Money with a dash of Funny: March 2013

Wednesday 27 March 2013

BRIC FDI flows, not all that it seems

"But back to that story about BRIC investments not being foreign, but rather dressed up as FDI with internal money. So just as rich Americans are looking to have investment companies in the Cayman or Bermuda, rich Indians are able to do the same into India. And the risks to these places, these small economies with large financial centres are essence at risk, if the home base tax authorities decide that this is a definite no-no."

To market, to market to buy a fat pig. We finally caught a bid here in Jozi, partly because we had been drifting lower in the face of better and better global markets. The Dow Jones Industrial Average closed at another all time high last evening and the S&P 500 ended the session within a fraction, a point and two thirds away from the all time high. The top ten companies in the S&P 500 are nearly 21 percent of the overall index. And Apple is a whopping 4.44 percent of that, at the end of the LAST quarter, not presently. So, if Apple was at 700 odd USD a share, that would imply that the S&P would be around 24 points higher than we are now. And that record would have been surpassed. It is amazing really how those individual companies can make that kind of difference. Equally, amongst the other big constituents, Exxon Mobil peaked at 95 odd Dollars in late 2007, it is currently just above 90 Dollars a share. Exxon Mobil is a 3.25 percent constituent of the overall US market, with a market capitalisation of 403 billion Dollars. Or, in local currency terms, at an exchange rate of 9.28 to the US Dollar, 3.739 trillion Rand. If you take all the stocks from places 6 on the ranking tables down to place 25, from MTN all the way through to RMB Holdings, the collective market cap of those businesses are 2.744 trillion Rand. This is still a whole one trillion Rand less than Exxon Mobil.

I have purposely excluded the top five listed companies on the exchange, because British America Tobacco might be a trillion Rand market capitalisation company, but of the shareholder base only around 14 percent are South Africans, check out page 100 of the 2012 annual report, the exact number is 14.03 percent, excluding treasury shares. So roughly 140 billion Rands, a very significant value, is owned on the South African register. BHP Billiton have been excluded because of course there is a listing in London and Sydney, a plc and limited, but here we reflect the London listing. So whilst BHP Billiton on the local share register might look like a smaller entity than BATS, that is not actually the case when you add the two. If you check on Google finance the market cap of BATS ADR it is around 103 billion Dollars, 67.9 billion Pound Sterling, but if you add the two ADR programs of BHP Billiton in New York (BBL and BHP) you get to 173 billion Dollars.

BHP Billiton is a much bigger business than what is reflected here in this market. Their detailed annual report does not give me the information that I need, but Blackrock as their biggest shareholder own around 5 percent of the overall business. I had not had too much joy, so I called an investor relations contact in London, he said roughly one third UK and Europe, one third US investors, one third Aussie investors, five percent South Africans and five percent Asia/other. So we have good reason to exclude that, BHP Billiton too. SABMiller, that has a market cap of 55 billion Pounds, roughly at 14.04 to the Rand is equal to 772 billion Rands. But, and this is actually a big but, Altria (an American listed company) owns 27.39 percent of SABMiller, BevCo Limited (the holding company of the Santo Domingo Group, the Colombian business empire) own 14.98 percent. BevCo, I wonder where that is domiciled? From a little snooping, it looks like BVI. Ha! A little more on that very issue later!

But as you can see quite quickly, SABMiller is not a South African owned business anymore, it has global reach. The PIC however still is a significant shareholder, but "only" owns 4.49 percent of SABMiller. And then Anglo American, you will recall from that piece that we wrote last year, titled Anglo American and their platinum headache: "See that!!! Nearly two thirds of Anglo American shareholders are either from the UK, North America and Europe. Those people actually own the business. As a business owner, you have a right to appoint the best person for the job. And if the best person happens to be South African, to take the business forward, then by all means, choose that person."

Anglo American is not really a South African owned business either. And then Richemont, where locally we get the opportunity to own global depositary receipts (GDR), 10 GDR's equals one share in Zurich. According to the Annual report from 2012, page 40, roughly 21 percent ownership is from our shores. It is fair then to say that Richemont is NOT a South African owned company either, and we should be so lucky that we have access to these global giants.

So, having taken those five companies out of the reckoning the entire rest of the market capitalisation of the companies sixth to last on the ranking tables tallies up to nearly 5 trillion Dollars. What is so very sad then is that Exxon and Apple market caps combined are probably worth more than the entire equity holdings of South African investors, given what I have just explained above. The two biggest US companies by market cap are more valuable than our entire stock market wealth. Perspective, sometimes not altogether fun.

What is good enough for Warren Buffett/Berkshire Hathaway is good enough for me. Or is it? Because around here at Vestact we are sceptics when it comes to being investors in big financial institutions. They are prone to more than just a few problems, provided of course that they can suck it up, then you should be fine. Is a trading loss of 6 billion plus dollars equal to a mining project gone wrong and the associated write downs of the project? Same thing? Different types of risks associated with these businesses means that you should expect volatility from time to time, but surely even mining companies have a greater deal of clarity than perhaps a single person and a position worth billions of dollars?

That is perhaps a different argument altogether, and perhaps there is no clear cut answer, rather invest in something that you understand well. Berkshire made available funding to Goldman Sachs at what looked like very attractive rates for the Omaha based conglomerate, back in 2008. In the middle of the crisis. It was a time of need for the under pressure financial powerhouse, pressure from Washington DC, and pressure from all sides in credit markets that were essentially in the deepest ice age perhaps ever seen. Buffett stepped in, understanding that a then 139 year old institution was better run and better capitalised than their market peers. But who was to know in a time when normal didn't apply. So when Goldman Sachs struck a deal with Berkshire, back then, preferred stock yielding 10 percent, and convertible warrants at below current market prices! If you read this WSJ article: Berkshire Set to Get Big Goldman Stake, you will see that the deal is good for all considered. Which is good I think, you always need a balance. So Matt Taibi, what do you think about that? Please write a 100 page piece that not everyone is going to read, but rather quote bits and pieces of how evil Berkshire and Goldman are. Thanks Matt, keep writing your clever stuff.

Wow. This is pretty amazing. At least I would like to think: Most foreign investment in BRICs isn't foreign at all—it's tycoons using tax havens. Just a little aside, just as we thought a few days ago, Russian PM, Dmitry Medvedev was quoted (Reuters story) as saying in a meeting with government officials in Russia: "The stealing of what has already been stolen continues". Wow. Tough and strong words I guess from a fellow that I thought would follow that line, that is why I thought the Cypriots looking to the Russians for help was a long shot. Hope.

But back to that story about BRIC investments not being foreign, but rather dressed up as FDI with internal money. So just as rich Americans are looking to have investment companies in the Cayman or Bermuda, rich Indians are able to do the same into India. And the risks to these places, these small economies with large financial centres are essence at risk, if the home base tax authorities decide that this is a definite no-no. I know that the Indians put the Mauritians under scrutiny in the past, dare we even speak about Cyprus? Yes, because I am guessing that the governments of these BRIC group of countries could not really care that someone is looking to avoid the local tax authorities. Phew, but I can also imagine business connections have strong political connections. And as such, we will have to watch these things closely. But then I am often reminded that companies like Apple, Microsoft and Cisco have more than three quarters of their cash offshore, outside of the US.

Crow's nest. We were trading up strongly at the open. Not anymore, perhaps some Italian political manoeuvring and a little more clarity for the Cypriot depositors. And locally we had the government suggest that Eskom is going to struggle through the winter here. How should we say, not good.

Sasha Naryshkine

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Monday 25 March 2013

Nike. Like.

"Nike has put themselves at the forefront of innovation and brand awareness amongst sports apparel. They are the ultimate aspirational brand in this division and it seems like their marketing division will not let this slide even though they have had some unfortunate athlete mishaps. As the world grows GDP Nike will benefit at a much faster rate."

To market, to market to buy a fat pig. Saved at the 11th hour. Or even 12th hour. Cyprus is what we are talking about, a deal was struck last evening in Brussels, that still needs to be ironed out over the coming weeks it looks like. It looks ugly for the deposits over 100 thousand Euros who could be facing a haircut of as much as 40 percent. Wow. That is amazing. But I think that there is a message that is being sent here. The message from the developed world and established and large economies to tax havens and offshore financial centres is, beware. That is why I think that the aggressive nature against depositors is being pushed by the Europeans as a collective.

Effectively the second largest bank, Laiki, will see insured deposits of 100 thousand Euros or less transferred to a bank that will be fully capitalised and the "bad assets" will be wound down. The whole idea is to say, hey, your dodgy deposits (presuming that they are), are not welcome in this Europe. Find somewhere else. This is only good from a credibility point of view for the rest of Europe, but not so great for the depositors, dodgy or not. The depositors, who now are stuck with the almost certainty that they will lose a substantial amount of money in this process. Laiki is not of course in any way attached to Laika, translated to "barker" in English from Russian. That was the Russian dog that had a one way ticket to space. Much like Russian depositors who have a one way ticket to a haircut on their deposits to the Cypriot treasury.

The truth is that nobody complained whilst the Cypriots enjoyed their economy doubling in 15 years, having positioned themselves as an offshore financial centre. And at the core of the problem was that there was no central European banking regulator to wag their finger and shake a big stick at the banks. The 10 percent corporate tax rate attracted a whole lot of offshore businesses being relocated there. Building activity went nuts, from being 8 odd percent of their economy in 2000 to nearly 15 percent in 2008. The contribution of the public sector is really noticeable, that became really bloated, doubling in size in a decade. In 2012 it was the second biggest contributor to GDP.

But hey, what was not to like? The weather is good, and more importantly, you are inside of the Eurozone. That was the main attraction for deposits from places like Russia, it is better to have a bank account denominated in Euros than Roubles, right? Correct. Forget it if it was Cypriot Pounds, that would NOT have happened. The conclusion of a wonderful piece from the FT on Friday: Cyprus - just pop the red pill, please is exactly the sad and sorry option that the small country is now faced with:

"Cyprus now has a binary choice: become a gimp state for Russian gangsta finance, or turn fully towards Europe, close down much of its shady banking sector and rebuild its economy on something more sustainable."

Think of it this way. And this is why the Russians rejected the Cypriot efforts last week to drum up some more support. If you were sitting in the Kremlin and you saw capital move offshore to avoid local scrutiny, how are you likely to view that money? With disdain. In the same way that the US tax authorities view the BVI, Bermuda or the Cayman Islands. All lovely places to vacation, but essentially rich people and corporations that are trying to not pay taxes back home. Quite crudely, that is how I think that Russians viewed it. So, oligarchs and rich Russians, you are on your own there in Cyprus.

I suspect that the economy and financial services in particular in Cyprus are going to suffer, and suffer badly. I thought to myself last week, well at least the Germans can go and vacation again in Greece, because there is another sunny place in Europe where they are hated more. And that is Cyprus. It cannot be easy for the people to have to swallow this exceptionally bitter pill. But staying in the Euro has had its perks already, but of course recency bias is always a problem. People always base their expectations on the recent past, either positive or negative. Nobody argued that Cypriot government employees were amongst the best paid in the Eurozone. I never heard that.

The reason why it took so long to deal with this problem is that in truth there were far bigger fish to fry. Italy and Spain and even Greece were more important last year. Much more important. And so whilst the minnow was eating and supersizing itself, the sick bigger fish had to be fixed. And for the record I don't think that this sets any precedent. And the reason is because this is how Cyprus positioned themselves. You can't have everything though. You can't be a tax haven, part of the Euro, and not comply. No time like the present to push harder for a central European banking authority to make sure that is closed quickly.

Markets this morning globally are cheering this news, so I guess whilst the implications are for less trust in the direction of Europe inc, i.e. Brussels and less trust of local politicians and banking institutions, the medicine was awful either way. Local equity markets here are responding with a cheer, markets across Asia responded favourably too. The Euro after having made a good fist of it has levelled out again. But stocks in Europe at the beginning of trade are responding with a two thirds of a percent gain.

In case you missed it, perhaps you took the day off like I did on Friday, Bidvest have done something cheeky and potentially opportunistic. The official announcement came Friday, joint cautionary announcement: "Bidvest Shareholders are advised that Bidvest has today submitted a firm intention letter ("the Letter") to the Board of Directors of Adcock Ingram Holdings Limited ("Adcock Ingram") in terms of which Bidvest proposes to acquire 60% of the issued share capital of Adcock Ingram from its shareholders." Wow. Why I say cheeky is that the timing seems good, from the part of Bidvest. Adcock has struggled for the better part of five years since having been unbundled from Tiger Brands.

Adcock's bottom line has only managed to grow below inflation for the last five years. Top line growth has been muted too, growing at less than 9 percent per annum for the last half a decade. The stock has woefully underperformed their peer Aspen. In part due to the brilliance of Aspen, but also one got the sense that post the Tiger unbundling and the associated accompanying fines that they kind of "lost their way". Plus with their business being less internationally focused like Aspen, and with South African business dragging with AVR tenders not going their (Adcock's) way.

I am guessing that Bidvest are seeing sunnier days ahead for the Adcock business and by being the majority shareholder, they could give the business much needed impetus. I wonder what the PIC, as the biggest shareholder thinks, they own 14.4 percent. And then Blue Falcon Trading 69 at 10.34 percent. That entity is nearly two thirds owned by Kagiso and just over one quarter owned by a community trust, Kurisani. I am not too sure of their intentions. You might still have a lot of "soft" old Tiger Brands shareholders, who might be more than happy to go along for the cash option. I suspect the PIC might not be too happy, but I am sure that the fellows at Bidvest have done their homework. The cheque for 60 percent of Adcock at current levels is around 6.5 billion Rands, roughly 8.3 percent of the Bidvest market cap. I suspect that this might just be their biggest deal ever, without having done too much homework in this regard.

Byron's beats the streets On Thursday evening after the market closed in the US Nike released third quarter results which sent the stock up 11%. If you need reminding the Nike share price hit a speed bump a long with the Chinese economy last year. Sales had slowed in that region and inventory was oversupplied. The shares slowly started creeping back as things proved to be not as bad as everyone initially thought and has now surpassed all time highs again. I can safely say we stuck to our guns and added to the stock whenever the opportunity arose and will carry on doing so. Let's look at the numbers.

Revenues from continuing operations increased 9%, 10% if you exclude currency changes. Diluted headline earnings per share were up 20% to 0.73c. EPS comfortably beat revenue growth because of margin expansion (increased 30 basis points to 44.2%), a lower tax rate and the share buyback. Future orders are up 7%. Earnings for the full year are expected to come in at $2.64 for 2013 and $3 for 2014. Trading at $59.53 the share trades at just under 20 times 2014 earnings. That may seem expensive but the company is expected to achieve double digit growth for the next 4 years at least.

Here is what CEO Mark Parker had to say about the quarter. "Our team delivered strong results in Q3. We did it with a relentless flow of innovation into our key categories. Given the diversity of our portfolio, we're able to capture big opportunities that drive sustainable, profitable growth. At the same time we continue to invest in new ways to enhance athletic performance, build strong consumer communities, and improve how we design and manufacture our products. That's how we increase our potential and drive shareholder value."

As I mentioned above, we really like the long term story here. Sales growth in mainland China is still slow as they pump the promotions and discounts so as get rid of the excess inventory there. But that region will come right. Growing GDP at 7.5% which is already off a high base means billions of Renminbi being created for disposable income. If you earn more you consume more, especially calories. This means you need to burn those calories away. Exercise and a healthy lifestyle come hand in hand with a better standard of living.

Nike has put themselves at the forefront of innovation and brand awareness amongst sports apparel. They are the ultimate aspirational brand in this division and it seems like their marketing division will not let this slide even though they have had some unfortunate athlete mishaps. As the world grows GDP Nike will benefit at a much faster rate. We continue to add to Nike as one of our core Vestact holdings in New York.

Crow's nest. We are flat now, after some initial exuberance. Another short week in store, four days on and then another four days off. Ironically in Cyprus it is Independence day when they celebrated their autonomy from Greece. The very country that led them to this mess right now that their banks are in, buying Greek bonds at the time for Cypriot banks seemed like a good idea, they would have been better off parking them in German Bunds. But that is history. There is not enough clarity yet, and that might weigh in the coming days to the long weekend. Let us not forget the importance of the BRIC's summit, even if it seems all talky and not too much resolution. A new club takes time to gain traction, but nice to be a part of it, even if I don't agree with the entry, we don't have the clout, but most importantly, the population.

Sasha Naryshkine and Byron Lotter

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Wednesday 20 March 2013

Russian cocktails

To market, to market to buy a fat pig. No. That is what the Cypriot government voted, a tiny parliament (56 members) voted no, well 36 of them. 19 abstained, there must have been one person missing. But what now? I suspect that this is just political posturing, but there is hardly any time left. In the second quarter of this year there are principal and interest amounts of around 1.6 billion Euros to pay to the bond holders. And in the third quarter this year, the amount is 0.8 billion. Again, in a world where we talk about the Fed balance sheet being trillions, 2.4 billion Euros is hardly sizeable, but when your whole economy is around 18 billion, that represents a hefty 13.3 percent of their GDP. Around there. So, that becomes very significant. Seeing as the French finance minister said that there was no plan B, it is not immediately apparent where to next for the country. I suspect that this is simple political posturing, looking for more from the Eurozone. Check it out, I uploaded the photo from an official Eurogroup document written last year:

According to the WSJ, in this piece, titled Cyprus Rejects Rescue Plan, the government is working closely with the Russians for further loans, in return for possible equity stakes in their newly formed gas industry and banks . A 2.5 billion Euro loan is due to be repaid to the Russians in 2016, that amount is not included on the list above. What might happen is that the Russians could use this as a bit of a leverage tool over the Europeans, and why not? But CNBC suggests that the Russian money might be unsavoury to the Kremlin, and the Cyprus finance minister might be there to tell them that they are considering a 20 to 30 percent levy on their deposits. Gee, sounds like they are upping the ante here.

So, a little posturing, looking for perhaps more from the Europeans, in the coming days we will see who blinks first. The small matter of civil servants needing to be paid is, how should we say, a pressing matter? How do you say debt restructuring is almost inevitable, and is perhaps the next step. The horror of it all, I wonder who owns Cypriot debt? The pressure for the politicians in Cyprus must be completely unbearable. A pretty good look at the situation and "money" in general from Cullen Roche: Some Monetary Lessons from Cyprus. I am 100 percent sure that if there was a central European banking regulator, this would not have been allowed to happen. Time to move quickly in that direction, which of course is happening already.

Market participants are either treating the size and scale of the problem in Cyprus as it should be, too small really to worry about in the bigger picture, or were perhaps not giving it enough attention. Either way, markets locally drifted mostly lower through the course of the day, a big sell off in resources, and a sizeable sell off in Richemont. Sizeable, because in Europe the stock sank over four percent. Why? Well, it turns out that Goldman Sachs were hired to do a bookbuild, that went off well, of around 7 million shares, quite a large shareholder I guess. 520 million shares in total, is 7 million a lot? I guess it is. But the fact that the bookbuild went well suggests to me something that as is always the case, for every seller, there is also a buyer.

On the local jobs front we managed to add 22 thousand folks in the formal (non-farm) sector in the fourth quarter. See this: Quarterly Employment Statistics. See page five for the long and short of which sectors added for the quarter and which ones did not. Mining was essentially flat, construction jobs were shed (5000 in total), retail and services are where the jobs are being created. Government created a lot of jobs year on year, but shed jobs in the quarter. And in terms of gross earnings, it turns out that the best job to have is one working in the "community, social and personal services industry". What is most interesting however, is that the employed salaries have risen significantly over the last four years.

At the same time we have seen local inflationary data this morning, and I am afraid to say that we are now starting to press towards the top end of the range. 5.9 percent. For the full release, check it out: Consumer Price Index February 2013. What amazes me about these numbers is that it is heavily weighted, as one would imagine, to the folks with higher incomes. But inflation is a problem that impacts on poor people the most. Because in the contributions segment, the pressure is being exerted by the food, transport and housing and utilities groups, as well as the services sector. Petrol, public transport, beer, electricity and vegetables all registered 10 percent plus year on year increases. Scary. We wait for the MPC announcement at midday.

In New York (New York), where the folks are urging the summer to arrive earlier, it seems cold there, markets essentially had a nowhere session. The markets have been hot, last evening however was another lukewarm session. Markets started off really well with another sliver of housing news that was pleasing, this time in the form of building starts and building permits, both rising to multi year highs. Excellent. Which means that more people building homes and applying to build those same homes which essentially means that the consumer confidence levels have to be more elevated than in the last few years. You would not embark on an expensive exercise if you felt the future was less certain.

Byron's beats the streets The banks used to own and run Visa in order to link banks with different card issuances. When it listed in 2008 the banks each got a portion of the company. Some of the banks sold, some of them held on to them. The ones that held on have obviously done very well as the share price has gone from the listing price of around $64 to $156 today. Since the reorganisation in 2007 Visa and Visa Europe have operated independently because the members (banks) in Europe decided to keep it as a non-profit association and pay Visa Inc royalties for their services.

Why am I telling you this? Because when the agreement was structured the European members were granted a perpetual put option which allows them to sell at some stage. The WSJ has reported that the Visa Europe board will discuss in April the option of selling to US based Visa Inc. The price will be determined by a formula within the put option based on forward price earnings of the business and other such ratios.

The sale would raise billions of much needed Euros for the 3700 struggling members and would also be beneficial for the purchasing parent company. They can now focus on running this massive region for profit as opposed to relying on just the royalties. There will be lots of potential synergies and Visa's network will just get bigger. It is one of those businesses where the bigger your network, the faster you can grow. The bigger you are the more merchants will be forced to accept your cards otherwise they will lose business. When that happens the more valuable you become to the client because your service is more accessible and the client will have preference for your brand over others.

That is why we have chosen Visa because they are the biggest transaction processor amongst the lot. Of course the business model is fantastic. I am told that transactions in Italy are still predominantly cash so as to avoid taxes but the government is now forcing electronic payments on their citizens in order to monitor the movement of money. Banks are doing the same, incentivizing electronic payments because moving cash around is risky. It is a no brainer.

Whether the deal will go through or not is speculation at this stage. But having announced a $2.9bn share buyback and having 0 debt, I am confident they will have the capital to finance a deal. We continue to add to this stock even though it has done well recently, the potential going forward is huge.

Crow's nest. Who knows what is going to happen next, always something "interesting" on the go. The MPC decided to keep rates on hold, which was the right thing to do. What I do however know is that tomorrow is a public holiday.

Sasha Naryshkine and Byron Lotter

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Tuesday 19 March 2013

Squeezing the pips out of Cyprus

"Of course nobody knows what the benefits were for the country of being inside of the Eurozone, I wonder if that would be easy to quantify? Surely Russians, who are around 30 percent of all the deposits would NOT have flocked to Cyprus if their deposits were in Cypriot Pounds. They would have found some other place to park their funds. Surely loans would not have been extended to Greeks over the seas if they had been denominated in Cypriot pounds? No, those would have been taken elsewhere ..."

To market, to market to buy a fat pig. We learnt more about a little island in the Mediterranean than we knew before. Perhaps this decision, which has not yet actually been passed, will set a dangerous precedent, perhaps it is a lesson that the rest of Europe want to dish out. In reality, being in is better than being out. It is an election year in Germany. I am pretty sure that all sides have bailout fatigue. Oh, dash it all, the one Cypriot that I actually know, she has parents that live there and I saw her at the school dash this morning and forgot to ask her if she had chatted to her parents. Just to get a sense of the mood on the ground, which I am sure is more than a little frigid!

But surely it cannot be worse than nationalizing private pension funds, which has been done before, as someone pointed out on the twitter thingie, old, but relevant: Hungary Follows Argentina in Pension-Fund Ultimatum, `Nightmare' for Some. Both are just too awful to bear, but I suspect the government nationalising your savings because they couldn't get a grip on their finances, that is much worse. But how would you feel if the government dipped into your cash savings? Outraged. Crazy oligarch Russian money and tax avoidance deposits from Greece aside, this is dangerous. But I think a once off, this is NOT likely to happen in Spain, Italy, Ireland or even Greece for that matter. And seemingly, a spokesperson for the parliament suggests that this might not actually pass.

I also suspect that the Cypriots, the ones where the power lies, will bash this out until they reach a firm conclusion. Today and tomorrow have been declared bank holidays, parliament will make this decision. A very unpopular one. And no doubt will haunt them for the rest of their careers. A few little facts that Bloomberg neatly compiled in this article: Cyprus Bank Assets Dwarfing Economy to Make Aid Exception. Amazing stuff in there, really informative. The three biggest banks took heavy hits as they wrote down their Greek bond holdings, like everyone else. I am afraid that the quality of their loan books are more than poor, but someone would pay for that. The book I mean, if the banks went insolvent.

Depositors are seemingly guaranteed up to 100 thousand Euros per individual, per bank, as per this Deposit protection scheme from the Central Bank of Cyprus. But who would make good for these deposits, if the banks failed to get the necessary funding to stay afloat? No really, think about it for a second. What is missing and something I keep asking is, where are the regulators in all of this? Turns out two are British and one is Swiss: Independent Commission on the Future of the Cyprus Banking Sector. Or is this just a special commission? Turns out that they may have their work cut out for them. The banking system is outlandishly big. Too big relative to their economy.

Would this have happened if there was a central banking regulator? I guess not, because they would have been a whole lot stricter. Cyprus would not have been allowed to have done this, allowed their banking system to be 7 times the size of their GDP. Is there an alternative? The French finance minister just this morning suggested that there is no plan B. Nothing. A little bit of history is worth noting though, the Cypriot economy was worth 9.31 billion Dollars in 2000, to a whopping 25.3 billion Dollars in 2008. Mind boggling, that sort of growth. But of course nobody questioned that, that is expected! Byron pointed out something interesting, via the Motley Fool: Cyprus' Unprecedented Bailout: More Common Than You Think. That one key paragraph:

"If Cyprus had its own currency, it would be dealing with its economic problems by printing money. That would eventually cause inflation. How much? I don't know, let's say 6.75%. In that case, those with cash deposits in Cypriot banks would lose 6.75% of their money in real terms -- the same amount being directly confiscated on most deposits through the IMF bailout."

Of course nobody knows what the benefits were for the country from being inside of the Eurozone, I wonder if that would be easy to quantify? Surely Russians, who are around 30 percent of all the deposits would NOT have flocked to Cyprus if their deposits were in Cypriot Pounds. They would have found some other place to park their funds. Surely loans would not have been extended to Greeks over the seas if they had been denominated in Cypriot pounds? No, those would have been taken elsewhere, perhaps Ireland, but the language most certainly helps. This is not a new problem, I saw a paper written last year in July, through all my trawling, titled: Macroeconomic imbalances - Cyprus. It is truly the most insightful thing I have read over the recent days on the country. And don't say you were not warned, it was here already. Note one sentence that almost puts it all into context: "The total private indebtedness (as a share of GDP) in Cyprus is the second highest in EU, with debt of non-financial corporations being the one that stands out."

Too much reliance on tourism, productivity levels have fallen, government has become bloated, banking sector got out of whack, too much exposure to Greece, too late to act decisively. And why were the folks over at the EU too late to act? Well, there were more important things to deal with last year. Greece. Italian and Spanish bond yields. Various programs designed to strengthen the Euro. Ironically if the economy was bigger it might have taken a closer front stage. I suspect that the recent push back will see a watered down proposal when eventually parliament does vote. Of course what you won't see is rich people marching in the streets in Moscow to demand that their government takes a look at this proposal. You are NOT likely to see that. The same could be said with rich Greeks, you are not likely to see them attract attention to themselves either. This small story continues to evolve, recent news suggests that those with under 20 thousand Euros pay nothing by way of the levy. Save the folks with smaller deposits.

Byron's beats the streets I am still reading those Warren Buffett annual Chairman's letters in my spare time and enjoying it immensely. If you are interested in investing, these letters that Warren Buffett has written to Berkshire shareholders every year are better than any financial book I have ever read. Plus they are free and available on the Berkshire Hathaway website. Here is the link, from 1998 onwards you can download the pdf version and sync it your iPad like I have done.

On Sunday I was reading the letter from the year 2000. The tech bubble popped in August 2000 but leading up to that period Berkshire had been criticized for not embracing the future of technology and missing the huge surge in those share prices. On the back of this very interesting period in the market where many lessons were learnt he came up with a very good analogy about distinguishing the thin line between investing and speculating. It was so good I had to share it with our readers.

"The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities, that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future , will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There's a problem, though: They are dancing in a room in which the clocks have no hands."

Now I am not saying that we stick to the Berkshire philosophy 100%. Warren Buffett would not invest in many companies we hold, especially the technology ones. But it is a great guideline, especially when you are feeling a little overconfident and need to be brought back down to earth. You see, their philosophy is very conservative. They will not touch a business that they do not understand 100% and do not go near speculation at all. In Buffett's world almost every South African business would not make his mandate because of their location. The theory that Africa is the next big growth story is far too speculative.

Here at Vestact we are flexible. We tend to amalgamate a whole host of theories and apply what we feel are the important parts. We are conservative but not to the point where we would abstain from investing in a company like Naspers because they have a high valuation. Sometimes I feel being able to look at the bigger picture can be more important than the intricate number crunching details which are usually based on presumptions. Of course we are still learning as we go along and that is what is so fascinating about working in the industry. It is great to have mentors like Warren Buffett to guide you along.

Crow's nest. The Cypriot parliament is closer to actually triggering a technical default than I guess we think. Not being able to pay peoples pensions and government officials salaries will sink home quite quickly. Ironically people will have to dip into savings. I genuinely feel desperately sorry for everyone here. I really do. But the alternative is much worse.

Sasha Naryshkine and Byron Lotter

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Monday 18 March 2013

No bondholders. Sorry depositors, cough up!

"What makes the situation quite unique is that the Cypriot banks do not have bondholders. They did not need that source of funding because the deposits were flowing, to quote Lloyd Christmas from that awful movie Dumb and Dumber: "A place where the beer flows like wine." And in turn, and this is where the problem lies, Cypriot banks extended dodgy loans. That is the core of the problem. Not enough has been written on that as the key angle as to why the Cypriot banking system got into this mess in the first place."

To market, to market to buy a fat pig. Whilst the Proteas turned up in pink at the bull ring, just up the road here, the green slipped off the screens across global markets Friday. And this ended a 9 day winning streak for the Dow Jones Industrial Average, closing below an all time high. Locally our markets fared poorly into the close here as markets began to drift lower over on Wall Street. Still, the sell off was tiny, small by comparison to what we have seen in the past, the Dow and S&P 500 closed down less than one fifth of a percent. Locally it was wild movements in the Banks, down 1.6 percent which dragged the broader market lower by nearly two fifths of a percent. Resource stocks tried their hardest, but alas, it was not to be. Banks across the vast expanse of water known as the Atlantic had a mixed day, Wells Fargo and Bank of America after passing the stress tests rocketed to multi year highs, whilst amongst the failures of that test, JP Morgan Chase, was sold off. It could have also been related to the fact that the company was facing a grilling of their ex and current employees up on capitol hill. A few cheers no doubt when Senator Carl Levin retires, the man who chairs the committee that gave Ina Drew and the like a grilling Friday. The whole "London whale" trade that went horribly bad to the tune of 6.2 billion Dollars.

Cyprus could do with a few of those Dollars. The country is under intense scrutiny this morning and global stock markets are selling off on the news that depositors are going to take a haircut. That is right, depositors, and not bond holders, we will explain why in literally a second. The news is causing stock markets globally to sell off, that is fairly dumb in my opinion, how would depositors taking a haircut in an iffy banking environment? Not too sure. But that is the reason for the big sell off, nobody is quite sure what sort of precedent this sets, you see.

You sort of know where Cyprus is, if you have never been there. I presume most folks have done a geography lesson along the way, you know that it is in the Mediterranean Sea. But when I looked again, I was amazed at how far south the island was, how it was below Turkey, and further East than any of the other European Union fellow members. Cyprus is one of the most recent entrants into the Eurozone, having "enjoyed" member status since 1 January 2008. The country has not been a republic for that long, having only obtained independence from the United Kingdom in the early 60's. Anyone older than 55 will remember violence in Cyprus in 1974, and a brief war between the Greeks and the Turks after a coup. I suspect that where the country finds itself today however is waking up on a bank holiday, a religious holiday (Clean Monday), with very little to celebrate. Because the headlines read poorly for the little island that has a population of around 800 thousand. Oh, did I mention that I counted some 20 odd annual public holidays?

In recent years the economy, and in particular the real estate market, has boomed. What is not to like about Cyprus? The weather looks amazing, the sea temperature is always agreeable, the first world infrastructure is tops and of course as I say quite often, you can't replicate natural beauty. A former tenant went there on a holiday a couple of years back and commented on the wild building and investments by the Russians. And this is the key you see, because like many islands around the world, there is an extraordinarily large focus on financial services. And more importantly, because of the historical connection and shared heritage, there is a strong economic reliance on Greece as both imports and exports are dominated by that one country. The corporate tax rate is a mere 10 percent, the lowest in the Eurozone. For now, I saw an article suggesting that the corporate tax rate will be hiked to 25 percent.

Almost equally, they are the second smallest economy in the Eurozone, second only to Malta. That is right, an economy so small, that it is around 0.14 percent of the entire Eurozone. Or roughly a mere half a day of economic activity in the whole Eurozone, that is the size of the Cyprus economy relative to the rest. Which is I guess 6 hours in Germany and 3 hours in France. Ha-ha, ignore that, because that is plain rude to the French. The biggest problem however is that Cyprus positioned themselves as an offshore financial centre. Or in crude terms, a tax haven. For Russians, who have according to my reading around 20 billion Euros worth of deposits, having a Euro backed banking account was far better than having an account full of Roubles. Interestingly, as an aside, Wikipedia lists Mauritius and Ghana on the list of financial centres. In Europe the options are Liechtenstein, Luxembourg, Monaco and Malta, all lovely places to visit I guess.

What makes the situation quite unique is that the Cypriot banks do not have bondholders. They did not need that source of funding because the deposits were flowing, to quote Lloyd Christmas from that awful movie Dumb and Dumber: "A place where the beer flows like wine." And in turn, and this is where the problem lies, Cypriot banks extended dodgy loans. That is the core of the problem. Not enough has been written on that as the key angle as to why the Cypriot banking system got into this mess in the first place. The problem loans are directly linked to Greek individuals and companies, that country is in the midst of a multiyear recession. Ironically, the depositors were funding weak individuals and companies in Greece.

The terms of the bailout that Cyprus now has to accept are perhaps a bitter pill to swallow. A once off levy of 6.75 percent of deposits up to 100,000 Euros and 9.9 percent on deposits above that is what is being proposed. New proposals have suggested a 15 percent tax on deposits above 500 thousand Euros. I can understand why there are howls from the mass media. Suggestions that this is plain theft on depositors hard earned money. But the moral compass in me questions the source of the money. Why would you make a deposit in Cyprus of all places? Because of the secrecy and anonymity of the banking system? Does that suggest that perhaps there is something to hide?

The one side of me feels completely outraged and why would small folks take a knock, but as far as I understand it, the government of Cyprus is already dealing with that, and will make suggestions for lower depositors. But in a way I think that this is the Germans taking a sideswipe at the Russians, why would they want to foot another bill for reckless activity and not so savoury deposits? Lastly, in ending this little piece on Cyprus, can you see why we are not altogether aligned with the idea of taking meaningful investments in banks? Parliament in Cyprus votes on this matter today at three o'clock our time. The Economist piece says it all: Unfair, short-sighted and self-defeating. Perhaps we don't understand the politics of Europe enough.

Byron's beats the streets

The first thing I noticed about Aveng is that 20% of the business now comes from Australia. WBHO and Murray & Roberts have both targeted the Australian market as a geographic diversification opportunity. That economy has been doing tremendously well after benefiting from the commodity Bull Run created by China. Everyone thought they were finished when China was supposedly hitting a hard landing. That was not the case for either country.

But again it is the same story for Aveng, they make R392 million profit from R25 billion revenue. Those are shoddy margins. And when we go through the Basil Read update you will see the kind of problems a construction company can face. The order book is down on the back of slower infrastructure demand in Australia but they are still happy with the order book level. The demand is definitely there with big mining projects in Mozambique and large contracts from Eskom. It is a well run business but the environment is so tough, I would stay away completely.

As for Basil Read, well they are just facing endless headwinds. A road they are building in Botswana is facing claim entitlements. This causes delays and delays cost money. Another road building delay on the N12 has occurred due to lack of supply following the transport strikes. This has caused the project to lose R85 million. Rain has also been terrible for the road building deadlines.

At the same time, when a contract is finally finished, getting paid is the next challenge. They are still waiting for R80 million from the Free State provincial government and are expecting it in May. I really do hope they get paid. All of these issues have resulted in the company posting a drop in earnings of between 215% -225%.

Most of the time I write about companies or sectors which I think are good investments. But sometimes you have to look at the sectors you should avoid so as to prevent a bad decision being made. It can take one bad investment to erode away all the previous gains of your portfolio. We have steered away from the building companies for these reasons mentioned above and feel justified with that decision.

Crow's nest. I saw hitting the wires that the Cyprus parliament is NOT going to be voting today and instead will wait until tomorrow afternoon. I suspect that there are bank chiefs in Cyprus that will be enemy number one, but not the government, who in a "master stroke" have levied a tax on people's deposits. Foreigners mostly. People with stuff to hide I guess.

You must have seen this picture: How the world has changed: St. Peter's Square in 2005 and 2013. You will recall how I get a little steamed up when people compare market periods from this year, say 1983 to currently. As recently as 2005 nobody had a smartphone. And that wasn't long ago. "Things" change quickly.

Sasha Naryshkine and Byron Lotter

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Thursday 14 March 2013

Iron ore long term score

"Five years ago the price was 60.8 Dollars a ton, two years ago the price was around 190 Dollars a ton. In September last year we were plumbing new multi year lows in the mid 80's Dollars per ton. Bizarrely however the price of Iron Ore appreciated from 12.54 Dollars a ton in February of 1983 to 13.82 Dollars a ton in February 2003. A whole ten percent in 30 years."

To market, to market to buy a fat pig. The Dow Jones Industrial average continued the winning streak, registering another small gain to be on the longest winning streak in 16 years. Nine straight days of gains. At the same time, Arsenal FC were dumped out of the champions league, not through lack of trying, they only lost on the away goal rule. What do the two have in common? Well, and far as I understand it, this is the first time since 1996 that no English football club finds itself in the last eight of the competition. And staying with the UK, the pound is in some serious trouble. Folks are worried. And Britains pound Sterling is showing that, the FT had a great piece yesterday which includes David Cameron flogging a collapsed horse: Britain's austerity is indefensible.

So the new pope was elected, small steps for the Catholic Church here, I am mindful that the new popes parents were Italian immigrants to Argentina. But still it sounds like progress to me. Now what for those on pope watch? Talking about great Argentineans, did you see that Lionel Messi had a mould of his foot (not boot) taken by a Japanese crowd, who then created a gold model to go on sale, around 5 million Dollars -> Lionel Messi's golden left foot: yours for £3.5m - video. Messi's annual salary is 11 million Euros. He could buy two if he wanted. And his annual endorsements are around 20 million Dollars per annum, so he could clearly buy more.

Football, religion, a winning streak, Britons and a crazy (perhaps warranted) salary, where are we going today? Well, locally yesterday the market slid through the session after having traded at an all time high at the session start. The Rand plumbed new multi year lows, I drive past that sign on the highway every day at Sasfin, they might have to add a column on the far left soon. 10 coming? Who knows. Industrials continued to make ground, financials and in particular banks (down 2 percent) sold off the heaviest out of all the majors. Platinum stocks took a drubbing, the broader sector struggled. The iron ore price is under a little pressure, falling as much as 3 percent overnight. The iron ore price is down 20 Dollars a ton in the last three weeks, but is still trading at 139 Dollars. Talk about skittish markets.

Five years ago the price was 60.8 Dollars a ton, two years ago the price was around 190 Dollars a ton. In September last year we were plumbing new multi year lows in the mid 80's Dollars per ton. Bizarrely however the price of Iron Ore appreciated from 12.54 Dollars a ton in February of 1983 to 13.82 Dollars a ton in February 2003. A whole ten percent in 30 years. On an inflation adjusted basis, according to my inflation calculator, 12.54 Dollars in 1983 was the equivalent of 22.91 Dollars. So, they were going backwards. In price terms. And then the Chinese came along with their great building and infrastructure development process, massive.

That 60 minutes program was picked apart by a few people I see, a great piece in the BusinessInsider overnight: Everyone's Got The Chinese 'Ghost Towns' Story All Wrong. What a twist! Who would have thought that the media would hype a very short list, 5 places in total. China's top 72 cities have a combined population of nearly 300 million people. You have heard of Changchun. No? Nothing? Well, seven and a half million people live there. Nearly the same number as the entire population of Switzerland, or Israel. Two million more than the entire population of Denmark. Keep calm and carry on. Still, the question about property prices being too high, yes, that is probably (most definitely) a bubble.

That empowerment deal that GoldFields managed to do, for their South African business, is in the spotlight again, as of yesterday. The news was first brought to light by our journalist mates Lindo Xulu and Barry Sergeant when they were working at Moneyweb. Both men are fearless, great chaps too! David McKay had a great story: Governance failures dog Gold Fields, DMR. Sounds all wrong, surely the whole purpose is to empower many, and not, from face value, looks like connected people. Again, it is probably fine to be connected, but not be absolutely dodgy, that part does not sit very well with me. And the GoldFields share price? It seems like nobody really seems to care, at least from an "investor" point of view. If you have a look at the Gold Fields ADR in New York, it trades 4.91 million shares on average. 728.68 million shares in issue. Trades entire market cap in 148 days. I pretty much doubt that much of the activity has anything to do with "investors".

I actually heard last evening the conversation that David had with Bruce Whitfield on 702, in which David implied that through his own chats with mining investors that money was more likely in the coming years to flow to Zimbabwe, rather than South Africa. The reasons were that the perceptions had been created that the South African landscape was likely to get worse, and the substantial risks being taken on by being in Zimbabwe were justified, because from a regulatory point of view, rock bottom had been reached. Perception unfortunately counts for a lot. The perception that Greece was going bust was real, even if they restructured and essentially real money was lost. It could have been more. Greece has been out of the news for months. Yeah, remember Alexis Tsipras? Last seen at Hugo Chavez's funeral.

Demand for specific goods and services do go away, as they become no longer useful for that generation. This is mostly as a result of scientific advances that our species makes, and there are good examples everywhere. Records and record players, video (VHS and Betamax) players, a phonograph, tape cassettes, telex, typewriters, analogue telephones, more recently PDA's, typewriters, dial-up modems, floppy disks, hard disks, movie projectors, old camera companies (Coronet Camera Company) and even Atari. Atari recently filed for bankruptcy, late January actually, I am surprised that took so long. With regards to automobiles, there are many examples. But what are the chances of the combustion engine being replaced? I guess for the moment, very little. But what about advances in science that could mean that batteries could be produced commercially to make the massive advances that we need?

Well, I stumbled across this, just the other day, a substance called graphene. Graphene is relatively new, that ones spell checker does not realise that it is indeed a word, even though it was "invented" or discovered at the beginning of the last decade. The applications are endless. The FT has this article: Graphene: Faster, stronger, bendier. And then after reading that, watch this Fast Company piece on Graphene. Amazing. The reason why I am ever so slightly anxious is that I fear we might be left with all this platinum in the ground that is only useful in jewellery applications. And here we sit and dither whilst the world changes.

Crow's nest. You remember that closing piece that we did yesterday. That piece on market timing, rather one should just stay the course. This piece (The Truth About Market Timing) has a rather sober conclusion: "Focus on maintaining an intelligent balance of assets, and leave the martket timing to the newsletter writers. When they get it wrong, they lose subscribers. When you get it wrong, it crushes your retirement plans . . ." Rather, one should just stay the course. Barry Ritholtz wrote an associated piece titled: Why Time Frames Matter to You. Read that! We fall into the last category there. Which begs the question, why do we write a daily piece? Well, a puzzle isn't built in an hour, or minute. At least a Swiss Alps 1500 piece is not built in an hour, or even a day. Small pieces of information, if you manage to sift through the noise make a longer term view become increasingly clear.

Sasha Naryshkine and Byron Lotter

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Wednesday 13 March 2013

Rocky Rand is not an ice cream flavour

"Some pretty eye popping numbers there, the state has been a massive employer, and not only that, they pay exceptionally well. The state has employed 400,000 people from 2006 to September last year in the same time when private sector employment has essentially been flat. Wow. And the state represents 22 percent of all of those folks formally employed, but account for 29 percent of the wages."

To market, to market to buy a fat pig. On the home front we saw resource stocks try their best, up a percent as a collective, but not enough to get the broader market higher. Stocks closed marginally lower on the Highveld, financials and industrials the laggards. The Rand continued to be under pressure, weakening to a four year low to the US dollar and I get the sense that there is a lot of hand wringing going on right now. I will try and put your minds at rest a little later. The main reason given was weakening fundamentals, an excellent article in the FT explains it beautifully: South Africa: rand slumps on deficit. Phew, there are some rather bleak looking comments in there. Words like "precariously funded" and "FDI outflows" as well as portfolio funding falling by more than half from the third quarter.

Phew. Where to from here? The current quarter might be slightly better than the last, but stories circulating about strikes at one Anglo American coal mine and five Exxaro coal mines are not "helpful" from a fund flows point of view. I suspect that government will only become a whole lot more serious about the issues impacting our economy when it starts to impact on collections. Already it was a sizeable number in the budget, but you only get serious when you have bills to pay. Here it is sports lovers, the USD versus the South African Rand (ZAR), Indian Rupee (INR) and Brazilian Real (BRL):

So what does this actually show? Firstly the green is Dollar strength and that is in large part explained through improving US fundamentals relative to the rest of the globe. That is something that we know, and recently the fundamentals have improved a lot, so much so that the last third of the five year graph really brings it back home. The US economy has improved dramatically, relative to the other three economies. The Indian economy is the one that Jim O'Neill recently in an interview at that lake Como powwow is most concerned about. So, in part the weakening local currency is as a result of weakening fundamentals here, but at the same time, a much better and improving situation across the seas in the US. The biggest issue for us here is that having attracted strong inflows, the perception towards us as an investment destination has changed. And that means that less inflows will come in.

Eish. I am not too sure what to make of it. But here it is, mess around the time frames to see that it is not just us: USD -> ZAR, INR, BRL. What does become apparent over a ten year period is that we have done more poorly than the Real or the Rupee and are the ugliest of the R sisters. Or brothers.

Mike Schussler boot the boot in once again last evening, with a published article on Moneyweb titled: State collects 44% of GDP in revenue. Some pretty eye popping numbers there, the state has been a massive employer, and not only that, they pay exceptionally well. The state has employed 400,000 people from 2006 to September last year in the same time when private sector employment has essentially been flat. Wow. And the state represents 22 percent of all of those folks formally employed, but account for 29 percent of the wages. If ever there was a time that the state realised that they could collect more taxes because times ahead are tough, it is now. Loosen up on business, let business create the necessary revenue that the government desperately needs. Sadly, as with most things in life, humans are reactive, and only when treasury starts to tell the ugly truth is when we "change" the current course. We just need growth. But in order to get growth, you need cooperation from government.

I think I can, I think I can. What a relief for those watching the trends and seeing the Dow Jones eke out the smallest of gains to make the current winning streak to 8 in a row. And of course, yet another closing high. I say of course, because the beginning of the streak, the closing all time highs continue to be superseded on a daily basis. The S&P 500 could not push further forward and sank one quarter of a percent. Is this recent run up in equities about to plateau? Gosh, who knows, there are any number of events that could scupper the recent good mood and push anxiety towards the front again. Italian elections are no way from being resolved and Italian borrowing costs have been heading higher in the last two weeks. That is, how should we say, not good. So that is the one issue.

The other major one of course is the US budget, the Republicans put forward their best ideas yesterday in the Paul Ryan camp, some describing it as "leftovers warmed up" and suggesting that he is in "wonderland". Check this article out in Bloomberg, that uses the phrase WTF, whatever next! The Right-Wing Case Against Paul Ryan's Budget. I guess if you can write that, you can write almost anything. WTF. And what is the point of both sides putting their best foot forward if nothing is going to eventually come of it? I suspect that I could never ever become a politician, no skills in that department. But the anxiety of the budget and the cuts seemingly is not there as much. Maybe we will only see it later.

Crow's nest. People are waiting for the smoke to rise above that simple little chimney in the Vatican, white or black smoke, these are weighty decisions. So that is something completely non financial I guess, that is making headline news. Oh yes, and the queens delicate tummy in the UK, how is she doing, that seems to have captured some attention. Boeing seem to have fixed their problems, that should be good for the Dow Jones Industrials as the 8th placed stock in that price weighted index. IBM are the most important in that index, they are a whisker away from their all time high. No coincidence. And what will put your mind at ease in terms of valuations is Dow Dividends Near All-Time High. What you can also tell from the story above is that cash on hand by these companies is also at an all time high, 487.9 billion Dollars. So cash is at an all time high, probably strip out the financial component of the previous dividend high, and you will find we are comfortably above that 2008 number. Keep calm and carry on.

Paul sent through a wonderful quote the other day, we are not into motivational material around here, if you want that, go and watch the original Susan Boyle audition. This is via this article, Why correlations tend to 1.0: "Your long term results are less the return of how well you pick assets than how well you stay the course during bad periods." Stay the course. Don't get spooked. Be rational. Oh yes, keep calm and carry on.

Sasha Naryshkine and Byron Lotter

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Monday 11 March 2013

Sasol's Lake Charles surge

"Back to Sasol though. This company was formed, as a government parastatal, in 1950 with the intent of pursuing a coal to liquids technology that existed, but production at scale. Those were dark old days for South Africa, obviously the powers at the time wanted energy independence for the country. Sasol listed locally in 1979, the ADR listed famously on the day that Saddam Hussein's statue was torn down in Baghdad in 2003. Ernie Els bought the first ADR share, he was interviewed on the floor, I remember it pretty well. Condea was bought in Europe in 2001. Oryx was a monster achievement back in 2007, the Qatar plant started production back then, after having originally been commissioned in 2001. There were some serious problems at the start, but that changed as they managed to settle. More recently the Lake Charles announcement was a huge push to be taken seriously at a global level."

To market, to market to buy a fat pig. The monthly jobs data clocked a much higher number than the market was anticipating and that had a huge positive impact on the rest of the market. The number is always a little tabloid in nature, people throwing out their predictions. The reason why I say that is because the number is hyped and has many different meanings for many people. For us around here it is just the trend moving in one specific direction that tells us recovery or weakness. For some it means trading like crazy. I don't envy that crowd. The numbers lifted the Dow Jones Industrials to another record high, I saw a Barrons (and not our Byron) article on the weekend looking at Dow 15000 by the end of this year and then 18000 at the end of next year. Check it out: The Odds Favor the Bulls. Odds? Barrons actually worked out the inflation adjusted levels, in order to surpass the record from October 2007: 15,651.80. I was around 150 points out. So, records are meant to be broken, no doubt we will get to that 15700 odd level at some stage in the coming years.

Locally we sold off in the last hour or so, the gold stocks gave a little back of that heroic rally on Thursday. Over ten years, as a collective, the gold stocks are down 7.4 percent, in Rands. The Sappi ADR has been far worse, down nearly 75 percent in Dollar terms. It would have made more sense to buy the Rand Gold price, in the form of the GLD ticker, which launched in November 2004. That has shown a nearly 430 percent return since then. The question as ever is, does one switch into the gold companies now, at these levels? Again, all one had to do was to look at the employment numbers in the local mining sector to get your answer there. The numbers are staggering. Equally are the numbers that 50 percent of all the reserves in the world came from under our feet. 50 percent? Sounds like a big number. Around one third of all gold above the surface was from here. I presume the difference in the numbers suggests that the rest is jewellery.

In 1996 South African gold mines were more than 20 percent of annual output, that number has fallen substantially, to 7 percent. We are 5th on the list in 2011, below Russia. Ahead of Russia is the US, then Australia and in top place is China. In 2006 we were 2nd and producing 84000 kilograms more. Production has roughly fallen by 30 percent since then. We are currently producing about as much gold as we produced 110 years ago. I managed to find a table from the chamber of mines that points to an actual overall improvement in mining employment in South Africa, thanks to PGM's, Iron Ore, chrome and manganese. And no thanks to gold and diamonds, which of course were synonymous with South African mining. Great table, courtesy of the Chamber of Mines annual review:

And then perhaps what I was talking about before, the fact that we have been slipping on the ranking table. Globally gold production has been increasing, sadly our deposits are deeper, more dangerous and the costs are just too much. And the average grades per ton have fallen from 4.3 grams to 2.8 grams in the ten year period from 2002 to 2011. The Rand sales of South African gold have increased by nearly 67 percent over the same time frames, but I guess the costs have increased by more. The more you tread water, the more tired you get. Here it is:

So what is the answer? To focus on the minerals that we must get out the ground as quickly as possible, because of the huge demand? In large part the industry has actually responded well, as well as they can. Iron ore export sales are twenty percent of all mineral exports, which was 282 billion Rands in 2011. Iron ore job creation is up five fold in the period 2002 to 2011. What is most amazing however is this next table, astonishing. And it all ties into that piece that we did a few weeks ago, titled You didn't make that iron ore price. Connect the two, being in the right place at the right time:

Massive increase in the Iron Ore price has made this an amazing industry to have been in over the last decade. Leading to expansion in production which is coupled with mining investment. A tale of two industries.

This morning we have interim results from Sasol, one of South Africa's biggest home grown companies. On the by market capitalisation ranking tables Sasol is in 8th place, 260 billion Rands. Just, and I mean just behind Naspers (265 billion), which have overtaken them in recent days. MTN is comfortably ahead of those two with a market cap of 331 billion Rand. And then there are the big 5, all with primary listings offshore. BATS, SABMiller, BHP Billiton, Richemont and Anglo American are those big five, remarkably SABMiller's market cap is more than double that of Anglo American. Over ten years SABMiller in Rand terms is up 872 percent, whilst Anglo American in the same time is up 97 and a half percent. A shrinking giant (relative) and a new giant, dominant in our home market.

Back to Sasol though. This company was formed, as a government parastatal, in 1950 with the intent of pursuing a coal to liquids technology that existed, but production at scale. Those were dark old days for South Africa, obviously the powers at the time wanted energy independence for the country. Sasol listed locally in 1979, the ADR listed famously on the day that Saddam Hussein's statue was torn down in Baghdad in 2003. Ernie Els bought the first ADR share, he was interviewed on the floor, I remember it pretty well. Condea was bought in Europe in 2001. Oryx was a monster achievement back in 2007, the Qatar plant started production back then, after having originally been commissioned in 2001. There were some serious problems at the start, but that changed as they managed to settle. More recently the Lake Charles announcement was a huge push to be taken seriously at a global level. In case you missed it, from last year December: Sasol. This changes everything. These projects are huge, and generally take a whole lot of time.

So the company continuously changes, in order to meet the needs of their customers and a changing market. The fluctuations in the oil price and the Rand to the US Dollar (their products are priced in Dollars) make forecasting this company a tough old business. Really tough. But having said that, the market usually trades the business as a function of Rand oil price. And on that metric, a mere two months ago the percentage of the Sasol share price to the Rand oil price was around the crisis levels. Leading some to believe that the company offered some of the best value around. The stock is up around 11.5 percent this year, moving higher as I write this. Jumping around a little in this message, Sasol is 7.2 percent the size of Exxon Mobil. I guess that is not bad. 13.6 percent the size of the ADR of Royal Dutch Shell. And 22.3 percent the size of the BP ADR, so I guess not bad at all for a "little" company down here at the end of Africa. Enough history and enough background, let us jump oily boots and oil into the numbers.

Sasol synfuels production increased ten percent. Operating profits increased 4 percent to 18.9 billion Rands, remember that these are half year numbers. This was on revenue that was 3 percent higher at 85.440 billion ZAR. Headline earnings per share edged up 2 percent to 24.01 ZAR per share, the dividend declared for the half is 5.70 ZAR, payable on the 15th of April. The enterprise value was five percent lower at 246.479 billion ZAR, mostly as a result of several write downs. Refresh your memory here, with this piece that we wrote: Sasol, you have to be patient here. The average crude oil price for the first half was relatively unchanged at 109.81 Dollars per barrel, the average Rand to the US Dollar over the same period was 8.48. The average currently is comfortably above those numbers. This excellent table tells you almost everything that you need to know about the business currently. The massive synfuels business is hugely profitable for their shareholders. A modest contributor to group revenues, but the most important contributor from a profitability point of view. Also, note that the Synfuels international business has similar margins to the local business.

So what do you get when you buy Sasol? A fairly well diversified business geographically and by segment, with reliance on one particular business, the local synfuels business. For their profits. And I guess, like we said earlier in the message, the Lake Charles expansion is possibly more key to this company in the medium term than anything else. And I guess the company is being priced for that, this is not a very demanding rating at all.

The execution risk of that project means that you have to be patient and trust that a company of this size and scale will get it right. The company is really cash generative and will have to juggle with their capital raising (so far so good) and using existing cash flows to fund a 21 billion Dollar project. I suspect that although this is not quite a swing for the fences approach, it is close. I suspect that if any company globally can bring off this type of project, we have to back David Constable and his current team. We continue to hold this business, and add on weakness.

How can one compare a time in history and say, this market feels like a specific year. How? The collective is not some strange living beast, it is all the buyers and sellers making a decision at one given time. Don't patronise the rest of us telling me that the price should be trading twenty percent lower, or higher. That implies that the collective are stupid. Mind you, that wouldn't be the first time. At the moment I am seeing a lot of, well this market feels like 1982, or 1951 or 2006. When someone says that, just ask the simple question, how many iPhones, Kindles, Galaxies and iPads had they sold back in 1951, 1982, or even 2006. The same answer each and every time. Zero. This market has no feel like any other time, because at each particular point more progress was made than the previous point. 2013 has a distinctly 2013 feel to it. That is all I think that I am trying to say. What is true however, when some people are trying to compare a certain era to another is that workers wages as a percentage of the entire US income have fallen to a record low. It turns out that machines can do many jobs for cheaper.

Plus, the other thing that I don't get is this whole idea that we are waiting for some sort of viscous pull back. I saw a fellow on the box, in the US, a few weeks back, when the Dow Jones Industrial had recaptured the 14 thousand mark again and was heading back or close to the all time highs. He pointed to the trading floor below him and said, me and 100 plus other guys have been expecting a pull back. Why? I suspect that there are a few things going on here, but perhaps the most important in my mind is that the financial services industry is under pressure. All the big banks have announced that they are reducing their head count. Barclays are planning to lay off ten percent of their investment banking employees this year. Google "bank layoffs" and you will see what I am saying. An NBC piece suggested that a Reuters poll estimated 160 thousand jobs have been lost or announced in the last three years alone. Of course some jobs since the financial crisis have been created too, so the losses are around half of that really.

Unfortunately the new jobs are non revenue generating (not all), and folks in the industry for a long time must be feeling more regulation against a backdrop of greater capital reserves and less risk taking. All that leads to substantially lower bonus pools, as the public sees the industry as the poster boys and girls for their personal financial pain. Less risks and less money made equals lower bonuses and job security is also not a given. In this environment it is easy to see why many could be very cautious and not overly optimistic about the future. I suspect that this might be forecasting based on personal outlook. I could be completely off the mark with this one.

Byron beats the streets. This morning we received 6 month results for the period ending December 2012 form AVI. The table below tells a thousand words, explaining segmental revenue, profits and which businesses are growing and which businesses are slowing.

Within Entyce sits all the beverage brands such as Five Roses, Freshpak, Frisco and Koffiehuis. Snackworks includes the biscuits you dip into these beverages such as Bakers. It also includes Provita, Baumann's and Willards. I&J is a deep sea Hake fishing company which I am sure you have come across before.

Within the Fashion Brands division includes Spitz which is a leading branded footwear retailer. Green Cross which is their most recent acquisition is also a retailer in footwear. And Indigo brands which produces and distributes personal care products such as Yardley and Lentheric. Now that you know the mix let's go back to that table. As you can see the food production is still the biggest revenue driver and growing moderately while the fashion brands have the margins and are still growing fast. That Spitz business contributed around R250 million in profits for the 6 months. They bought this business for R375 million in 2005. You can safely say this was a great acquisition. But I am sure AVI were integral in leveraging off this brand. South African's are obviously very fond of fancy shoes. If it weren't for a weaker rand increasing input costs this part of the business would have done even better.

The table also shows us that the I&J business is struggling and as an effect becoming less significant. Fish are depleting, it is certainly a tough business to be in. I am sure they would sell this if an offer was put on the table. At 5% of profits i wouldn't be too concerned but I'd like to see it out the portfolio if possible.

For the group revenues grew 10.8% thanks to volume growth and higher prices. You see consumers had to absorb a weaker rand. Operating profit increased by 7.9% to R921.3 million which equated to headline earnings per share of 210c. Because of the luxury retail division, the second half of the year is usually well below the first. Earnings expectations for the year are closer to 360c. Trading at R57 we see 16 times forward earnings. I'd say that is pretty fair considering their business mix.

Except for I&J every single brand within the mix has a good future in my opinion. The food manufacture division will benefit from supply agreements with the likes of Shoprite and Massmart who are expanding throughout Africa. You already know my thoughts on coffee, tea has a similar future. The luxury retail segment fits within our aspirational consumer theme and we have already seen how well they are doing. I believe this will continue. On the back of a tough half which included a weak rand and a tough period for I&J the share price has flattened somewhat. I see this as a good opportunity to buy.

Crow's nest. All time highs everywhere, including here. Interestingly the risks earlier that would have scuttled any sort of rally seem to have less of an impact. The sequester is essentially the same thing now that it was on the first of January, but perhaps less skittish participants have not sent the market heading for the hills. Italy, the European issues don't get anyone anxious anymore. The world is better off now than at any other time in history. Even if it does not feel like it.

Sasha Naryshkine and Byron Lotter

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Friday 8 March 2013

Awesome Aspen. Not warm, smoking hot!

"Add to the potential of their Asian business to their robust and equally fast growing Latin America and African businesses and you can quickly see the reasons why investors are paying up for this stock. We continue to hold and add where we see fit, this is a decade long investment at least."

To market, to market to buy a fat pig. Stocks rocked again here in Jozi, the gold miners had an absolute pearler of a day, a peach of a day, GoldFields and Harmony up over seven percent apiece. Some said the Rand, which weakened to a four year low during the session intraday could have something to do with it. Some said that it was a technical bounce. I thought that the stories around the silicosis lawsuit being directed elsewhere was one reason, and the finalisation of a deal to buy old South African gold assets could be the other reason. Some expecting a jump in the gold price soon after all the recent selling, some suggesting fund flows from the gold equity bulls. All I know is that Harmony Gold is down nearly 61 percent since mid October 2002. GLD, the Rand Gold price instrument, that allows you to hold the physical gold as an instrument, listed in November 2004. Since then, it is up 431 percent. Yowsers. GoldFields over the same time frame is down over 25 percent, it doesn't really matter if you add back the Sibanye Gold, the All Share Index over the same time period is up 325 percent. In Rand terms.

Back then in October 2002 the Rand was at 10.40 odd to the US Dollar. The low, lows was late 2004, 5.65 to the US Dollar. In the post Lehman Brothers collapse and depths of despair in the storm that was the great financial crisis, the Rand weakened to beyond 11.10 to the US dollar. The subsequent recovery saw the Rand firm to 6.60 to the US dollar in late April of 2011. And now we are back at 9.10 and beyond. Honestly, how do you plan in that kind of environment as an importer or exporter? The Euro has been less volatile, but around about the same story. That is what the free market gives you, volatility. And unless you are a major currency, the headwinds batter you more. The Indian Rupee is 26 percent weaker over 5 years, the Brazilian Real is 14.5 percent weaker, strangely, we are a less 11.38 percent weaker from the same point. So, don't get anxious, it is a lot about the US economic health improving substantially and want for Dollar based assets again.

Bill McBride over at Calculated Risk sheds some insight: Fed's Q4 Flow of Funds: Household Mortgage Debt down $1.2 Trillion from Peak. Deleveraging has taken place. He suggests it is not over, but heading in the right direction. What is more important, and Byron alluded to it a while back, the "feeling rich" factor. The WSJ fleshes that out: Freshly Flush, the Consumer Is Back. Minus debts and liabilities, the net worth of American households in the last quarter was 66.07 trillion Dollars. And bear in mind that we have had a serious rally in the first quarter of this year, as well as a housing market that continues to improve. So I expect when the Federal Reserve releases that same report in early June (when the days are shorter and colder here) the overall wealth will be much higher. And you know what people do when they feel richer? They spend. The Americans are good at spending, it makes their economy go around. That should be good for all of us.

Mark Perry had another set of graphs: Rising stock market and housing recovery bring US household net worth above pre-recession level. I have taken the one from his piece that I think is most important. 66 trillion. In 2002 that number was barely

Quickly back to the Jozi markets, stocks were obviously buoyed by a 6.9 percent move northwards in the gold sector, platinum miners actually sank 0.16 percent. Wow. Resource stocks collectively added 1.6 percent plus, sending the market to its best levels since mid February. The high, highs were from earlier in Feb, with the All Share intraday a whisker away from 41 thousand points. We are currently at and around 40720 points. Another couple of good days for us here locally and we will be through those recent all time highs. I suppose a good non-farm payrolls number might actually see another rally higher. We don't have to wait long, around three thirty local time here to see that number. This might give the commodities complex a bit of a lift today: China Export Surge Helps New Leaders Sustain Rebound: Economy. Still, I wonder when we are going to see the real impact of the Chinese consumer, when are they going to be driving consumption.

Over on Wall Street the Dow Industrials closed at another record high, the S&P 500 was still creeping up getting closer to the all time high, but around 20 odd points to go so still over a percent and one third away. But, as I said above, it is all about the jobs number today. The expectation is around 165 thousand jobs, the impact of the sequester on the government employment in the US, that is a big issue in the coming months. For now though, everything looks like the same as last month. I am interested to see whether or not there will be revisions to the prior months, that would indicate that the labour market continues to improve. The weekly jobless claims have moved down by around 6-8 percent over the last few months, that could have quite a big and long lasting impact. Now that Americans are richer, perhaps that will lead to greater job creation.

Oh, but whilst the Dow Jones managed to reach another all time high, Cullen Roche points this out: Pessimism Rises Even as Dow Hits a New High. As you can see, the bearish sentiment is around 30 percent higher than "the usual" bearishness. But what seems strange is that the neutral view is changing to both bullish and bearish. I get that. People get off the fence, which is a good thing.

Ok, one of the most important stocks in the Vestact stable, Aspen Pharma reported numbers for the half year to end December. Revenues from continuing operations increased 20 percent to 9 billion Rands, operating profits increased by 24 percent to 2.5 billion Rands. This translated to normalised diluted headline earnings per share of 379 cents. Cash generated from operating activities grew 9 percent to 1.3 billion Rands. Gross profits grew 22 percent to 4.3 billion ZAR. Profits before tax grew by 29 percent.

Ok, that was all the important numbers, the segmental revenue and profits view give you a pretty good idea that Aspen is no longer a South African company. 63 percent of revenue and 64 percent of EBITA comes from outside of our borders. Byron suggested on the box this morning that if the company did not have that sort of exposure the stock price from the South African earnings alone could be 110 odd Rands a share lower. I suspect it might even be more, the reason why Aspen commands a much higher rating relative to the rest of the market is that they have managed to grow aggressively. And that Asia Pacific springboard is wound tight in Australia, they have a twenty percent market share there in scripts written. See the numbers below, from the Segmental contribution for six months ended December, slide 17.

The great thing about their two major businesses, SA Pharma and Asia Pacific is that they both managed to grow revenues in excess of 20 percent. Margins have actually improved over the last two years, with group operating margin having increased 30 basis points from the prior comparative period. Just to give you an indication of how quickly this company is growing, revenue for this half is double what it was for the half four years ago. More than double in fact.

In their local business, the South African one, the core business had a good first half, the baby formula business did well. The ARV's business is expected to slow, you can imagine the margins are not that great. In the second half Aspen continue to expect the baby formula business to do well. I remember those days of baby formula, when you couldn't go anywhere without a couple of feeds. Those were the days my friends, they did end and the sleep sort of started. The next business division, the Asia Pacific business is where the real growth is going to come from. The move to use Australia as a springboard and to buy Sigma. I remember there were many naysayers back then, they were overpaying, remember? 6.1 billion Rands back then. I suspect that whilst that will capture the attention of the analyst community, the opening of a company on the ground in Nigeria is also exciting.

The reasons that I say that is because you must look at the territories that the company operates in and then this table, sort by healthcare spend to GDP, data from the World Bank: Health expenditure, total (% of GDP). At the top of the pile, if you order descending, the US is miles ahead of the major European economies, spending 18 odd percent on healthcare relative to GDP. Phew. Lower down, you have France at 11.9 percent, Germany at 11.6 percent, the Netherlands at 11.9 percent, that is seemingly the number. Ten to 15 years on however, because the data is supplied from the 1998 period onwards, those developed countries are spending 100 basis points more on healthcare than they used to. And although economic growth rates have been slow, the spend on healthcare continues to rise in rich countries.

Now, I am getting more to the point for Aspen. Let us look at Asia, the Philippines, Indonesia, Thailand, China and Vietnam, what is their spend as a percentage of their relative GDP? The Philippines, it is 3.6 percent. In Indonesia it is 2.6 percent. In Vietnam it is slightly higher at 6.8 percent, Thailand is 3.9 percent whilst in China, where the population is around 1.35 billion folks, it is not on this list, but a Bloomberg story (China Health-Care Spending May Hit $1 Trillion by 2020) suggests that it is around 5.5 percent, but could grow to 7 percent of GDP by the year 2020. The suggestion is that it would treble in the next seven years. Wow. And that is the point that is worth making, whilst richer countries continue to pay more for healthcare off a higher base, the real potential is in markets where medical spend is still low, but growing fast. And Aspen is well positioned in these markets, especially Asia and locally across our continent. I saw a report this morning on agriculture that predicted that by 2050, 81 percent of the worlds population will be in these regions. All needing better healthcare than they did before.

Valuations are really stretched, the stock has been on an absolute tear lately. The stock is up around 90 Rands from around 106 ZAR a year ago. Five years ago it was 30 odd ZAR. The increase in the share price has been meteoric. If the company makes a little less than 8 Rands for the full year to end September, the stock will trade on a 25 multiple at current price levels. Earnings however continue to grow at a really healthy click though, a 15 to 20 percent earnings growth rate should be the norm for the next two years. Driving the share price has been North American buyers, look at slide 28 on that same presentation, Distribution of fund managers. It is South Africans and Europeans that think the stock is expensive, because they are fewer.

Add to the potential of their Asian business to their robust and equally fast growing Latin America and African businesses and you can quickly see the reasons why investors are paying up for this stock. We continue to hold and add where we see fit, this is a decade long investment at least.

Byron beats the streets. Yesterday we received very good looking results for the 6 month period ended 31 December 2012 from Spur Corporation. Revenue increased 40.4% to R336 million on the back of good loyalty programmes, promotions and a very strong Christmas period. This equated to a 33.1% increase in headline earnings to R77.4 million. This equated to 90c per share. The second period is usually weaker than the first because it does not include Christmas but because the company is growing fast lets annualise this number. At R1.80 earnings for the year and the stock trading at R27.65 it affords a P/E ratio of 15 which is reasonable. The stock has had a fantastic run of late trading at half this price at the end of 2011.

Sales across the group grew 17.5%. Spur sales were up 16.5%, Panarottis sales were up 30.6% and John Dory's grew sales 11%. The biggest revenue driver however was from manufacturing and distribution which rose 85.7% following the integration of the DoRego's distribution centre which is turning out to be a good purchase. The international business also had a good turnaround growing sales by 26.4% after actually bucking the trend in the UK.

All in all a very good set of numbers. The company now compromises 471 restaurants up from 456 six months ago. They plan to open up 11 new Spurs, 1 Panarottis and two DoRegos in the next 6 months and are planning second Spurs in Tanzania, Nigeria and Swaziland. I am also very impressed by their innovative drive with loyalty programmes and promotions which have clearly been a success. Their adverts have been all over the place, both Spur and Panarottis, as irritating as they may be, they are creating awareness.

I also like the sector. The industry is going to grow fast in developing countries. Eating out is a luxury and people aspire to be able to afford that. Demographics are also changing as people work harder and longer hours and just don't feel like cooking after a long hard day. Rather go and relax in a happy environment like Spur with good value for money food.

I still prefer the Famous Brands mix and with that extra fast food element, the franchisee input costs are less and therefore it is easier to grow the number of Restaurants. Most of Spurs business involves the sit down and serve model. But having said that, Spur looks cheaper and is coming off a lower base.

Crow's nest. At Lake Como in Italy they have a wonderful get together behind closed doors every year. The location is stunning. So whilst bureaucracy continues to be the glue that keeps Italy together, Italian politics is in disarray. As usual. It is in a constant state of crisis, with a massive gap in the last decade or so. Silvio Berlusconi has three separate charges against him, just yesterday a court in Milan convicted Berlusconni to one year in jail for breach of confidentiality, but strangely the court issued no orders to carry out the sentence. The more things change ..... and you think that we have problems politically here? Well, Jim O'Neill and Nouriel Roubini were interviewed, Jim gave a sunny outlook whilst Nouriel was always bearish. Sigh. No credibility, I got mad and shouted at the screen, the word fraud even came up. Telling us that things are always so bad. If he is so convinced he should short all asset classes and make a bomb. I notice that one of his lieutenants, Megan Greene left and started her own thing. Yeah, the droning got too much for her too. Anyhows, jobs, jobs and more jobs today, the biggest event in our world, even if we "do nothing" around it, it is fun to watch.

Sasha Naryshkine and Byron Lotter

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