Looking across my screens I cant see too much that would change that in the absolute short term, but stocks are looking cheaper. And that means that those with buying appetite should be putting funds to work.

Sasha Naryshkine and Byron Lotter

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Thursday 15 November 2012

Anglo's horrible no good week

"Two difficult phone calls to have made would have been the project co-ordinator to Cynthia Carroll and then her call to the chairman John Parker. And then, the more important question is, when Anglo American start shipping iron ore in 2014, what is the iron ore price going to be, and what will global steel demand look like?"

Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E. Gold miners took an absolute pasting, down nearly three percent on the day, platinum stocks collectively sank nearly two and one quarter of a percent, whilst retailers sank by roughly the same amount. The overall market was lower by 0.41 percent to end the day off at 37242. We were at some stage during the day 100 odd points higher. Not the greatest performance lately. The currency weakened, the violence in the agriculture sector which has spilled over from the mining sector seems to be weighing on sentiment again. We forget that an equally worrying truck drivers strike was resolved timeously not so long ago.

The mine workers strike at Amplats is still not resolved, we have seen another extension of the offer from Amplats. The first return to work offer was tabled on the 27th of October, the talks had started with the workers, the company and the represented unions. There has since not been an extension, but according to the Anglo American Platinum update on 9th of November, workers were to return by 12 November, or the offer would lapse. There is a MiningMx story from last evening which suggests that the strike could actually end today: Amplats breaks 8-week strike with new offer.

That last part: "The strikes have cost Amplats close to 170,000 ounces in lost platinum production which would fetch around $250m at current spot prices, Reuters said" was highlighted in a trading statement from Aplats yesterday. The company said that they expect to make less than 20 percent (no range) than they made in the prior period. Less than 20 but not less than ...... ? is hardly encouraging for shareholders. Of course if you needed reminding, Anglo American holds four out of every five shares at Amplats. And it has been a bad week for them, Capex overrun at Minas-Rio, Kumba Iron Ore earnings to be lower (Anglo own nearly two thirds of Kumba) and now this trading statement from Amplats. Eish.

No wonder the stock looked so cheap, the market knows. I have already seen a few sell recommendations on Anglo American. And earnings are expected to slump. I saw a note that suggested the following: "Anglo trades in line with the sector average but in our view demands a discount. As such, we reiterate our SELL recommendation." I have however also seen lots of buys and holds, an equal amount, so let us just say that the jury is out on this one. Trying times indeed. Forward the stock demands a multiple of around 14 times, which does seem expensive considering the deep fog that seems to have set over it.

Talking fog, let us just put this out there. Anglo American costs on Minas-Rio are set to be roughly 20 percent of their current market cap. How did I work that out? I took the Pound Sterling market cap, 23.68 billion Pound Sterling and then multiplied it by the Dollar currency cross, 1.5845 and got to 37.52 billion Dollars. 8 billion dollars is to that market cap 21.3 percent. In April of this year, if you read this document, Minas-Rio is one of our four major strategic growth projects, it says: "The $5 billion project is expected to produce 26.5 million tonnes per annum." Add the revised upwards costs of 8.8 billion, that is the high number, and the whole cost of the exercise is closer to 14 billion Dollars. That includes the purchase price. Wow. Words fail me really.

Two difficult phone calls to have made would have been the project co-ordinator to Cynthia Carroll and then her call to the chairman John Parker. And then, the more important question is, when Anglo American start shipping iron ore in 2014, what is the iron ore price going to be, and what will global steel demand look like? I suspect that global steel demand will be robust, still driven by the Chinese consumption, albeit at a much slower rate than before. All around, this project has been awful for the company and is perhaps the main reason why Cynthia Carroll resigned, or was forced out. Yech. And if you needed reminding of how bad it has been, MTN and Richemont are breathing down Anglo American's neck here in Jozi, in terms of market capitalisation. Richemont are a mere 7 percent away from Anglo, whilst MTN are only 9 percent away. Different histories, MTN and Anglo American, the one is a whole 77 years older than the other. Wow. Times changed quickly. If MTN were a person, they would only now be illegible to vote or get a drivers licence this year.

Digest this.

Don't laugh ok. But this story is hard not to laugh at: Puppies: The new indicator of prosperity? This kind of makes sense. If you are rich, you are going to own a nice puppy that you are going to have to look after, Make no mistake, I feed my hounds in the morning, every day and it is their absolute favourite time of day. What does however amaze me is that there are fewer people getting puppies in the developed world, perhaps it is expensive.

The housing recovery improves, and I guess this is a sign. Housing Inventory declines 17% year-over-year in October. What does that mean? Lower inventory means sellers are fewer, which means the demand side could or should continue to drive prices higher.

Dave Rosenberg has been a little bearish. For quite a while, so I was more than a little bemused to come across this post from Cullen Roche, in which he quotes Rosenberg extensively: David Rosenberg: The Most Compelling Argument for Equities. The part about fixed income yields relative to the dividend yields: "I think that for those investors who are running into cash or cash-like instruments or government bonds in the name of safety need to realize that interest income is in a full-fledged bear market and dividend income is in a massive bull market." You kind of knew that part though, yields on government bonds that are safe are really low, whilst company cash reserves have swelled to massive levels, and they are being more generous. This part made me really sit up though, the "five-year Treasury yield down to 60 bps, at a time when the dividend yield in the stock market is closer to 2.3%, for a 170 bps gap we haven't seen since 1958." So does this mean Breakfast with Dave is going to be an equities affair? Perhaps his view on housing has changed.

We showed you something similar the other day, the post from Josh Brown titled and then Google ate the entire newspaper industry really hits you hard. The graphic which shows that Google ad Dollars has absolutely crushed the US Newspaper and Magazine industry Advertising Dollars shows how consumers have changed the flow of the dollars. Check out the associated graphic, thanks Josh for this, I really appreciate it:

Oh, and while I am here I must give Josh's book a punt, I just finished reading it. Check it out: Backstage Wall Street: An Insider's Guide to Knowing Who to Trust, Who to Run From, and How to Maximize Your Investments. I must warn you however. It is actually shocking how the bucket shop houses operate. And Josh lays it all out here. A must read.

Facebook announced something different last evening. Here it is from the horse’s mouth: Announcing the Social Jobs App. What is it? Well, this is the app that helps users connect with roughly 1.7 million job offerings. The Social Jobs Partnership or SJP will "make it easier for people on Facebook to find and share employment opportunities." I must say that this was perhaps a long time coming. The only downside I can see is that if you are mates with your boss on Facebook, how do you keep this a secret? I am tuned into the LinkedIn stream which suggests so and so added new skills or even better upgraded to a fully paid service. That kind of hints to me that someone is more than putting themselves out there.

So what does the rest think? Well, it turns out that this has been positively received: Facebook Launches Job-Listing App. That was the Wired view. What about the WiredIn view? If such a thing exists. Turns out that it does, but not what I would have thought. But again, I am getting off the point here. The point that I am trying to make is that this announcement coincided with 800 million shares becoming available to be sold in the market. Huh? You would expect that price to go down then. But instead it was up over 12 and a half percent. Still, the stock is half of what its all time high was. Some are suggesting that the selling will come in days as those wanting to exit now can. And who knows how that will end.

Crow's nest. The leadership change in China has gone off smoothly, we can cover that in the coming days. American markets got bashed around their ears as there were more worries about the fiscal cliff, the ongoing negotiations between the two parties. Both have kicked off, this is going to be exciting. Everyone on the tv screens that I see are committed to this, wearing little buttons called "Rise Above". I think it might actually be a CNBC initiative. In fact I found reference to that: Why 'Rise Above?' We should have the same initiative here too. Rise above the political rhetoric in order to get the real problems solved. Make education an absolute priority. You can't take away the smarts of a person, if you know what I mean.

Sasha Naryshkine and Byron Lotter

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Wednesday 14 November 2012

Cisco powers up

"When you dig a little deeper into the revenue numbers you find that the new businesses have rocketed. I was very pleased to see a 30 percent growth in their Service Provider Video Business. Their wireless business grew by 38 percent and their data centre business exploded, up 61 percent. Collectively however, if you add those three businesses together they are still less than 20 percent of their overall sales, almost equal to their routing business, which saw sales contract a little. Even their core switching business showed negative sales growth of 2 percent."

Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E. Although retail and industrial stocks improved, supported by the beaten up platinum stocks that enjoyed a rare good day, the JSE All share still closed in the negative, down 0.3% to 37 352.25 points. The gold stocks were beaten up, the Rand continues to be battered, perhaps the storm is more external, the Euro Dollar rate continues to favour the Greenback, the Dollar has strengthened as much as three percent over the last four weeks. Equity markets have gone in the same direction, lower. So perhaps one should just watch the Dollar. And now, the Japanese are heading for another election as Prime Minister Noda has indicated that he will dissolve parliament (the Diet) in two days time. Elections will take place almost immediately and the expectations are that Abe will get another shoe in. Which might not be that good. Watch that space.

And if you missed it, everyone is reporting that there should be a major shortfall in platinum production, for the first time in nearly a decade. Johnson Matthey, the experts in this field said so yesterday. But their price targets for platinum is not that far off from where it is trading now, suggesting of course that those transacting in the precious metal know this news already. What might boost the platinum price a little is if Anglo American Platinum (or is it Amplats?) in their review decide to stick a few more shafts on care and maintenance. I can't see the situation looking anything but ugly for the short term. But, as they say in the classics, there is gold in them hills! Or platinum in this case. I curse the Citi report about the 2.5 trillion Dollars worth of value in the ground.

Telkom. Ouch. They have provided us with another trading update today, which follows the one from September the 21st, which we wrote up about in September: Telkom report another fall in earnings. At that stage Telkom reported that earnings were going to be lower, but did not give the absolute range. Now they have presented the range, which is worse than the estimates bottom point. "Telkom hereby advises shareholders that headline earnings per share from continuing operations for the six months ended 30 September 2012 are expected to be between 78% and 83% lower than the comparative period." Yech. And as we pointed out, HEPS (from continuing ops) clocked 191.7 cents this time last year. So expect HEPS to be 37.3 cents in the middle of the range, for the half year. Ooops.

And then "Basic earnings per share from continuing operations for the six months ended 30 September 2012 are expected to be between 62% and 67% lower than that of the prior period." Reminder, basic earnings per share was 32.5 cents this time last year. Expect that to be around 11 and a half cents this time around. Results are due next week, on Monday in fact. Perhaps this is the absolute bottom. I just can't find a compelling reason to own the stock. Sorry. We still avoid the stock, the company still has a dominant place in the South African telecommunications space, if only someone, somewhere would treat it as a proper business rather than a government experiment in a socialistic project. Sure I would like everyone to get internet access, but it turns out that the mobile companies are already doing that.

Byron's beats

This morning we received full year results from Spar group. Under the Spar umbrella falls the Spar brand, Build It, Tops and Pharmacy at SPAR. But this business model is different to the likes of Woolworths. Spar is a franchise so its main function is to operate its 7 distribution centres and supply and service independently owned Spar franchises.

This has its pros and cons. Because owners are incentivised to make their business a success you get some fantastic Spars, like the one at Broad Acres which is better than most Woolworths stores. But this goes both ways as bad operators can tarnish the brand. The Spar in Parkview comes to mind. And this is exactly why Woolworths have been buying back their franchises, so they can control their quality. Spar does own some of their bigger stores (11) to maintain some sort of quality standards.

The success of this distribution business is still fully geared to the retail sector and how well their stores do. And according to the numbers we are still seeing double digit growth. Turnover increased by 12.2% to R43.2bn. 6.4% of that was attributable to price increases and the rest due to volume growth. Within the revenue mix, Spar wholesale grew 11% to R35.5bn, TOPS grew 18.3% to over R3bn and Build it grew 18.5% to R4.6bn. So people are drinking more beer while improving their homes. They are eating a bit more too.

Headline earnings rose 11% to R1.06bn which equated to headline earnings per share of 616c. The stock trades at R122.88 which is actually down 3.2%. These numbers must have missed expectations. The dividend declared equated to 430c. You see they can afford to pay out shareholders the lion's share of earnings because expansion is out sourced to entrepreneurs. Earnings of around 700c are expected for next year. This means the stock trades on a current yield of 3.5% and a forward PE of 17.5. Expensive but we have discussed retailer valuations extensively, these levels are inflated by foreign ownership and judging by their recent performances, rightfully so.

Unfortunately for us, Spar is a case of you just can't own them all. We prefer Massmart because of their model and Wal-Mart backing. We have also favoured Woolworths in the upper end supermarket sector and Cashbuild as a separate building retailer. I like the stock and the sector but we prefer the others just mentioned.

It was that time again, the Cisco disco. The company released results for the first quarter of their financial year, and judging by what the stock is doing afterhours, let us just say that the market enjoyed them. A lot of people struggle to understand this company, I figured that I was always going to do a worse job than Google finance in trying to describe the company, so here is a copy paste, right up the alley of a former police chief here locally. You know, the fellow that had a remarkable resemblance to Morgan Freeman.

"Cisco Systems, Inc. designs, manufactures, and sells Internet protocol (IP)-based networking and other products related to the communications and information technology (IT) industry and provide services associated with these products and their use. The Company provides a line of products for transporting data, voice, and video within buildings, across campuses, and around the world. Its products are designed to transform how people connect, communicate, and collaborate. Its products are installed at enterprise businesses, public institutions, telecommunications companies, commercial businesses, and personal residences."

If you want to think about the internet as a river, or better, a set of canals providing the information, then Cisco are the people who build sluice gates, the people who make sure that the water flows fast and in the right direction. Routers, switches, wireless systems, storage facilities, the cloud, call centres, even fancy IP phones. Those Cisco phones rock. So, everything to do with the internet. So, if you think that the internet is a growth business, just in general, then Cisco would be well positioned to benefit from the continued expansion and digitalisation of the world. Heck, your fridge is even going to have an IP address. IPv6 people. The whole idea is that you would be able to control your house from a smart device, turn on lights, get your fridge to relay to you that you are running short of stuff (milk, veggies) that ordinarily you would only discover later. The future is here already, perhaps some people find that a little invasive, a talking fridge. Perhaps it comes with a scale and can tell you to "step away from the fridge people" when it is just you alone. No more midnight snacking.

Cisco released the numbers post market, the top line number came in slightly higher than anticipated 11.876 billion Dollars for the quarter, led by a strong bounce in their core business in the America's. Still, this only represents a 6 percent increase from the corresponding quarter. But hey, I will take that especially when they say in the documents that went alongside the Q1 Fiscal Year 2013 Conference Call, that it is "a very challenging market, where many of our peers are reporting declines." Good one. Gross margins ticked up, which was another sign that the hard work the management team has done with streamlining the business, simplifying the business has started to pay off.

When you dig a little deeper into the revenue numbers you find that the new businesses have rocketed. I was very pleased to see a 30 percent growth in their Service Provider Video Business. Their wireless business grew by 38 percent and their data centre business exploded, up 61 percent. Collectively however, if you add those three businesses together they are still less than 20 percent of their overall sales, almost equal to their routing business, which saw sales contract a little. Even their core switching business showed negative sales growth of 2 percent. Pleasingly their services business grew 12 percent, this is the second biggest segment representing 22 percent of total revenue. So this is a case of the older businesses contributing less and the newer business starting to grow strongly.

The company bought back 15 million shares at an average price of 16.44 USD per share, but more exciting for shareholders was the big bump up in the dividend to 14 cents a quarter. That translates to 56 cents per year, which at an afterhours much higher share price of 18.12 that represents a yield of 3 percent before tax. This is a company that only paid their first dividend in March of 2011, that is better than "not bad". Net income grew 11 percent to 2.569 billion Dollars, that translated to 48 US cents per share earnings for the quarter. I would say that you should expect at this click around 200 to 205 cents worth of earnings for the full year. Again, at the aftermarket price (18.12 USD) the stock trades on a forward earnings multiple of less than 9 times. Phew, old tech went cheap in a hurry. But when it was expensive it used to be known as new tech, we will explore that a little later.

Cash, cash equivalents and investments was 45 billion Dollars as at the end of the quarter. That sounds like a lot. In fact, relative to their market cap of just shy of 90 billion Dollars, that is crazy. Nuts. In fact, given that the stock has jumped after market to what roughly translates to a market cap of 96 billion Dollars, their cash, cash equivalents and investments as a percentage of market cap is 47 percent. On an ex cash, cash equivalents and investment basis, the stock trades on an earnings multiple of less than 5 times. What? I can see why the average price target for the analyst community is 21.53 Dollars, as per Yahoo finance.

These are record results against a backdrop of a challenging macro environment. But that does not answer the question, why is the stock so cheap? Perhaps it is John Chambers. Don't ever let life challenges set you back, Chambers overcame dyslexia. However he pays himself (the company pays him, sorry) an awful lot of money. Some people suggest the guy is worth as much as 1 billion Dollars. Holy smokes! Last year the fellow was paid nearly 38 million Dollars. Wow. He has been CEO for 17 years, it will be 18 years in January.

Or perhaps it is that old tech has been discounted out of sight. But the truth is that the company has operating cash flows of around 10 billion Dollars per year. We are going to be patient on this one. The stock looks cheaper and I suspect that it will get a rerating soonest. Stay the course, we are still buyers.

Digest this.

Sometimes you come across a piece of analysis that crystallizes what you have tried to say all along. Corporate and households in the US deleveraging aggressively, saving more, and making sure that they get their financial house in order after the worst financial crisis in living memory, or that is at least what everyone tells us. Naturally the US government filled or plugged the gap, and as such saw their debt levels balloon much to the horror of all and sundry. This post absolutely nails it, with Cullen Roche explaining how Goldman Sachs economist Jan Hatzius Connects All the Dots. More cash on companies balance sheets, more savings by individuals, and US government committed to winding their neck in over the coming years. Or at least that is what the fiscal slope event is telling us. That can't pass soon enough!

Crow's nest. We are flat. US futures are higher, perhaps the positive Cisco news about corporate America. That is good to see after a barrage of negative news lately.

Sasha Naryshkine and Byron Lotter

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