Money with a dash of Funny: December 2012

Friday 7 December 2012

ABSA's African advance

"But what does this mean if you are indeed an ABSA shareholder? Well, I suspect that you got a pretty good deal, that was my initial thoughts without having done too much of a detailed analysis. I was gobsmacked at how small the ATM infrastructure actually was, which means that mobile money has a brighter future than I even thought."

To market, to market to buy a fat pig. Yesterday all eyes were on the really witty and suave Mario Draghi, the head of the European Central Bank. He lowered his projections for the European recovery, I guess that is about right. All the numbers that I have seen in Italy for instance have suggested that lower economic activity has not exactly bottomed out yet. I suspect that in the next month or two we will see both the unemployment rate taper off and PMI bottom in Italy. Silvio Berlusconi was up to his old nonsense again in Italy, but existing Prime Minister Mario Monti survived a vote of sorts related to economic policy. Berlusconi has withdrawn support for Monti's government as it exists now. Bother. Well, we didn't get that face by being someone who doesn't love himself. Berlusconi that is. He is 76, extremely rich and extremely opinionated. I remember him keeping Angela Merkel hanging whilst he took a telephone call, check it out, priceless: Berlusconi keeps Merkel waiting by taking phone call at NATO summit. He must have been organising another one of his weekend "meetings".

Back to Mario Draghi. The ECB predicted that the zone would contract in 2013, revising down from half a percent growth in 2013. Inflation expectations were also lower for both next year and the year after that. Growth anaemic, inflation no problem and outlook more than foggy. But, as the ECB chief said, they had done a lot. And were ready to do whatever was needed of them, now that the programs are in place. And of course, the countries wanting to participate, they now know the conditionality clauses. I suspect, like the Italians and the Spanish, with someone waving a giant stick, the bond vigilantes will stay away. This is almost like a leopard warding off a few hyenas.

Back home in Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E we managed to end another day at a record high. Not quite near the all time highs, which were set intraday yesterday, but closing at another record high, I guess that is very pleasing from our point of view. And believe it or not, I have seen several notes in recent days from brokerage houses suggesting that some South African retailers, which have dizzying valuations for the locals, have been called buys. Yes, don't stress about the 25 times multiple, the growth rates over the coming years look appealing enough for us, thanks very much. And you can't fight or perhaps even fault that. In the same way that we sit here and think that the prospects for both East African and West African retailers are very good. Using the generic Mark Mobius type commentary, check this one out, from October this year, a guest post on his blog: Will South Africa's Struggles Overshadow its Potential? We often have a chuckle when we do a Mark Mobius here and say stuff like: "Big population, low base, lots of mineral resources, steady democracy, lots of potential". That is possibly the same line that international investors take on our retail sector in the same way we would, for instance look at Nigeria's retail sector.

The biggest news on our market by a country mile was the announcement by Barclays and ABSA, as per the Barclays website: Barclays and Absa agree strategic combination of Barclays Africa operations with Absa. By combining the rest of the African operations with ABSA locally, there is a headquarters and a strategy from one place. Which I personally think is awesome for both sets of shareholders, which is why I suspect that is the reason that ABSA rallied 5.5 percent yesterday. In London, Barclays rallied 1.63 percent to close at a 52 week high, which I guess is pleasing for that long suffering set of shareholders. Over a five year period Barclays shareholders are still down 55 percent. Eish. Over ten years they are down 38 percent. Eish indeed, that has been a rather awful time, no thanks to the period of great pity of late 2008, early 2009.

But what does this mean if you are indeed an ABSA shareholder? Well, I suspect that you got a pretty good deal, that was my initial thoughts without having done too much of a detailed analysis. I was gobsmacked at how small the ATM infrastructure actually was, which means that mobile money has a brighter future than I even thought. So what will ABSA shareholder hold now? Well, as per the release: "Botswana (67.8%), Ghana (100%), Kenya (68.5%), Mauritius (100%), Seychelles (99.8%), Tanzania (100%), Uganda (100%) and Zambia (100%), as well as the Barclays Africa Regional Office in Johannesburg (100%)" Kenya and Botswana have minorities through the local listings. ABSA will continue to "own 100% of Absa Bank Limited, 95.8% of Barclays Bank of Mozambique and 55% of the National Bank of Commerce in Tanzania." As you can see there is a strong focus on East Africa here, with only a base in Ghana in West Africa. Zimbabwe and Egypt are ~~considered basket cases~~ are excluded from the deal. The combined new entity will be known as Barclays Africa Group Limited. The ABSA brand will be continued to be used locally in their retail banking and card division. I am guessing just for now. Here is a slide (which I messed with a bit to fit my page) to explain which businesses they are buying:

So, what did ABSA pay Barclays for this transaction? 129,540,636 ABSA shares valued at roughly 1.3 billion Pounds Sterling or 18.33 billion ZAR, based on two things, a) an exchange rate of 14.10 ZAR to the British Pound and b) Based on price of 141.5 ZAR per ABSA share. As of last evening that was 149.5 ZAR. Still, before you get excited, the 52 week high is above 160 ZAR a share. The 3 year performance at this point is a 17 percent gain. More on that a little later. Paul said for a second, who did the independent analysis here? Was it the same people that valued Autonomy at 10.1 billion Pounds? I laughed and said no, I suspect not, and when I got a chance to look closer found that it was Goldman Sachs International who acted as the financial advisor on this deal. If ever you needed a rubber stamp.

In case you wanted to know who the HP/Autonomy advisors and banks, lawyers and accountants are/were: H-P's Autonomy Deal: Here Are the Advisers. On HP's side there was none other than Barclays! And on Autonomy's side there was Goldman Sachs along with 5 others, including UBS, Citi, JP Morgan Chase and Bank of America. But that is another horrible chapter in deal making, HP, what were you thinking? Awful.

Back to the price paid by ABSA for Barclays Africa, 1.3 billion pounds is a lot of money. It represents a little more than four percent of Barclays entire market capitalisation. By adding another 129 and a half million shares, Barclays ups their stake in ABSA to 62.3% percent. As ABSA shareholders, you get diluted by as much as 18 percent. In the presentation, titled Barclays Africa transaction Investor presentation, there are a few highlights worth pointing out: "Price to book of 1.7x and 10.1x historical PE (1H12), no control premium as Barclays remains majority shareholder" AND

Basically, ABSA paid a ten multiple based on annualised profits after tax for the rest of the African operations, which were 1.8 billion Rands. Is that cheap? Well, yes and sort of. I did a quick back of the matchbox calculation for Barclays Kenya, which earned 0.67 shillings per share for the half year (Barclays Kenya Posts a 13 per cent Increase in Profit Before Tax), and last traded at 14.30 shillings (Barclays Bank of Kenya Ltd – Bloomberg price). That is an about 10 and a bit multiple. So, to be fair to this cheap transaction price paid by ABSA and the rest of their shareholders, this was market value. Which explains why there is no premium paid, because not too much changes for the gorilla shareholder Barclays.

I shall leave you with the not so good news for ABSA shareholders, but the past is the past. Over the last 12 months ABSA has returned 2.25 percent for their clients. Not great, bearing in mind that there was a big 5.5 percent move yesterday. FirstRand over the same period has returned a mind boggling 48.55 percent over 12 months. Standard Bank a more muted 8.8 percent gain. And Nedbank a very acceptable 23.9 percent return over the last 12 months. Year to date the banks have returned 21.5 percent as at this morning. Astonishing really that ABSA have lagged their peer group by so much over the last year. Over five years however, to be fair to ABSA, which have returned 24.6 percent have lagged the broader index, but not by too much. The banking index over five years has returned 30.4 percent. Last year, not good, five year, just lagged. The good news is that ABSA are up another two and a half percent this morning, so far.

In New York, New York. 40^o 43' 0" N, 74^o 0' 0" W Apple bounced back after a big fall the session prior to that, perhaps the stock was too juicy to ignore. Check out this subscription only WSJ article: Apple's Power Within. It basically suggests that because Apple is both a hardware and software company, that is quite a good thing. Phew, insightful. No really, it is a good read, check it out. All this of course ahead of the non-farm payrolls number, a much lower number expected this time around, no thanks to the Hurricane named Sandy. Sandy of course is also ironically the squirrel that lives at the bottom of the sea in Spongebob, and is always trying to keep dry. See the connection? Hopefully there is no need to mop up the floor when the non-farm payroll number comes through at around three thirty this afternoon.

Crow's nest. That will be about all that Mr. Market is focused on for today that is. Word on the hill is that both sides have committed to not going home for Christmas, I can remember saying that was almost the best thing about these negotiations. Of course nobody wants to spend time with their colleagues over Christmas and in particular in this case, the opposition. So I am guessing that a deal will be forthcoming soon, with concessions on both sides. We shall see. I, myself am off early, I shall be back on the first working day of the year. Byron and Paul are here right up to that week between Christmas and New Year. We are of course always online and available through our emails if you need us! Oh, and Gangnam Style just clocked 900 million views, you must try and get PSY to one billion!

Sasha Naryshkine and Byron Lotter

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Wednesday 5 December 2012

Apple falls far from the tree

"I am not too sure what to make of it all. There is definitely been a shift in quicker roll outs, shorter times between products and rising costs associated with development. But Apple still sits on the most impressive cash pile. Which is now at 538 Dollars around 127 Dollars worth of their current price, in cash alone that you get when you buy Apple. So, if historical earnings are 44.16 Dollars a share, on an ex cash basis Apple are trading at 9.3 times earnings. And a two percent dividend yield. Phew, I am not too sure about you but that looks crazy cheap. I suspect that because the stock has rallied so hard this year, and folks are anticipating higher dividend and capital gain taxation as a very widely held stock there might be folks cashing in."

To market, to market to buy a fat pig. The focus of our TV's yesterday was mostly about the midterm budget in the UK, something that the Brits call the Autumn statement. I did see my mates in the UK on Facebook suggest that it was snowing, perhaps Autumn was skipped in the same way that we skipped Spring here in Jozi. That famous little satchel, I want to know how old it is, the one that The Chancellor of the Exchequer carries. The title, as far as the record books show, stretches back to 1221 (more or less) when a fellow by the name of Eustace of Fauconberg took charge of British finances. So the office is nearly 900 years old. That is simply astonishing. There is actually an incomplete list at Wiki: List of Chancellors of the Exchequer. Wiki also reveals the not so secret of the red briefcase, the Budget box. What made me chuckle was that the key to the original one was lost. Perhaps it was a bad budget and the key was swallowed by the Exchequer at the time.

What I did find quite interesting was the fact that the poms decided to drop the corporate tax rate by a percentage point. They now have one of the lowest corporate tax rates anywhere in the world. I was showing Byron one of my favourite Milton Friedman clips on YouTube, titled The Free Lunch Myth. I love the opening quote from French economist Frederic Bastiat, from around 150 years ago or so: "Government is that fiction whereby everybody believes that they can live at the expense of everybody else". But in this piece, Milton Freidman suggests that corporate tax be done away with, in its entirety. You would probably find that currently it is much easier to collect directly from the company.

Freidman is not all folks cup of tea, but I must admit that I really, really like his stuff. He is an economic Nobel prize winner. He is a free market type, which is probably why I like his stuff. His biggest successes you could say is that he influenced Augusto Pinochet, the military dictator of Chile. His Grandson is a Chairman in a foundation pursuing the idea of Seasteading. New republics and all that! Pursuing the idea of Liberalism. I can see why the idea is so appealing for free market lovers. Off topic, we started on the poms and got led here.

In Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E resources led the charge again, powering up one and a half percent as the Chinese government committed to their infrastructure plan. You will recall yesterday in our message that we did a simple analysis of what the great Chinese miracle had done for ordinary citizens. In other words, the economic reforms away from an agricultural driven economy towards manufacturing has been a great success. But, it is not without its problems, Chinese people have been unable to shift into a consumer mode, and if anything have been saving more and not less. A cultural understanding is needed for all folks living outside of the country. Remember that the social security system internally in China is virtually nonexistent. One more important thing, currently in the urban areas a set of grandparents will have only one grandchild each. 4 Grandparents, 2 parents, one child. Let us just say that the six of the older folks know that they have to save for themselves, the reliance on the younger generation is a bad idea.

But whether we like it or not, the Chinese have done great things indirectly for our economy. The people at Kumba/Sishen/Anglo and BHP Billiton did nothing to change the price of iron ore, it was all driven by the Chinese urbanisation rate. That is why when I read headlines like this one from yesterday: South Africa's ANC May Ignore Moody's by Increasing Mining Taxes with the economic policy head Enoch Godongwana quoted as saying: "It may well be that we will not increase tax on gold because most of the gold mines are marginal" I have a sad laugh. I differ with even my own father on the matter of mineral wealth. If you cannot exploit mineral wealth, what is the point of having it? I said to my father the other day that the Great Dyke of Zimbabwe is supposedly 2.575 billion years old. Marine species of animals (which we are) have been dated to around 550 million years ago. How so does a natural deposit have ownership by the people that dwell there? That is a separate philosophical argument with many heated viewpoints.

The whole idea of taxing more profitable mining businesses because they are more profitable is just plain dumb. The commodity that they mine, that is decided as a function of supply and demand by a market made up of many, many different participants with many, many different views. What will happen if the gold price and platinum prices double in the next five years as a result of higher inflation rates, will those then become taxable targets then too? We might posses a vast wealth of minerals and resources, but in my view (and you know I advocate free markets) the quickest and easiest way to get them out of the ground and sell them is to allow business to mine more freely. Government can never be more efficient. Never. It is impossible, there is little or no incentive for employees to take risks.

On the other hand there is greed and exploitation, which needs to be balanced against profit motives, that is a place where governments can draw the lines within business must participate. My point is simple, government should decide whether or not they need to collect more taxes just as a result of a company doing better, or put a yoke around the proverbial golden egg laying goose. To the point where the goose starts only laying eggs every two to three days, rather than every single day. Again, the whole idea that governments think resource companies are "doing well" because of them is completely misplaced. It is as a result of improving commodity prices and that is directly linked to global growth, industrialisation and urbanisation. End of rant.

I couldn't help but notice that Telkom, sorry, I mean Telkom SOC with the S owning less than 40 percent, had their credit rating downgraded to BBB- by Standard & Poors. With a stable outlook. This was two days ago, by Duncan McLeod: Telkom suffers fresh ratings downgrade. Not new news, Moody's have done this already, back in October. Telkom are sailing around without a rudder on the high seas, and the boat is not in seaworthy state. State. Too much state interference.

Tech stocks in New York, New York. 40^o 43' 0" N, 74^o 0' 0" W were dragged lower as a result of Apple inc. getting completely flushed. The stock was down nearly six and a half percent. Why? Well, the two reasons that people could come up with was a rise in the dividend taxes coming (another dumb idea in my opinion, the company is taxed, why should the investor be taxed too?) and perhaps Apple is losing traction in their dominance of the tablet market. Those were the two reasons that I could see directly. TechCrunch had this piece: Apple Drops 6.4% Due To Volatility And Uncertainty: The iPad Mini Is Out, Now What? And then there was another one, which quotes well known Apple analyst from Piper Jaffray, a fellow by the name of Gene Munster. Did You See Gene Munster's Opinion of the Massive Apple Inc. (AAPL) Selloff?

I shall copy and paste that Gene Munster piece: "A DigiTimes article from today suggests that iPhone 5 is selling well based on comments from wireless chipset providers and seems to suggest upside to the Street's 43-45 million estimate for December [...] In the same article, DigiTimes is suggesting a 20% q/q decline in Apple's demand for parts and components in March. We believe this 20% decline is to be expected coming off of a launch quarter and do not believe it is an indication of how units might trend in March."

I am not too sure what to make of it all. There is definitely been a shift in quicker roll outs, shorter times between products and rising costs associated with development. But Apple still sits on the most impressive cash pile. Which is now at 538 Dollars around 127 Dollars worth of their current price, in cash alone that you get when you buy Apple. So, if historical earnings are 44.16 Dollars a share, on an ex cash basis Apple are trading at 9.3 times earnings. And a two percent dividend yield. Phew, I am not too sure about you but that looks crazy cheap. I suspect that because the stock has rallied so hard this year, and folks are anticipating higher dividend and capital gain taxation (dumb idea in my opinion, oh I said that already!) as a very widely held stock there might be folks cashing in. Particularly if the future, as ever, is a little cloudier. I smell a buying opportunity. It just depends on the feeling out there of what level is cheap.

Beijing central. 39^o 54' 50" N, 116^o 23' 30" E I had to have a laugh at the new and very simple list that Xi Jinping outlined for communist party and government officials in China. Check it out: Xi Jinping regime frames dos and don'ts of behaviour for Chinese bureaucrats That one made me laugh: "Travelling in oversize motorcades". It is spelt wrong in the text there, which is a little disappointing. Spell checker. Quite, back to the who paid for the road in the first part place. People paid for the roads, but yet the folks that collected the taxes get first dibs, somehow does not make sense.

Crow's nest. It is mixed out there, US futures are lower. We managed to get to new highs again yesterday. Even if we can hang onto these gains all through the months I will be most pleased. The fiscal cliff thing I guess is a major irritation. Real juicy economic data in the form of non-farm payrolls will be released Friday. That is always the one thing that gets the hyperactivity counter clicking higher. Poor Byron is out with a stomach bug, at least he gets to lose weight the terrible way! Poor chap, get better.

Sasha Naryshkine and Byron Lotter

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Coal. Not diamonds. Not your best friend.

"Do you really think, in 30 or 40 years, that 42 per cent of the world's electricity is going to be generated with the incredibly carbon-inefficient coal? I think the answer is probably not."

To market, to market to buy a fat pig. Chinese stocks have surged this morning, they have collectively gained three percent. The reasons given are that Chinese officials are going to be continuing along the path of grand urbanisation. So, thanks to that "feeling", stocks have surged. I read something amazing, in 1978 Chinese savings to GDP was 38 percent, in 2007 it was 51 percent, check out that piece here: The New Shape of China's Economy. OK, you say, so Chinese people have saved a little more over the last thirty years, BUT...... in 1978 Chinese GDP was 148.18 billion Dollars which would mean that total savings were then 56.3 billion Dollars. In 2007 Chinese GDP was 3.49 trillion Dollars, savings would have then been 1.78 trillion Dollars. Astonishing. I will go a step further, according to Google Public Data, savings as a percentage of GDP in China was 52.7 percent of GDP, which was 7.31 trillion Dollars in 2011. That translates to 3.85 trillion Dollars.

Which means that between 2007 and 2011, Chinese net savings grew by 116 percent. The S&P during the same time period went down over nine percent, guess who feels richer and who feels poorer? I then decided that it would be fun to see Chinese savings on a per capita basis, so I checked out the Wiki entry for Demographics of China. Let us presume that the population as per the census in 1982 was more or less the same as in 1978. So, we can work on a number of 1 billion. That same Wiki article suggests that the 2010 census saw that there were 1,339,724,852 people in China. For the purposes of this comparison, let us use 1.34 billion versus 1 billion back in 1978. Back in 1978, if I use the savings rate as per above, the average savings per capita was a mere 56.3 US Dollars. Wow. Sounds like nothing. Fast forward to 2011, that number jumps to a still not really that high 2875 Dollars on a per capita basis. It is fair to say that "things" have improved dramatically for Chinese citizens over a period of 35 years.

In Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E resources took a bit of a hit again, it has been a see saw week thus far, the Rand really firmed up yesterday. It is very noticeable the Euro Dollar cross working in favour of the European currency over the last month. There has been a weakening of two percent of the Dollar versus the Euro, part because the Europeans are pulling together and even the cynics are now believers, but part also because the Americans are grappling with the "fiscal cliff" issues. I suspect that the recent moves, the last two days or so has been supporting the Rand. Strangely however, a weakening Dollar has not brought about a stronger gold price. In fact the gold price is weaker by a percent and a half over the last two weeks. In fact, from the middle of November, jumping back the Euro, the European common currency has strengthened 3.2 percent versus the US Dollar. The Japanese Yen? I swear I have not been watching this at all, but when I checked it out, the last four weeks the Euro has strengthened by 4 percent plus versus the Japanese Yen.

Back to Jozi, stay with me whilst we hop around this morning, industrials fared better, but it was not enough to prevent a really modest loss on the day, stocks as a whole ended the session down 0.15 percent. I saw a tweet that suggested that Harmony had fallen on bad times and was set to be booted out of the top 40 when the JSE meet to have a look at the weightings of their indices. Harmony had plumbed to a four year low, last at these levels in November of 2008. But at that point, the stock proceeded to have the most heroic gains in three months. From November 21 2008, when the share price opened at 63.60 ZAR to 131.75 ZAR on the 19th of February 2009. Less than 90 days and the stock more than doubled, yowsers! In the last year however, on the 30th of November 2011 the stock was at an intraday high of 114.37 ZAR, but fast forward a year and sadly you get to a closing price of 66.65 ZAR. Phew, volatile at best, not for the faint hearted. Gold miners, I heard Peter Major from Cadiz suggesting that the Gold Fields deal to unbundle their "local" assets is a very good idea. Peter said that international and offshore investors alike could then decide what they want to own. I for one am looking forward to it, not because we have any vested interests, but rather to see what "investors" are thinking.

Stocks on Wall Street in New York, New York. 40^o 43' 0" N, 74^o 0' 0" W had another iffy session with the same single issue plaguing what the business networks term investors. Investors do not get worried about events that come and go. Investors do not pay too much attention to non-farm payrolls, but rather the trend over the last six months. Investors do not trade around a specific event. Investors look at earnings. Investors make investments, traders trade. There is a massive difference. After all was said and done, all the major indices ended between 0.1 to 0.2 percent lower on the day. Not a great deal of change from the prior session.

People are still getting their knickers in a knot, as the rhetoric from Washington. DC. 38^o 53' 42.4" N, 77^o 02' 12.0" W seems to not really be changing and heading towards a conclusion sooner. But fear not sports lovers, because if you do not understand the issues facing Americans, check out The Fiscal Times. There is more than enough gumpf there for you to get your teeth into. I wonder what will happen to this domain when the "event" passes.

I love it when people are passionate about their point of view. The other day, two to be exact, we had this little piece in our linkfest:

Another thing that I often wonder about is whether the negativity from our industry peers is as a result of people being under pressure. Not a week goes by nowadays without us seeing the headlines about job cuts, and bonus cuts in our sector. Headlines like this: Citigroup Securities Unit Said to Cut Bonuses, 150 Jobs. Surely if you worked in an industry that had negative public perception, and your job was not exactly safe, your outlook on life would be less rosy than before. Oh, and another thing that I absolutely love, next time some person at a gathering suggests that bankers and banks are to blame for the financial crisis, just ask, "how so and why?" I would love to know the answers

I did ask the question, so I had set myself up for this type of answer from Nick, who is passionate no doubt on this subject. His answer:

"how so and why?" "HOW SO AND WHY?"
1. The crises was started from a housing bubble that burst. A bubble created by sub-prime lending. This is fact.
2. How about the fact that sub-prime lending is also called PREDATORY lending, offering loans to people who can't pay - you can't get more evil than that.
3. How about the fact that Goldman Sachs offered sub-prime loans and simultaneously bet against them, shorting their own customers – immoral much?
4. How about the fact that Barclays and other banks were caught manipulating the LIBOR rate for profits - banks cheating others yet again.
5. How about the fact that bank chief's salaries are unreasonably high compared to the rest of their employees?
Now you're going to say the poor should never have taken on a loan they can't afford. Yes, but they were SOLD the loan. They were gamed! Bankers made them believe they could repay.
Not even lawyers are hated as much as bankers dude. No-one has a forked tongue quite like a banker. But you knew all of this very well Sasha. "how so and why?" Honestly...

Clearly the question had Nick so upset that he set about with a detailed answer of my question. Throughout history there have been many moments when "bankers" mistakes, private losses were socialized, because society itself realised that the alternative (letting the banking system fall) would be a worse outcome for the current political dispensation. Let me rephrase, perhaps it is the other way around, politicians realize that the alternative, letting the banking system go would lead to economic hardship and more radical politics. Which would mean that their chances of getting re-elected would diminish dramatically, and their political parties chances of getting into power would be years away, the example of the Republicans post the Great Depression is a good one. The roots of Fannie Mae and Freddie Mac are from the Great Depression. Government wanted people to own houses.

OK, so the problems around subprime lending, the fault is placed squarely on the lenders, the banks and the entire banking system. All sorts of weird and wonderful loan types (check Adjustable-rate mortgage) were invented for consumers that were cashing in on the housing bubble. There was a great piece, a great piece by David Faber of CNBC titled The House Of Cards. Not the British thriller series, but rather the causes of the subprime crisis. David visited Vegas, interviewing ex Fed chairman Allan Greenspan and even crossed the Atlantic to Scandinavia to interview a small towns treasurer, who had invested in Mortgage Backed Securities, to get a higher return and as such upgrade the town. The town lost. Politicians wanted rates low, even though technically they can't influence the Fed. The reason politicians wanted low rates was because they wanted home ownership to increase, the happier your population, the more chance that they are happy with the status quo.

Josh Brown (I know, you probably are getting tired of me quoting his book) says in Backstage Wall Street that in his mind Joe Public started to speculate in the property market because they were disillusioned with stocks. Equally home ownership reached nearly 70 percent in 2004, up nearly ten percent from 1990. Everyone wants to live in their own home, everyone wants roots. But not everyone has a proper credit score. No sir, some people have terrible credit scores.

In the Wikipedia piece, titled Financial crisis of 2007–2008, there is the following paragraph that could or could not be your point of view:

"The bursting of the U.S. housing bubble, which peaked in 2006, caused the values of securities tied to U.S. real estate pricing to plummet, damaging financial institutions globally. The financial crisis was triggered by a complex interplay of government policies that encouraged home ownership, providing easier access to loans for subprime borrowers, overvaluation of bundled sub-prime mortgages based on the theory that housing prices would continue to escalate, questionable trading practices on behalf of both buyers and sellers, compensation structures that prioritize short-term deal flow over long-term value creation, and a lack of adequate capital holdings from banks and insurance companies to back the financial commitments they were making."

The point that I was trying to make to everyone is that bankers were one of the folks in the chain of events. Government (staffed with elected people, looking to hold onto power) encouraged home ownership (people buy homes). The Federal Reserve (smart people, economists) kept rates low to recover from the dotcom period. Loan seekers (people who often live beyond their means) lied to unscrupulous loan officers (people looking for more money quickly) who were working on a commission basis. Banks (staffed by people making decisions based on their bonus outlook) were happy to extend the business because it was profitable.

Banks (filled with the same people) sold the loans to Wall Street Investment banks (same guys staring at the bonus pool, eat what you kill types) who then repackaged them as securities. Investment Banks (staffed with the greedy people) then sold the securities to folks seeking higher yields (people who needed a better income in a low rate environment). The securities were rated by the ratings agencies (who were staffed with smart people tasked with rating bonds or securities investment grade), often themselves not seeing the risks. Talking risk taking, the regulators (staffed with government employed people) failed to pick up any conflicts of interest at the time. Also, the law makers (elected officials, people too) failed to see the crisis coming, this was quite well deflected by themselves. These are all people in the chain of events. Not just the facilitators of the loans, the people who requested the loans, but the investors couldn't get enough of the mortgage backed securities themselves. If you are looking for a good read around the whole time, Michael Lewis has a great book which I read, The Big Short.

People caused the financial crisis. People who lied and were greedy. People who did not pay attention. People who were looking out for their own bonuses, instead of what was ethical. People who thought that good times would continue. People guarding the regulatory gates who fell asleep. All people. That was my point, not just bankers were to blame for the financial crisis, but rather a whole collective chain of individuals who made judgement errors.

A bank would not extend a loan if they did not expect someone to pay it, that would be dumb business, all loans are extended in good faith from both sides of the equation. As a result of the banking crisis, loans to individuals have become much harder, rightly so. The issues of remuneration, that lies in the hands of the shareholders is my belief. The issues around the Libor fixing scandal, that is plain criminal, those folks should be prosecuted and dished out the sentence they deserve. Where were the regulators and law makers whilst this was happening allowing something as important as a decided rate amongst an elite group to decide something as important as Libor? Several steps behind. As for Goldman being on both sides of the trade, there is a serious case of poor ethics here, perhaps even criminal, as well as an element of hedging too. That was wrong. There was a whole lot of wrong doing by a whole host of people. That was my point, not just bankers were to blame, but they were a soft target as a result of having paid themselves enormous pots of money, from paper gains. Greed. Greed is both very good and very bad.

Byron's beats

A couple of years back Sasha found this article which derived the term Mesofacts. It was coined by a fellow called Samuel Arbesman who now has a blog called mesofacts.org. Here is the definition of a mesofact from the website.

"When people think of knowledge, they generally think of two sorts of facts: facts that don't change, like the height of Mount Everest or the capital of the United States, or facts that change a lot, like the weather or the stock market close. But in between there is a third timescale, with its separate category of facts: facts that change slowly, or mesofacts. This middle, or meso-, scale, of facts are the most interesting and yet the most slippery with which to be acquainted. These change over the course of a single lifetime but we tend to nonetheless view them as constant."

Here at Vestact we base our investment philosophy very much on finding mesofacts whether it be an investment opportunity or a warning sign to get out or stay out of certain investments. With that in mind I came across this Reuters article titled Tighter regulation pushes miners to cut thermal coal exposure. The article interviews Marcus Randolph, head of BHP's coal and Iron Ore operations. This is what he said: "Do you really think, in 30 or 40 years, that 42 per cent of the world's electricity is going to be generated with the incredibly carbon-inefficient coal? I think the answer is probably not."

At this stage coal is the world's top fuel for power generation because it is cheap and there is lots of it, especially here in SA which has really helped us with electricity supply over the decades. But like Marcus Rudolph I certainly agree that coal use is going to decline, Rio Tinto also said they will slow spending in the sector.

So what do we do as investors? BHP Billiton are one of the world's biggest coal miners but fortunately they also see mesofacts. You see, if you invest in good companies with good management teams they do the hard work for you. Although it was badly timed Billiton bought billions of dollars worth of gas assets, what I believe will be coals main replacement. Divesting from coal, investing in gas, shifting and adapting with the times. Our other investment with coal exposure is Sasol. If you read yesterday's message you will know that they are planning ginormous expansions into gas so they are already on top of it.

The last coal dependant entity which affects our lives is our very own Country. That is why, as someone who is very environmentally conscious, I support fracking. Of course all the relevant provisions and safety's must be worked out but unfortunately for the Karoo farmers, unless there is an alternative found, gas is the future.

Crow's nest. Righto, the index just clocked a new all time high this morning. We are rocking again. Stocks are up nineteen and a half percent for the year, collectively. Whoa. That is better than anyone predicted at the beginning of the year.

Sasha Naryshkine and Byron Lotter

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Tuesday 4 December 2012

Bidvest bags Barbie

"As shareholders of Bidvest, even though both these announcements are fairly insignificant in the bigger scheme of things for the company I take away two things. The first is that Brian Joffe still sees opportunities out there, especially geared towards the South African consumer. That is certainly a good sign because he has a knack for making good acquisitions, probably amongst the best deal related timing in the country."

To market, to market to buy a fat pig. Gold stocks, platinum stocks and generally commodity stocks as a whole had a horrible no good day in Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E, sending the broader markets lower. The Rand was firming up, but generally metal prices were trending softer through the day. As such we trended lower, we caught a bit of a revival from the US markets, but that was short lived. The only thing that irks me about summer time is the less US trading time that we get. And the void that is the first hour, when we wait for European markets to come online. And of course the traffic lights that don't work that snarl up my traffic progress. That irritates me about summer time, the poor JRA must be pulling what ever hair they have left out!

I guess locally we should talk about a PMI number which was improving, but still below the 50 mark. 49.5 to be exact. Check it out here, the Kagiso Purchasing Managers Index, November 2012. On the negative front the business expectations number was lower but that was marginally offset by an improving employment picture. That is always a very good thing, right? Improving employment is an absolute must in a South African context, sadly the headline from TimesLive this morning about our inability to be mathematically efficient is somewhat disturbing. Ok, deeply disturbing, this is the article: SA pupils can't read, count. And as usual, of course there is no person who says that they are to blame for anything. Nope, wasn't me! I am guessing we are all in this together. Unfortunately another negative in the PMI was the fact that the costs picture looked worse too! So, we can't read and write and we can get paid more, something does not quite stack up there. We have to improve education in South Africa. Make it a passion, or somehow cool.

There were two big announcements from Sasol which we will explore a little later in the newsletter, first there was the CFO quarterly letter, which was a little disappointing for the market I suspect, but that was also with a generally weakening commodities market, as I said above. Inside of the letter was a huge announcement. Something that we have been waiting for, for a long, long time. I shan't spoil the surprise, more on that later.

And then there was an announcement as the market closed yesterday, at five pm. And forgive me for getting outraged here, but seriously, WTF are Telkom doing changing their name to Telkom SA SOC Ltd? Seriously? SOC is state owned enterprise. Now, unless I am wrong and the government have increased their stake to 50 percent plus, how can Telkom be a state owned enterprise? Remember this piece that I wrote back in June: Telkom, Vodacom and government holding. Government owns less than 40 percent, which means that they are a minority. Sure, the PIC might own 10.89 percent, but isn't that the pensions of government employees? Not government, but people who work for government, surely those are two separate things. And by the way, changing the name does nothing for ordinary South Africans getting cheaper bandwidth, or even access to bandwidth. Ordinary South Africans have been voting with their phones, smarter handsets means greater bandwidth, which means lower mobile data charges.

Markets were unfortunately heading in one direction in New York, New York. 40^o 43' 0" N, 74^o 0' 0" W and that was down. Stocks started much higher at the beginning of the session but then faded to close around half a percent lower for both the Dow Jones Industrial Average and S&P 500. Tech stocks just managed to hang onto the 3000 mark, falling around one quarter of a percent. A rather sloppy looking ISM Manufacturing number which derailed somewhat the positive sentiment that has been floating about. The general idea that the economic news has been improving. I suspect that it has, the outlook is less problematic as more issues have been solved. The small matter of the fiscal cliff needs some sort of resultion.

The SASOL CHIEF FINANCIAL OFFICER UPDATE, 3 December was released yesterday. The highlights are many, including a production record at Oryx in Qatar, as well as another cracking (no pun intended) performance from Sasol Synfuels. The weaker Rand helped Sasol, the currency has of course weakened by 5 percent since the end of the Sasol financial year. And the Rand continues to remain weak, whilst the oil price has stabilized at these sorts of levels currently, which have been surprisingly stable. Amazing, in fact, if you think that for the better half of two years the oil price has been range bound and mostly in the 90 odd dollar range for WTI. Occasionally, like at the beginning of last year the oil price spiked when there were more than just a few issues in North Africa, the Arab spring. Sadly for the people of Syria, this is ongoing. It is disastrous to think that in a time like this, 2012, there are atrocities like that happening. I guess progress is relative to where you live.

The announcement that struck us as a "this changes everything" type announcement this: Sasol commences the front-end engineering and design (FEED) phase for an integrated gas-to-liquids and ethane cracker complex in Lake Charles, Louisiana, which of course is in the US of A. Why does this change everything in our opinion? Because if you do not have a serious presence in the US, even though you posses world class technology at that sort of scale, then prepare for a lower valuation. I guess that is the sad way of looking at it. Costs for this plant in Louisiana are expected to be between 11 to 14 billion Dollars. A mere 97 to 124 billion Rands. As a percentage of their market capitalisation, at the top end of the range, that is more than 50 percent. Now you get the sense of how big this really is. Add on top of that the cracker costs at the same place of between 5 to 7 billion Dollars (44 to 62 billion Rands) and at the top end of the range this plant collectively at Lake Charles will cost 186 billion Rands. That is more than three quarters of their current market capitalisation. Wow. Now you can appreciate the size and scale and our comments earlier that this really does change everything.

At full production, sometime in calendar year 2019, Sasol will produce 96 thousand barrels a day of "high quality transportation fuel, including GTL diesel and other value-adding chemical products" as per the release. And the cracker will "produce an estimated 1,5 mtpa of ethylene with downstream derivative plants." Let me just make this clear to you, this will be the biggest project of its kind in the US, and the second biggest gas-to-liquids plant on the planet, after the disastrous Shell project (Pearl) in Qatar. Disastrous for Shell because of the overruns and costs that exceeded budget by a factor of three! The cost ended up being a whopping 19 billion price tag for Shell. And costs, operational costs for Shell were more than they anticipated. So, as you can understand right now, there are more than just a few concerns about Sasol's ability to be able to execute on this sort of size and scale project.

This is the culmination of long and hard work, getting it "right" in Qatar after lots of teething problems, and exploring the USA option for about a decade now. The fact that I can read into the US being a better option over the Canadians is fairly interesting, perhaps location was key. As Sasol say about Louisiana in their wonderful (you must read it) report titled Value through excellence. Unlock the full value of natural gas. Gas-to-liquids: "The area was clearly poised for further growth and investment, and Sasol envisioned a partnership yielding significant benefits for the company, the community and state. A sizeable capital investment made a multi-million dollar impact on the region, yielding 50 new positions for research scientists, chemists and engineers. Also, by partnering with Louisiana universities, Sasol's R&D facility has helped enhance university programmes and enrich the educational experience of numbers of Louisiana students." This is hugely beneficial for the local economy, but the New York Times in the aforementioned article has their reservations.

The full release, jumping back to the guts of the Sasol announcement yesterday, indicates that the synfuels guidance for the full year was re-affirmed at 7.2 to 7.4 million tonnes for 2013. Interestingly the guidance for earnings for the full year uses the word "solid", I am not exactly sure how you would quantify that. Solid suggests no problems.

So that was the biggest announcement for us here, on the Sasol front yesterday. And even though first production in Louisiana might only be 2018, that is a full six years away. Jacques Kallis would have retired by then I guess. He is amazing. And to think that he had many detractors whilst he was on his way to greatness. Perhaps Sasol are a little like that too. A South African gem with unrealised greatness by the investment community, nothing like a full production plant in the USA just to attract a different set of investors. Who could of course re-rate the stock to a better valuation for all concerned.

In trying to explain this not so technical to understand piece, the analyst community have pencilled in 45 ZAR earnings for the current financial year and 44 ZAR the next year. So to be fair to the current share price, earnings are expected to taper off through to June 2014. And 2015, which seems like a long way away the expectations are for just less than 47 ZAR. But even if the stock was re-rated to a 12 times earnings multiple, at the current expectations we would be closer to 540 ZAR. Instead of that that lofty price, we find ourselves at 370 ZAR, there and there abouts. Roughly 8 times forward earnings, with a forward yield of nearly 5 percent. This is not uncommon though for oil and gas companies, just yesterday I was looking at the largest Italian oil company Eni SpA trades on a 9 times earnings multiple with a 5.7 percent dividend yield. ExxonMobil, the big daddy of them all trades on an earnings multiple of 9.25 with a dividend yield of 2.6 percent. Sasol are going to have to do a lot to convince investors that they should pay up for a more profitable entity. Therein lies both the key and the risks currently. This is a huge step forward into exciting territory. We continue to accumulate the stock on weakness.

Byron's beats

Bidvest have been very active over the last few weeks. Well I say last few weeks but these deals have obviously been discussed and evaluated in meeting rooms for months. Besides that point, the company has made two announcements indicating intentions to buy two separate companies.

The first announcement was a firm intention to purchase the remaining stake of listed company Amalgamated Appliance Holdings or AMAPS for R740 million. They already own 27.5% of the company and want to buy the rest. Amap's specialise in the sales and marketing of branded household goods like Hoover, Russell Hobbs, Tedelex, George Forman, Pineware, Sansui and TDK. They have the rights to sell many more of these brands.

The company has been doing well, from 2009 until the end of last year the company traded in a range around R2 a share, the Bidvest offer came in at R3.50. Revenue for the year ended June 2012 was up 20.5% compared to 2011 while operating profit was up 21.7% (to R84 million) compared to the previous reporting period. It is understandable, as households grow and more people enter the middle class these appliances will be bought. When the long awaited housing market turns in SA this company will be perfectly situated to boom. Here is the rational from the Amaps SENS.

"Bidvest believes the Transaction will enable AMAP to continue to service its customers more efficiently and after forming part of Bidvest the offering to AMAP's customers will be significantly enhanced. Conversely AMAP will benefit from being able to offer its products to the wider customer base of Bidvest."

The next announcement is to buy the entire issued share capital of Brandcorp Holdings from private equity group Ethos. Paul and Sasha reminded me that Brandcorp was once listed (before my time) and were taken off the market by Ethos. According to their website they are a similar company to Amaps, distributing niche industrial and consumer products. Consumer products include Polo, Disney, Barbie, Cellini, Hello Kitty and Hannah Montana. Industrial Brands include Hitachi, Wera and Pratley. For the same reasons that Amaps has a bright future, so does Brandcorp.

As shareholders of Bidvest, even though both these announcements are fairly insignificant in the bigger scheme of things for the company I take away two things. The first is that Brian Joffe still sees opportunities out there, especially geared towards the South African consumer. That is certainly a good sign because he has a knack for making good acquisitions, probably amongst the best deal related timing in the country.

The second is that both these companies have good potential synergies with each other and the Bidvest group. By gaining access to their massive distribution and client networks these companies can take it to the next level. Bidvest using their size and scale to dominate, that is what conglomerates do. We are happy to see the company doing what they do best.

Crow's nest. We are lower here today to start with. It is non farm payrolls week, which means that everyone starts up the prediction machines, starting tomorrow.

Sasha Naryshkine and Byron Lotter

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Monday 3 December 2012

The plague was worse

"This is by no means the worst time ever for the Europeans. The bubonic plague, I am guessing that was pretty bad. According to Wiki, that killed between 30 to 60 percent of the European population. World War II, that sucked as well. That only ended 67 years ago. 2.5 percent of the global population died in that conflict, it was very bad for the Russians, just less that 14 out of every 100 people in Russia lost their lives during WWII."

To market, to market to buy a fat pig. On Friday we raced ahead in the second half of the Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E market session, led mostly by a weakening currency that buoyed the Rand hedges. There were loads of August interim (and a few year-end) smaller companies that reported as the week wore on, remember that listed companies are obliged to report results inside of three months or face suspension. The currency swooned to 8.90 to the US Dollar as the Trade deficit widens to worst level in several years (BusinessDay story) thanks, or no thanks to a weakening Rand. See, a weak Rand is bad for the country, be careful what other economics funks wished for. Unless of course we become energy independent. And the only way that is going to happen is if we let free enterprise unleash their expertise on solving that little problem. Big problem. Like I showed you last week with the US trade numbers, energy imports are costly on any economy.

After the final bell rang for the close, we had topped 38 thousand points and closed there for the first time, half a percent better to 38104 points. We are now an amazing 19.1 percent higher for the year. Yes, this was the year that nearly saw the disintegration of the Euro. Or at least in the eyes of many a market yapper. Our base case was always that Greece and all the others would stay in the Euro zone. And that in a number of years that there would be more members, not fewer. Make no mistake however, it is still tough there: Eurozone Unemployment Hit Another Record High on Friday, the worst level in the 13 year level of the common currency.

This is by no means the worst time ever for the Europeans. The bubonic plague, I am guessing that was pretty bad. According to Wiki, that killed between 30 to 60 percent of the European population. World War II, that sucked as well. That only ended 67 years ago. 2.5 percent of the global population died in that conflict, it was very bad for the Russians, just less that 14 out of every 100 people in Russia lost their lives during WWII. So to say that this is the worst time ever for the Europeans, well, possibly in the last 15 years. The Yugoslav wars "ended" a mere 13 years ago. I am pretty sure that was worse for them, than now. Outsiders might think that for the Greeks it is a "good idea" to leave the Euro and restructure, but imagine the anarchy if overnight people's pension funds would lose more than half their value. Bear in mind that many European countries have huge safety nets, Greece is no exception.

Ironically the core of the problem and part of the debate in the US right now on budget reforms is taking centre stage. Some call it the "fiscal cliff". I finally saw a decent enough explanation in the WSJ titled: Q&A: What Is the Fiscal Cliff? Indeed. The fiscal cliff (more like a windy downhill) might well be the pain the Americans need. But the timing is perhaps off. Ironically (again) when times are good, nobody really wants to talk about cutting back. Because cutting back is seemingly not necessary. We are strange things, us human beings. From the same publication, the WSJ is the answer from the other side: GOP Takes Aim at Entitlements. It is tough to take stuff away when you have it already, humans do not adapt well to negative changes.

Markets in New York, New York. 40^o 43' 0" N, 74^o 0' 0" W effectively stayed at the non strikers end for the session Friday, stocks had barely budged by the close, although much of the day had been spent in the red. The week ended with marginal gains, very slim gains actually, with only the NASDAQ adding 1.5 percent for the last week of November. That is right sports lovers, this happens to be the first working day of the last month of the year 2012. Year to date the S&P 500 is up 12.61 percent, not bad if you think about all the problems that we have had. The hardest question to answer often is, well, what next? I suspect that our base case of multiple expansion will continue to happen over the next 18 months or so. What that means, is if the S&P 500 collectively can earn 111 Dollars a share, at a 14 times multiple that translates to 1554 on the S&P 500. On a 15 multiple that translates to 1665. You see, it does not take too much, just the return of deal making related activities and confidence to increase for stocks to get re-rated with not too much changing. I came across this good piece from Calculated Risk, which gives one an overview of next year: Goldman Sachs: "Moving Over the Hump".

Just this morning we have seen from Beijing central. 39^o 54' 50" N, 116^o 23' 30" E the release of the HSBC PMI. I am not a big one for these releases, partly because this specific release is based on the replies from purchasing managers from "more than" 420 manufacturing companies in China. An awful amount of importance is placed on the accuracy of the answers of 420 odd questionnaires filled in, don't you think? It is what it is I guess, whichever way you think of it. Anyhow, it is pleasing that the final read has been ratcheted up for the month of November. Which, when I had a look at the early release dated 22nd November was at a 13 month high. Above 50 means expansion, I would take 50.5 right now, thanks. The knock on effect has meant that commodity prices have lifted somewhat. Dr. Copper has been stagnant for a while, but the early signs are that we are seeing a recovery in the prices. The copper price has hit a six week high this morning on this news.

Digest this linkfest.

Have you ever heard the saying, "that is the best thing since sliced bread?" Or so and so thinks that they are the best thing since sliced bread? Well, it turns out that sliced bread is a pretty old invention, according to this piece, that I came across in one of my RSS feeds: Bread that lasts for 60 days could cut food waste. The sliced bread machine was invented in 1928. But this new machine, pretty much the same as a home microwave oven, revolutionizes bread once again. And the part about Americans throwing away 165 billion Dollars worth of food a year, how do you feel about that? Crazy. A 700 gram loaf of bread here in South Africa costs around 8 to 10 Rands. So, roughly 1 Dollar. That is basically 165 billion loaves of bread wasted. Or, 450 million loaves a day. Enough to feed our continent no doubt, one quarter of a loaf each. Wow. I wonder if lower production as a result of lower demand would actually result in higher soft commodity prices, and not really "solve" the problem.

I thought this might be a useful way of describing how low the inflationary environment actually is in the US, over the long term. The piece is titled: Congress Looks at Doing Away With the $1 Bill. Before you rush out and buy gold, because the doomsdayers were right on the inflationary front, bear in mind that this is actually as a result of savings. A one Dollar coin would stay in circulation for 30 years, whilst a one Dollar note needs to be replaced every 4 odd years. Saving money, more efficient.

Why didn't I think of this? In fact, why didn't more people think of this? The headline reads: Greece set to unveil terms of crucial bond buy-back. Makes sense no? If you are buying the debt at much cheaper levels, why not? Of course most folks would say that no, you should hold to maturity, but it almost looks like the Greeks are going to bully their banks, into participating. Patriotic duty is the suggestion from the Greek treasury. In addition to this repurchase, this interesting article suggests that the Greeks have done more than enough work: Greek debt "transformed into a zero-coupon perpetual bond". Read it, it will enlighten you.

Crow's nest. What is happening this week? Well, locally schools (not for the matrics, they are done and dusted already) break up. At least here on the "Highveld" in Gauteng. And that means like migratory birds, everyone flocks to the coast shortly thereafter. We however are still around and will only be away from the desks for the period between Christmas and New Year. But at the end of this week there are the non-farm payroll numbers. The expectations are low, on account of Hurricane Sandy. Happy week to all of you.

Sasha Naryshkine and Byron Lotter

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