Money with a dash of Funny: June 2013

Tuesday 25 June 2013

De Nationale Pers

"The roots of the company trace back to 1915 in the Mother City with the business of newspaper and magazine (and a little while later book) publishing being their primary business. The name Naspers is a diminutive for the original Afrikaans name, De Nationale Pers, which translates in English to The National Press. A company nowadays that hardly resembles its name in any shape or form, but we will get into that."

To market, to market to buy a fat pig. It has been a particularly tough time for stocks globally and in particular emerging market companies who have since the beginning of the month had their heads handed to them. I thought of making a short clip of Mark Mobius being wrong and a liar, but I was not sure if satire was my thing. Perhaps I should try it. The new Instagram video feature is perfect, 15 seconds is about the attention span of an ordinary person nowadays. So what if we are not as patient as our grandparents, they didn't have 100 channels to choose from and cheese was just cheese, as was milk.

Emerging market exposure has been slashed, outflows match the outflows from 2008 and the middle of 2007. Paul sent me this little graphic: Third largest ever weekly outflows from EM assets. Wow. It looks kind of wild when you see it! I also stuck a one month comparison of the iShares MSCI index and compared it to the S&P 500. Emerging markets have been pole axed, underperforming by more than ten percent! One month. Ten percent. And all the "blame" can be squarely put at the door of the ten year US treasury yield, which has spiked post the Ben Bernanke FOMC delivery.

The ten year yield over the last ten years has gone from 2.01 percent to 2.56 percent as of close last evening. It was yielding 2.66 percent at one point. Now, from a percentage point of view, a yield spike of 25 percent on US ten year treasuries in 30 days is not something that happens very often. In fact, it almost never happens this way. Many are suggesting that this is the anxiety point that is warranted. Not sure, perhaps the bond markets have gone too fast, tightening is not exactly going to take place immediately. A while, some time next year, and late at that.

Naspers hit screens with full year numbers this morning. The company managed to top 50 billion Rands of consolidated revenues for the first time, a 27 percent improvement on the prior year. The internet business revenues exceeded pay TV for the very first time, so I am guessing that this is a milestone of sorts for the company. Bearing in mind that the roots of the company trace back to 1915 in the Mother City with the business of newspaper and magazine (and a little while later book) publishing being their primary business. The name Naspers is a diminutive for the original Afrikaans name, De Nationale Pers, which translates in English to The National Press. A company nowadays that hardly resembles its name in any shape or form, but we will get into that.

One of the big changing points in their history was when the company decided to enter into the pay TV business. It was twenty years ago in October that they split the businesses between MNet and other, which includes the DStv business that you are familiar with today. Remember "open time" and the spare channel that was before that?!?! Those were the days my friends. They (Naspers) were quick to realise that their media assets needed to be housed elsewhere and organised the whole lot under one banner, the Media24 umbrella in 2000.

And then perhaps an amazing inspired move in May 2001, whilst the dotcom landscape looked like the Terminator 2 opening scenes, Naspers bought a 46.5 percent stake in a Chinese business called Tencent Holdings. That business Tencent listed in 2004, and the stake was diluted to 35.04 percent as at 2009. That remains, in our minds, the future of the business and the real reason why the stock has become nearly a 30 bagger over a decade. Yes. I remember a time when Naspers traded at 25 ZAR a share, the 52 week high is 758 ZAR. There is your 30 bagger right there!

Naspers have done lots of other interesting deals along the way, their corporate profile suggests that they are going to continue to be a media and ecommerce platform outside of the traditional English speaking world. Think Amazon, eBay, Facebook, Twitter and so on in many different languages. They hold these types of internet businesses in places like Russia, Brazil, Latin America and most importantly China. Plus remember that their pay TV business is and has been better than they may have anticipated. We will focus on their emerging market internet businesses and in particular Tencent and then of course their DStv/Multichoice business, seeing as those two are the main contributors. And then their big growth business, ecommerce, that will be the third focus.

To get a full layout of what the business looks like, the company presents from time to time a really great diagram that helps investors. A picture...... you know, is supposed to tell 1000 words. In this case I am guessing that it is closer to 2000 words worth of writing:

So there you go, you now know what the group looks like for now, you can add a couple of other parts to their business over the coming months, the company never keeps still!

Time to chew into the meaty parts, or crunch the carrot, if that is your thing. Again, I used the company resources (Rand segmental analysis) to shrink this pdf file the correct width. Here goes, I want you to pay particular attention to the three big items there, Pay TV (both South Africa and their rest of Africa business), Tencent and ecommerce.

First things first, Tencent. The business registered a record number of concurrent users, topping 173 million users. Their total user base grew to 564 million folks, or roughly 42 percent of the entire Chinese population. That sounds like a lot! That is what the Naspers release says, the Tencent website suggests nearly 800 million users. Tencent revenues grew a whopping 79 percent, boosted in Rand terms by a weaker currency. In fact the weaker Rand boosted all international revenues. But Tencent is an interesting business, and like we said, perhaps the future of the Naspers business for now.

Tencent is a mix of chat and messaging (QQ and WeChat), gaming, ecommerce, online advertising and other online media. Tencent has market share in the worlds biggest country by population, and offer the services that multiple companies do in the US. The business is run by the founders, Pony Ma, who is a remarkable entrepreneurial fellow. Together with Tony Zhang the chief technology officer, another founder and Daniel Xu who is the chief information officer (another founder), the business has a very good team! Naspers continues to back this team and their business, the risks are always present with Chinese internet policy looking inwards. When the walls come down, the challenge will be to compete hard against their developed world peers looking for market share. The longer the walls stay up, I guess the better for Tencent.

Next, their DStv business, their giant that they were able to leverage off and acquire all these other interesting businesses. I was absolutely amazed that a business that some folks view as "mature" was able to grow revenue by 20 percent. They added 1.1 million subscribers to bring the total base to 6.7 million. The greatest thing about this business is, if you don't pay, you get suspended. As we often say around here, the power of football on the sports channel is the force that takes people over the tipping point, as far as quality programming and switching to satellite TV. And as they mention in the release, Supersport contributes more to sport in Africa than all the collective governments. Think about that for a little. I am guessing however that the sports administrators have a pretty good time, because, you know, they are worth it!!! A fantastic and profitable business with trading profits 18 percent better to 7.6 billion. Although paying Rands for Dollar based programming has its drawback!

Great business. BUT! The Naspers release says the following: "A significant shift is visible in user activity moving from the personal computer to mobile devices such as smartphones and tablets. This trend simultaneously disrupts existing business models and creates new opportunities." And Koos Bekker said that the pay TV business was becoming somewhat of a sideshow. What he means is that he can see developments of a shift to tablets and smartphones for peoples viewing choices in developed markets, away from TV's. And as such, he needs to view this business as a mature business, with strong growth potential across the rest of the continent. But, its time will come, as the print media business gave way to the present giants.

Lastly, the ecommerce business grew at a crackerjack pace, but you can see that was largely acquisitive growth. Here is the trick you see, this business segment is what Koos Bekker sees as the future. The business will continue to grow rapidly in emerging markets and to a certain extent be in catch up mode with developed markets where Amazon is as available as a platform as any other. The delivery mechanisms are important, I am sure that they are working hard in that regard. For the mean time, as a collective this business is not likely to register meaningful profits any time soon. "Ecommerce revenues doubled to R11,4bn, through a combination of organic growth and a few acquisitions. We extended the breadth of our products, with particular emphasis on etailing and online classifieds. As we are in the building phase, this segment is presently loss-making and we do not expect profits in the aggregate for several more years."

OK, the valuations part of the business are perhaps the trickiest part for many to understand, including ourselves I will have you know! There are the earnings which will in one part lay out the simple fundamental valuation metrics and the stock (always) looks expensive and then there are the NAV calcs. I think that it is always worth looking at both. First, the NAV part!

I sent this email to a journalist on Friday, I have updated the amounts for this morning, both the exchange rates and the Tencent (and Naspers) market capitalisations. So the updated value of Tencent implied in the Naspers market capitalisation is as follows:

TenCent market capitalisation is 508.78 billion HKD (Hong Kong Dollars) as at the close: Tencent Holdings Ltd (HKG:0700)

1 HKD = 1.30 ZAR - HKDZAR

Naspers own 34.26 percent of TenCent. Naspers value of that in Rands is (508.78 billion HKD x 34.26%) = 174.30 billion HKD = 226.6 billion ZAR!

Current market cap of Naspers (last evenings close) = 281.320 billion ZAR. Basically 80.5 percent price you see today is TenCent.

My first instinct is to say, how can that be possible? How is it at all possible that four out of every five Rands in Naspers shares price is equal to their stake in Tencent? But it is. So, the very first part of the calculation is to say OK, the Naspers share price closed last evening at 677 ZAR, so 80 percent of that, 541.6 ZAR is their stake in Tencent. So what you have left over is 135.4 ZAR a share. Into that you have to fit their very fast growing ecommerce businesses and their more stable DStv business. Is the rest of the business only worth 55 billion Rands? Gosh, I hope not, because the DStv business is growing at a serious click.

What you have to do is to say, right, those ecommerce businesses are going to be worth a bomb, it is the same reason why Amazon makes a loss and still trades near their all time highs. Their forward multiple is eye popping, Amazon that is. But they are gearing up for a future of same day delivery and getting into the groceries business. For the time being I don't see Naspers doing that! We continue to accumulate the stock on the basis that they are comfortably ahead of the curve, and it would be generous to say that there is competition even breathing down their necks. They set their own standards, which are world class.

Byron beats the streets

This morning we received full year results from the high flying Omnia. I covered the 6 month numbers in November last year in a piece titled Omnia six month results as expected. The piece explains what the business does as well as looks at some valuations. As you can see from the fundamental analysis, we worked with an estimation of 1200c earnings for the year. Well here are the real numbers.

Profits for the year are up 40% to R880 million. This comes from group revenues of R13.5bn which is up 23.7% from last year. Per share this equates to 1332c which comfortably beat expectations from last year. Of course they had to release a trading statement which I also covered a few weeks ago. This actual number came in just above the middle of the range suggested (between 1310 and 1340). The share trades at R170.25 which puts it on a historic multiple of 12.8 which looks very cheap for a company growing earnings by 40%.

The company consists of three divisions namely Mining, Agriculture and Chemical. Let's look at each division separately.

Mining. The mining division is flying. Revenues increased 43.5% to R4.379bn on the back of strong volume growth (24%) and price increases (20%). Better operating efficiencies resulted in operating profits increasing 54% to R735 million. This division contributes nearly 60% of operating profits to the group. But why is it growing so fast? I can think of 2 things. Firstly, their explosives are mainly used in open cast mining.

Businesses like Kumba have not suffered from the strikes nearly as badly as miners who have to operate predominantly underground. The platinum miners have to hire a rock drill operator to physically dig the holes themselves. It is therefore less labour intensive. Secondly Omnia have clients all over Africa and as a mining destination the continent has massive resources and is growing fast in the industry.

Agriculture. Fertilizers have also grown quickly and the division is really benefiting from lower input costs thanks to the new nitric acid plant that started operating last year. Revenue increased 20.6% while operating profits increased by 37.2% to R443 million. The division contributes 36% to the group's overall operating profit. I have always been excited by this division. Africa has plenty of farmable land but the technologies and use of fertilizers is still in its infancy. Omnia are in the right place at the right time.

Chemicals. As is with Sasol's chemical division, revenues are high but margins are almost non-existent. This industry has been struggling off the back of weaker demand from Europe. Revenues increased 10.2% to R3.7bn but operating profits decreased 35% to R56 million or 4% of the overall groups operating number.

The company is excited about its prospects going forward. Mining and agriculture in Africa are both fast growing industries. Fortunately Omnia do not have to take the operational risk, they can just export the product to whoever needs it. As you can imagine the weaker Rand has been beneficial but I am sure much of this has been mitigated by higher input costs. You would probably find that is why the stock is quite cheap, manufacturing in South Africa has many headwinds at the moment. I am confident that this company will still grow at strong levels and that at current prices, this is a great buying opportunity.

Home again, home again, jiggety-jog. Markets are recovering a little. I suspect that all we need from here is some positive economic news to suggest to the anxiety attack that everything is going to be OK. I can't wait for earnings soon! The Rand is catching a bid, but expectations are for a hefty petrol price increase. Hmmm.... long live the strong Rand. Tomorrow, a look at the competition commissions fine dished out to the construction industry.

Sasha Naryshkine and Byron Lotter

Email us

Follow Sasha and Byron on Twitter

011 022 5440

Monday 24 June 2013

Shy bore

"Shibor has a big affect on the liquidity of the Chinese economy and if rates are high it means banks are becoming less keen on lending to each other. This level has become extremely volatile after falling into the limelight. It reached a whopping 13.44% on Thursday which resulted in certain people going as far as saying that this will result in China's version of the Lehman collapse because of a massive liquidity crisis."

To market, to market to buy a fat pig. On Friday we took a late drubbing, US markets opened better but turned worse and continued to go lower. We are always guided by those that lead, and until it changes, Wall Street will lead equity markets globally. Until the Shanghai composite becomes the biggest market in the world, the US will lead. Obviously the pendulum is moving towards the east in terms of economic prowess, but the move will be slow. Even slower on a per capita basis, for every four Americans, there are 17 Chinese people, roughly. So more than four times the population in China than there is in the USA, bearing in mind that the area of the two is similar. The ratio currently with the US and India is 3.95 Indians to every American.

When you compare the economies of the three, you can quite quickly see the imbalances and how when Warren Buffett suggests it might take 100 years or longer, he may well be right. The Chinese economy is half the size of the US economy, the Indian economy is 12,5 percent the size of the US economy, or one eighth. On a per capita basis it is 47750 US Dollars for the US, 5444 Dollars in China and only 1509 US Dollars in India. Or 4 Dollars and 13 cents per Indian per day. Wow, that does not really sound like a lot, does it? Well, it depends where you are in the world, because four dollars is about what a tall Caramel Ribbon Crunch Frappuccino from Starbucks costs. At the market in India (at 59 Rupees to the US Dollar), you can get roughly 1 litre of milk, 1 kg of Rice, 500 grams of Chicken and 12 eggs for less than that fancy coffee.

So ironically, until things cost a whole lot more in India, and collectively wealth in China is four times that of the US, then the financial capital of the world (to paraphrase the late Mark Haines) is still firmly and squarely in New York. And the flows will continue to be dictated from and around Wall Street and their titans. And conversely emerging markets experience the flows both in and out in a more dramatic fashion.

Example. Picture yourself as a private investor in the US, sitting in retirement in Florida and watching everything that is available to you. Fox business network, CNBC, Bloomberg. And the talking heads come onto the show and suggest that perhaps emerging markets are not going to deliver superior returns and that local is starting to look better again. Quite simply you can switch out of the emerging bouquet of ETF's that you have, sell the units with the great liquidity that exists. The people who manage the ETF will then sell the underlying securities. And the currency flows will be out of emerging markets and into Dollars. Which explains of course why we have seen this -> Emerging markets for sale. That graph, courtesy of Jeff Miller at Sober Look, check it out:

Only the Brazilians have been worse off than ourselves and India, relative to the US Dollar. The saddest part is that Brazil have an infinitely better football team and India has the best one day cricket team, confirming that yesterday. I can't wait for India to tour here in November. For the time being, their supporters and ours are going to have to remain at home to watch the test matches! Too expensive to tour.

But I think that the point I am trying to make is that sometimes people look for an internal reason for selling on the local bourse. This is not 1984. This is 2013. Electronic trading on almost any platform is available from midair in the US, provided that you have a log in. You must have heard of Gogo inflight! Go-go, rather than an endearing term for an elderly lady that is wise in the ways of the world, if not the internet. This Gogo is the other way around, young and all internet -> Gogo Inflight Internet. You could not do that even five years ago. Don't look for a reason internally why the market and the currency has seen little love. The flows are not all local, like they used to be. I remember times when the market traded a couple of billion Rands a day. Heck, I remember speaking to people that thought half a billion Rands a day was cracking volume. Nowadays the average is 17 odd billion Rands! Liquidity certainly will translate through to volatility when the going is tough.

The wheels on the bus are going round and round, but more importantly Naspers through their Indian business Ibibo (which is held by Naspers international - MIH) have acquired a business called RedBus. Price undisclosed! Some people (dance cheek to cheek) suggest the price is 600 crore Rupees. Crore? Ten million. How much is that? Well, at the current exchange rate of 1 Dollar to 59.64 Rupees it is around 10 million Dollars. So it sounds a whole lot smaller than the amount bandied around a week ago, bearing in mind that this is quite possibly a part stake. Don't worry, more will be revealed tomorrow when we have the results from one of the best Internet and Media companies in emerging markets. First thing! We will be on the case, the presentation itself is later in the day, but the results are immediate. Exciting stuff.

Byron beats the streets today around the market and liquidity in China. Pay attention here.

Chinese interest rates

Shibor has a big affect on the liquidity of the Chinese economy and if rates are high it means banks are becoming less keen on lending to each other. This level has become extremely volatile after falling into the limelight. It reached a whopping 13.44% on Thursday which resulted in certain people going as far as saying that this will result in China's version of the Lehman collapse because of a massive liquidity crisis.

However before this got out of hand the People's Bank of China injected 50 million Yuan into the system which smashed rates down 495 basis points, back to a more sustainable rate of 8.5%. Business Insider did a piece titled People are Making way too Big a Deal About Surging Chinese Interest Rates. In the piece it quotes a chap named Richrd Xu from Morgan Stanley. He made some interesting observations.

"He pointed out that the total balance of both official interbank lending and over the counter interbank lending, in which rates are directly affected by SHIBOR, represents only around 8% of total bank assets."

You should also read the FT piece written by Kate Mackenzie referred to in the article above. Basically it states that according the current political agendas, although banking stability is very important to the Chinese economy, at present there are other projects which require the countries credit and are deemed more important. This includes small companies, farmers and rural areas.

Our job as asset managers is to look at these issues and try pick out the details and relay them on to our clients. I can comfortably say that after doing the research I am not too concerned about Chinese interest rates. Even if this does turn out to be a slight problem, interest rates in developing markets are always volatile. It is just one of those macro swings that are better to ride out then to try and time. In my world it is just another short term anxiety which creates a long term buying opportunity.

Home again, home again, jiggety-jog. A German IFO number has met expectations, and in the current environment that is not altogether a bad outcome. The global bond story, with yields rising continues to hang around like a bad smell, but beware if you think bonds are "finished". I suspect that if there is a bout of weakness in economic data there might be an abrupt about turn. That is what I am reading in any event. I just saw Mark Mobius on the box talking Chinese banks and loans. Keep calm (clammy hands) and carry on. It is tough to keep the faith, but like that fellow in Sixth Sense (His name is Haley Joel Osment), I see {whisper to Bruce Willis} buying opportunities.

Sasha Naryshkine and Byron Lotter

Email us

Follow Sasha and Byron on Twitter

011 022 5440

Wednesday 19 June 2013

GSK and Aspen, no clots there!

"There was some more clarity on the transaction with their main shareholder, GlaxoSmithKline (GSK) and their local and international businesses (Aspen Global Incorporated – AGI). It seems big, really big. Six month revenues (at last count) were just shy of nine billion Rands, this current transaction that we are talking about here could potentially add 35 percent (at current exchange rates) to their annual revenue."

To market, to market to buy a fat pig. We took off yesterday here locally, thanks to improved global markets enjoying a second decent showing. There is still some anxiety around, there were visuals of Ben Bernanke pulling into his office in a large SUV in Washington DC, on Constitution Avenue Northwest. Or is it corner 20th Street and Constitution Avenue Northwest? The Fed website was not that clear, at least to me. I checked it out on Google maps. Yes, things were so much better in the old days.

So the feeling is that this is probably the most important interpretation of the Federal Open Market Committee's (FOMC) statement that will accompany the end of the 2 day meeting. Look for signs! Even the finance minister Pravin Gordhan said that the interpretation of the commentary could have an impact on markets. And I guess most noticeably ours, we are prone to wild swings and roundabouts based on the news flows. Again, our view is that the Fed will do what they have to in order to meet the requirement of their dual mandate. And in case you didn't know what that was, or forgot, as per the Federal Reserve Act of 1913, Monetary policy objectives:

"The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."

Maximum employment and stable prices with moderate long-term interest rates, it sounds so easy not so? In fact so easy that you are bound to fail at even the simplest of simulations, this is an excellent old Fed chairman simulation interactive piece put together, if you pass first time then I would say that you have been lucky or know what is going on. I got it right on the third go, but the program tends to throw a whole lot of curveballs at you whilst you are the Fed as a whole, raising and lowering rates as you see fit! So that day comes today, the day that the FOMC will likely indicate that the current Fed programs will unwind in an orderly fashion. Rates are still set to stay low and like the rest of us, the Fed will watch the data releases and interpret them in the same manner as the collective. BUT, with an important twist. The Fed will be a whole lot less hysterical about it than the tapering twisty masses.

Talking of central banks, this morning we have the quarterly review from our Reserve Bank, release time at 10 am. If you wanted to go and responded to the invitation then no doubt we will see your news around 10, and you would have seen all the release already. Talking of local releases, we had a less trumped up but equally important employment report released by StatsSA yesterday: Quarterly Employment Statistics for March 2013.

It seems rather late, not so? 18th of June for a release of numbers for the first three months of the year? Rather late than never. These are the equivalent of our non-farm payrolls numbers says the octoboxes on the business channels and people shouting at each other on how they should and could be doing better! The overall number showed an increase of only 7000 jobs or roughly 77 people getting a new job each and every day. Or only 3 and a bit each and every hour. Really? That sounds completely pathetic. The annual increase is a more pleasing 80 thousand, but that does not pick up the slack. There are far too many school leavers looking for gainful employment but lack the necessary skills. As far back as I can remember school leavers had very little or no work experience. Perhaps there is a huge space to fill here, to become enablers of entrepreneurial activity here in South Africa. An entrepreneurial school!

Back to these numbers quickly. I think the good news is that if you have employment then your salary continues to tick higher. "The gross earnings paid to employees during the quarter ended March 2013 (January 2013 to March 2013) amounted to R377 191 million. This reflects an annual increase of R28 269 million (+8,1%) compared with the quarter ended March 2012 (January 2012 to March 2012)." 28 billion more Rands during the quarter! How much is that? Well, I took the first six months turnover numbers for Shoprite, Woolies, Massmart, Truworths and the Foschini Group (Foschini are the only one without the December/June cycle) and that came to just shy of 111 billion Rands. So whilst you might not think that is significant, it is certainly an improvement and adds to the spending power of what is a struggling and indebted South African consumer. Not good enough, we will have to try harder.

The release hit the wires this morning, the quarterly SARB review, the Rand firmed from those levels, adding a negative bias to a market that was trending lower I guess. Read all 95 pages and get back to me please!

Aspen Pharma, what happened there yesterday? The stock climbed 4.44 percent on the day to 193.25 ZAR and is up another two odd percent at the open of trade. Well, there was some more clarity on the transaction with their main shareholder, GlaxoSmithKline (GSK) and their local and international businesses (Aspen Global Incorporated – AGI). It seems big, really big. Six month revenues (at last count) were just shy of nine billion Rands, this current transaction that we are talking about here could potentially add 35 percent (at current exchange rates) to their annual revenue. Which would then makes the business more than a two thirds offshore revenue business, which is not necessarily a great thing, but it is amazing how much the business has changed over the last half a decade.

So what was the announcement? Here goes, a copy paste from the SENS announcement:

"AGI will acquire from GSK the Arixtra and Fraxiparine/Fraxodi brands ("the Brands") and business worldwide, except in China, Pakistan and India - these Brands generated approximately £420 million in revenue for GSK in its 2012 financial year ended 31 December 2012. The Brands would transfer to AGI at the end of 2013; and" "Aspen will acquire from GSK a specialised sterile production site which manufactures the Brands at Notre Dame de Bondeville, France ("the Site"). The Site would transfer to Aspen during the fourth quarter of Aspen's 2014 financial year."

These are anticoagulants, which are administered post orthopaedic surgery. These surgeries are becoming more commonplace, more knee and hip replacements, more shoulder and elbow surgery, and more spinal procedures. Plus these procedures are becoming mechanised to a degree, machines are helping in perfecting the outcome. And growing faster than people would have thought. From my reading on such matters around 750 thousand such procedures are performed annually in the US. Wow. And 60 years ago? Very few as I understand it, the first recorded metallic hip replacement happened as long ago as 1940. But it is now common in the developed world and increasing in the developing world where these procedures are becoming more common. Medical healthcare might be expensive, but the more people that have the expensive therapies, the cheaper they become.

Why the excitement though? Well for one, as we pointed out GSK is the biggest shareholder of Apsen. 18.6 percent. So why does that matter? Because as a shareholder of the entity that is going to accept the assets, they would want a fair price. And as GSK for their shareholders, equally they want to be seen as a dynamic business that is ejecting these less dynamic assets. Aspen can of course spruce and sweat these much harder, it is more core to their business. The way we see it is that it is a win for both businesses. This is a serious cheque that is going to be shelled out and might be part shares and part financed successfully as they have in the past. For the time being the collective are pleased and relieved. Expect more of these as time goes on.

Byron beats the streets

If there is one business that has proven extremely resilient in this weaker consumer environment, it has been Famous Brands. The business released quarterly sales numbers for the period starting March to the end of May.

"System-wide franchise sales increased 16.8%, comprising a 16% improvement in South Africa and a 27.2% improvement in sales in the rest of Africa region. Like-on-like sales grew 9.6%, with South Africa and the rest of Africa operations delivering growth of 9.3% and 13.2% respectively. The average weighted menu price increase was 4.25% illustrating the real growth achieved."

There a few things to note here. Firstly it shows how small the rest of Africa still is. The 27.2% growth only increased overall sales growth by 0.8% compared to the 16% recorded in SA. As this grows however inevitably and obviously the impact will be bigger every period. The other thing to note is how big an impact new stores are having. The franchise model allows entrepreneurs to take on these businesses and employ people around the country. It has a very positive impact.

Talking about new stores here is what the release had to say which quotes CEO Kevin Hedderwick: "During the quarter 34 new restaurants were opened. Hedderwick notes, Of the 30 restaurants opened in South Africa, 18 are in new emerging markets. We are especially pleased with our entry into these markets where we were previously under-represented and where our brands are viewed as aspirational. This penetration into new emerging markets is part of a deliberate strategy to make our brands available, accessible and affordable."

This is an exciting trend which goes back to my point earlier. The African segment is going to influence sales more and more. The update goes on to talk about certain plans with new stores internationally and locally. Most of this was covered when I did the full year results last month but here it is in case you want to read the full release. Famous Brands Defies Retail Slump to Deliver Strong Quarterly Results.

I want to make one more point here. Kevin Hedderwick has often stated that typically in a developing market the fast food industry will grow at twice the speed of the economy. At these rates it seems like this was an understatement. If the South African economy was flying Famous Brands would be doing even better. There is still so much room for growth in South Africa. Even without African expansion this business has great potential. Again the stock shows why it trades at the multiple it does. We are not deterred by this, the potential is still huge. We continue to add.

Home again, home again, jiggety-jog. The Ben Bernanke take down this morning, as the market tapers off ahead of the taper talk. Markets are off their worst levels. And don't forget the cricket today, let us hope we can get through to the finals at least and remove that monkey.

Sasha Naryshkine and Byron Lotter

Email us

Follow Sasha and Byron on Twitter

011 022 5440

Tuesday 18 June 2013

Taper talk tips the tape

"The FT article published late yesterday afternoon, written by Robin Harding, Fed likely to signal tapering move is close had a marked impact on the market, with the Dow losing 115 points from around 14:00 in the afternoon to just before 15:00. Fancy that! The skittishness of the short termers and the new worry means that there is likely to be a lid kept on markets until the Fed is clear on their moves. I don't think we lose any sleep around here on such weighty matters, the Fed will do what they have to!"

To market, to market to buy a fat pig. Friday was an age ago. Although as I am often reminded, it doesn't matter who you are, the poor homeless person or the president of the United States of America, you all have the same number of minutes and hours in a day. Although the more resources you have, the more you can allocate to others in order to make your day easier. If we all spent the day doing the same things then the true leveller would be the scoresheet by the time the sun goes down. But, we are not all the same, we are different, even the president of the USA has to take a summer vacation. But the cost for the American tax payer to look after him in his 9 day visit to South Africa, Tanzania and Senegal: The Obama Family Trip to Africa to Cost $60 to $100 Million. Wow. That is seemingly a lot of money, but as Paul said, US presidents have been assassinated whilst in office. And the last one being a ricin laced letter this month! So, the expense is, I guess, a necessity.

Anyhows, the market being closed here yesterday means that we have to be in catch up mode to improved international markets. But some of that will of course depend on less volatile currencies. Our market after a swoon last week recovered and is back up again for the year in Rand terms. Retailers and resources have been hit hard this year, even more so in Dollar terms, Industrials have seen us through some tough times, but some argue that if the Rand strengthens from here that industrials and hence the broader market could come under pressure again. It has been a tricky time in mining in South Africa, the best part however is that all sides are talking. Still, the event at Amplats late last week reminds us all that we are still in a very tricky patch: Amplats protest muddies Govt summit progress. Pfff....

OK. You have been sucked into the Fed tapering angst. Everyone has. Personally we seem to think that the US Fed stepping away from the market means that the economy can stand on their own two feet without the support of central banks. That seems like a GOOD thing to me, no "artificial" if you will, stimulus. Letting the collective take control of the market. I guess in some senses with the end of stimulus you could declare that this is a success by Ben Bernanke and the rest of the FOMC and Fed. I read this morning from Bloomberg that Bernanke stayed on longer than he wanted to, telling Charlie Rose (Meryl Streep can't live without Charlie Rose) that the Fed chairman had stayed longer than he wanted to. Check it out: Obama Says Bernanke Has Stayed at Fed 'Longer Than He Wanted'.

I guess this is as clear a signal that Ben Bernanke is going to step aside when his term expires 31 January 2014, Janet Yellen is expected to be the replacement. But it says on the Fed website that his term as a board member ends on the 31st of January 2020. Yellen is 7 years older than Bernanke, so perhaps at the end of a couple of terms (four years as Fed chairman), she will be in her mid seventies and really throw in the towel with public service.

But this week all eyes will not be on will.i.am and Britney, but rather on the FOMC for "signals" or "signs" of when tapering is actually going to take place. Jeff Miller, a blogger that I follow published an interesting piece with some insight: WEIGHING THE WEEK AHEAD: WILL THE FED CHANGE COURSE? The FT article published late yesterday afternoon, written by Robin Harding, Fed likely to signal tapering move is close had a marked impact on the market, with the Dow losing 115 points from around 14:00 in the afternoon to just before 15:00. Fancy that! The skittishness of the short termers and the new worry means that there is likely to be a lid kept on markets until the Fed is clear on their moves. I don't think we lose any sleep around here on such weighty matters, the Fed will do what they have to!

Initially two good economic data points gave the markets impetuous yesterday, they were Builder Confidence Hits Major Milestone in June, which was the best such read in 7 odd years and then quite a solid beat from the Empire State Manufacturing Survey. Good news all around after some mixed news.

Unfortunately this morning we are confronted with the news from Europe that passenger automobile sales hit a twenty year low, after some encouraging signs last month. Last month of course was the first rise in 19 months. The lowest level since May 1993. Gee, that was a long, long time ago! The FT carries the story well this morning: European car sales fall to lowest level since 1993. Sis. As platinum producers and by definition the main supplier to the autocatalytic convertor market, the anticipation of a bottom unfortunately has not yet been put in place. I suspect that we are nearly, nearly there, here is hoping that this is the last month of awful news.

The Naspers rumour mill is churning, this time about a potential acquisition in India, The Times of India reported over the weekend: South Africa's Naspers may acquire RedBus. RedBus? What is that? Well, it turns out that it is less exciting than you may think, a simple online ticketing website for bus travel across India. In classic Naspers style, they will look to acquire a stake in the business and then perhaps more as time goes on. The business RedBus just turned a maiden profit after seven years of operating, but as you can see fits the entrepreneurial spirit that Koos Bekker seems to identify so well. A stake, perhaps 30 to 51 percent, valuing the business as more than 100 million Dollars is no small cheque for Naspers, between 30 to 50 million Dollars. Naspers results this time next week, it should be exciting!

SABMiller announcing this morning that they have entered into a cooperation agreement with a Swedish crowd called Kopparberg, a listed brewer of mostly cider products, but beer and water too. SABMiller will now be able to distribute these products across all of their regions where they operate, the first exclusive agreement is to distribute across Australia, more to follow in the coming months. Cider, I suspect (and I did a quick spot check) that if you are watching your weight that pear and apple ciders are of a higher sugar and calorific content than ordinary light beers. But comparable to stout beers, so perhaps they are just attacking a different market and continue to grow their offering. Never sitting still over there, or here, I guess it is fair to say that the brewer is no longer really South African!

Home again, home again, jiggety-jog. So we will find a little later tomorrow what the Fed thinks they are going to be doing. Of course the ending of their program all depends on unemployment and growth. Luckily we have those numbers coming around all the time. And better economic news is better in the long run. Our markets are up more than a percent today, which is all good!

Sasha Naryshkine and Byron Lotter

Email us

Follow Sasha and Byron on Twitter

011 022 5440

Friday 14 June 2013

Tepid Telkom

"But the growth rates of the future of the business are not exactly exciting, 5 percent? The others are growing quicker. And the truth is that handsets and tablets are set to be the future of the home usage, if not already there in the developed world. So you want to be dominating in the data space, and whilst Telkom have more lines in than anybody else, our country still has too few."

To market, to market to buy a fat pig. We give Mr. Market too much credit, really. The collective acts like a four year old that either needs their comfort blankey (from Bernanke) or acts irrationally because there is not enough comfort or information. Just take the (almost past us, but finished according to the French president) Euro zone crisis where we were led to believe that every single piece of news from Angela Merkel's mouth was more important than the zone itself. What did she say? Everything is OK, then that is very good! However, when there was a void of news then the chattering classes were convinced that Greece was leaving, or this or that was happening right now.

I enjoyed the piece in the WSJ titled Analysis: Fed Likely to Push Back on Market Expectations of Rate Increase. As the article explains, the wind down is going to be slow and orderly. As the Fed continue to wind down, the economy will continue to improve and rates are likely to continue to rise, perhaps starting at the end of the year. The Fed have moved the starting point of that more than once. So what if treasuries are yielding more now than they were six months ago. I thought nobody wanted to be stuck in a low rate environment forever? And if you forgot to refinance then so what, rates historically are still low, there is lots of time!

So finally Mr. Market, when they saw the data from yesterday in the US, with improving retail sales (Monthly & Annual Retail Trade) and better than anticipated jobless claims (UNEMPLOYMENT INSURANCE WEEKLY CLAIMS REPORT), heaved a sigh of relief and embraced good news. After all, good news is good news, right? Markets went from the worst point on the open all the way through to the closing highs on the day. I saw that our market EFT in the US soared 5 percent! When I say our, I mean the iShares MSCI South Africa ETF, it is relatively small, according to Google finance 476 million Dollars, that hardly qualifies as a market mover, right? Any institution worth their salt would have their own setup here and be able to make inroads into the deep liquid markets that we offer.

It is rather strange to think of our market being one of the biggest in the world, in fact the 17th biggest according to this list: List of stock exchanges. The link then points you to a place where you can download a .pdf document from here: MONTHLY REPORTS. I selected all exchanges for the Month of May, 2013 and then hit go! It is always amazing to see what comes out the other end.

At the end of May 2013, the entire value of all the worlds affiliated stock markets clocked 58,582 trillion Dollars. Wow!! 15.8 trillion Dollars is on the NYSE Euronext, 5.279 trillion Dollars of that is listed on the NASDAQ. Joburg, 833 billion Dollars. Cyprus? Well, only 1.883 billion Dollars. The Mauritian stock exchange at 7.799 billion Dollars makes the Cypriot stock market look like a rank long hop amateur. The next page is unbelievably enlightening, the number of listed companies globally. My best guess was nowhere near. Locally we have 382 companies, 30 of which have their primary listing elsewhere, and are classified as "foreign" companies. The total number of companies listed are 45,459 across the affiliated stock exchanges.

That is how many choices you have. What counts as investment grade is never going to be a number that everyone agrees on, but that is an extraordinary amount of listed businesses. Choices! If you had to read 4 annual reports of these listed companies every day (yes, including your weekends and public holidays), it would take you 31 years to get through the whole lot. And by that time the landscape would have changed more than you could ever imagine.

What also amazed me was value traded year to date (end of May) clocked 23 trillion Dollars. If you annualise that number you get to 55 trillion. The value traded on equity markets yearly is nearly the market capitalisation in its entirety. In the bigger markets it is crazier. The NASDAQ year to date traded volume is 3.876 trillion Dollars, annualise that and you get to market turnover in the tech heavy index of 1.76 times. And that is on a year by year basis. Now who rationally can explain to me that people turning (churning) shares over the NYSE Number of Trading Days 2013, which equals 252 are "investing".

Am I the only person that thinks that 3.5 percent of the total value of the NASDAQ trading every week is absolutely nuts? Minimum holding period should be five years, at least in my world. By that time the NASDAQ has turned over 9 times its value. How the {expletive} does that possibly work?

My last point is about choices. I would send this sheet to each and every politician who talks about resource nationalisation, bigger taxation and so no, because this is just to show you how many investment choices there are across the globe.

Byron always asks me, why do you write about those Telkom results? What is the point? We have no clients who own them, why would you even want to cover them? Well, I often tell him that it is often as much as what you don't own, as much as what you do own. And with Telkom there is a company that the main shareholder (who owns less than 40 percent) thinks it belongs to the state. How do I quantify that? Well, the name changed from Telkom to Telkom SOC, with the SOC standing for State Owned Company. That is what the government think. It tells me that the main shareholder has very little regard for the rest of the shareholders, even though they don't have a majority, you get my drift. You can often tell a lot about a company if you check their shareholders out. And in this case meddling with the business of Telkom has seen them with too many CEO's and not enough focus.

But that ongoing gripe aside of who should be involved in the business of business, that is an ideological debate that we are never going to agree on. So let us look at the number: ADSL subscribers clocked 870 thousand, an increase of 5.2 percent. To put this into perspective, in late May Vodacom released results (see our analysis from back then: Vodacom with good FY numbers) and indicated that they had 18.5 million data subscribers. Obviously not as intensive users as Telkom ADSL subscribers. In the recent MTN subscriber numbers (MTN subscriber numbers, close to 200 million), data users with 13.2 million here locally. Again, the Telkom users you would think are a whole lot more intensive.

But the growth rates of the future of the business are not exactly exciting, 5 percent? The others are growing quicker. And the truth is that handsets and tablets are set to be the future of the home usage, if not already there in the developed world. So you want to be dominating in the data space, and whilst Telkom have more lines in than anybody else, our country still has too few.

Only 3.8 million fixed lines now, down from 4.895 million in 2002, a 22 percent fall over 11 years. Number of minutes on those lines left over continues to fall too, total millions of minutes used on the Telkom network in 2003 was 32,868, this time around it was 18,425 minutes. In ten years the number of minutes spoken on the Telkom network has fallen nearly 44 percent. It is fair to say that they have seen their core (originally) business absolutely annihilated.

And the value of the network, because the competition have invested heavily, is not worth what originally thought. "The Board decided to impair the carrying value of the assets of the Group by R12 billion for the year ended 31 March 2013. The impairment review was prompted by the considerable period of time that Telkom's shares have been trading at significantly lower value compared to its net asset value. After the impairment the net asset value is R34 per share. The impairment takes into account the impact on the financial returns of the Group in light of technology changes, competition from mobile operators and evolving regulatory landscape over more than a decade. These factors have eroded the returns from legacy assets."

Well, everyone has the same regulatory environment. The truth is that the handset evolved quickly, Telkom could not keep up. And evidently did not. So why would we be encouraged to believe that they are going to be in catch up mode from here? Even if management suggest that this time it is going to be different. I wish Telkom the best, because their success would be a success for all of us here in South Africa. Just think how we could advance education with a high speed broadband connection in every single classroom around the country. Imagine how that could change the dire state of teaching, I'm sorry, I mean "learning".

Home again, home again, jiggety-jog. Markets are flying here. The Rand has firmed a little, that is always encouraging. We are hopefully expecting this to continue, it would be great for the inflation outlook.

Sasha Naryshkine and Byron Lotter

Email us

Follow Sasha and Byron on Twitter

011 022 5440

Thursday 13 June 2013

Tapering tonk and tank

"Having said that, at some stage this money will start filtering into the system, and even if it doesn't it sits as a nice safe haven which will allow the banks to absorb another crisis. That creates confidence and certainty which in turn creates more economic activity."

To market, to market to buy a fat pig. Yesterday. Troubles and far away, you know how the song goes. There were retail sales locally, check out the StatsSA release: Retail trade sales (Preliminary) April 2013. And unfortunately in constant 2012 prices we only saw a 1.9 percent increase year on year. In Rand terms the sectors going backwards over the Feb, March and April were the Food, Beverage and Tobacco and Household furniture, appliances and equipment. But textiles, clothing, footwear and leather goods are the most improved.

Amazingly, 39 percent of all retail sales in South Africa take place through "General Dealers". In the past I have struggled to find the definition on the StatsSA website, but it is there now: "Retail trade in non-specialised stores with food, beverages and tobacco predominating; and 'Other' retail trade in non-specialised stores." I presume cash and carries and bulk stores.

But this table is worth a look, to get a sense of where South Africans spend their money. Seems we like clothes, shoes and handbags, I can't say that I am a very good customer there. In fact I am very useless in that department, but the way I figure it, you can only wear one pair of pants and shirt and shoes at the same time, not so? I am very proud of the fact that I still have the shoes that I got married in, they still "work" and I wear them often enough.

Total retail sales for last year at constant 2012 prices was 662.8 billion ZAR, up from 633.3 billion the prior year. And was up 82 billion in 2012 from 2007. I suspect that what often happens around here in South Africa is that the chattering classes jump onto the negative commentary and tell you how awful everything is, but over the last two decades the lives of many South Africans have improved, retail sales and access to credit has improved markedly. Before you tar and feather me (don't set me alight) don't get me wrong, I agree mostly with the chattering classes. I always think that we can do better, and should do better. Education is shocking around here, that is why we like businesses like Curro, because parents will do whatever they can to make progress in life.

This article in the WSJ was excellent and explained a lot: Question for Investors: Bumpy Return to Normal or New Volatility as Central Banks Step Back? The conclusion is/was not perfect, but the story tells it like I tried to discuss yesterday. Ironically an improvement in economic activity and the outlook in the US and Europe (and Japan) means that the emerging market flows will be in the other direction, back. And that adds to the volatility that we have seen. I guess that smug line, oh, Europe have their problems, perhaps we can dispense with that now.

Talking of which, remember when folks were crowing last week when the folks from Transnet failed to get away some debt that this was a "sign" that parastatals were going to struggle with bond issuances as a result of government policy uncertainties. Well, Transnet had this statement on Monday: Transnet roars back to market with R3, 3 billion bond. What!?!? How come that there was not as much excitement about the issuance than NOT getting the issuance away? Because that is the mood that we are in now. Everyone is feeling like they are not getting their best foot forward and not making sufficient progress.

But, as the curious and inquisitive guy that I am, I wanted to know the rate achieved, so I emailed the journalist from the BusinessDay who had written a piece:

"Good story, I read the Transnet release: Transnet roars back to market with R3, 3 billion bond.

And did not see the cost to Transnet, just the line: The issue of the 3-year floating rate note and the cost of the funding are in line with Transnet’s strategy of diversifying instruments and sources of funding.

Perhaps you could ask the specific person, .... the details at the bottom of the release: ...... what the yields were this week in the oversubscribed bond issuance, relative to the last weeks “flopped” bond auction.

The cost of funding of the expansion is really important for the public to know, because if the costs for Transnet have risen, perhaps they should rather let everyone know that too. If not, then I will shut up and sit down.

If you could find out what the two yields were, for the two issuances, I would appreciate that. Just curious."

Now the BusinessDay journalist sent the question directly to the spokesperson who replied directly to me:

"Dear Sasha,

The three year floating rate note was issued at 3 month Jibar + 110 which is 6.23%.

Last week's bond was not issued.

Kind regards,"

Two points. One, the duration is important to note here. The longer dated debt could not be raised because investors in fixed income are now mindful that in the short to medium term the interest rate outlook if for rates to rise. Hence it would be easier to get away shorter dated three year debt rather than ten year plus. Second point, I could not ascertain who the investors were, I did ask, but I got no reply. I want to know, are you worried about South Africa's ability to raise debt for ambitious expansionary projects, or do you think we are just in a spot right now where globally fixed income is in a wait and see mode? Perhaps. Time reveals all the answers, we continue to encourage diversification, geographically that is.

Byron beats the streets

"Some of the guys I chat to say central banks could have created a liquidity bubble that might burst if QE is suddenly withdrawn or perceived to be suddenly withdrawn."

A few things popped to mind but the very first one has to be a point that former member of the Fed, Bob McTeer has been drumming across for ages. He says, and I fully agree with him, that QE has not actually put that much more money into the system. This is because banks have been using the extra cash to ramp up their reserves rather than lending it out and pushing the money into the system. This is understandable, first of all regulations have forced banks to hold higher excess reserves. Secondly, the banks are being cautious. They got their fingers burnt in 2008 and do not want a repeat.

Here is the full explanation in a piece titled The Fed Has Not Been Printing Boatloads of Money.

Having said that, at some stage this money will start filtering into the system, and even if it doesn't it sits as a nice safe haven which will allow the banks to absorb another crisis. That creates confidence and certainty which in turn creates more economic activity.

Speaking about QE the question of tapering is the new craze for anxiety. Remember Fiscal cliff, remember Greece, remember the US debt ceiling? Tapering of the fed's QE policy is the new excuse when the market goes down. I am confused though. I thought this was a good thing? If the Fed are pulling back on Quantitative easing that means they feel the US economy is in a good place and can function without intervention.

This article titled Tapering is the Green Pill reiterates my point. Another question so often asked is when will the Fed pull out? That also confuses me because it is quite clear that the Fed will not just pull out. It will be a slow evolving process, just like how they started the buying programme. The Fed have also clearly indicated when this will happen. There is no time frame, rather a benchmark. And that is the US unemployment rate. When that comes down the Fed will slow down. They have clearly stated this so no need for speculation.

Lastly, it is not 'QE' that moves share prices over the long term. Yes it helps with market sentiment but at the end of the day it is earnings which underpin share prices. If there are jobs in the market , there are more consumers. The US economy relies on its consumers. This will help earnings which will push up share prices. The fed will only pull out when these jobs are created. So please stop worrying about the 'tapering of QE'. It is just a fad.

Home again, home again, jiggety-jog. Market participants are adopting the headless chicken approach, running to-and-fro. The Japanese market fell over six and a half percent this morning as the direction from the Bank of Japan becomes less clear and the Yen firms up strongly again. Volatility has definitely risen over the last few weeks. The VIX measures that I follow are all at elevated levels this year, but have certainly been rubbished over the last year. If you were long volatility you have been caned. Not so for the last three to four weeks. My best guess is that people trading these shorter term waters are on alert for ice bergs. My other best guess is that we will sail through this in the coming weeks and the anxiety will subside.

Sasha Naryshkine and Byron Lotter

Email us

Follow Sasha and Byron on Twitter

011 022 5440

Tuesday 11 June 2013

At least there is still labour

"They were touring one of the new modern factories, and Ford playfully turns to Reuther and says, "Hey Walter, how are you going to get these robots to pay union dues?" And Reuther shoots back, "Hey Henry, how are you going to get them to buy cars?""

To market, to market to buy a fat pig. We sank off our best levels, I saw somebody suggest that the only reason we ended in the green is that the Rand weakened to near its worst level in four odd years. Before you get your knickers in a knot about internalising the reasons why the currency is falling off of the cliff, I came across a WSJ article today that pointed out that the Indian Rupee lost nine percent to the US Dollar in the month of May alone. I wonder what mining related labour issues they must be having there? All that snarky sarcastic comment is supposed to say is that you must be careful not to internalise the conversation about the currency.

Financials also slid, banks ended the day much lower, but industrials rallied and the weaker currency also helped platinum and gold companies too. But still, the share prices of the local precious metal producers are a ghost of their former past glory, the gold index is down 50 percent over ten and a half years. I found an excellent table: CPI headline index numbers1 (Dec 2012 = 100), if we rewind to the January 2003 level of the index, and then we apply the inflation calculator, we see even steeper losses. Worse. Much worse.

Because essentially the 3091 points on the Gold index in January 2003 is around 5126 points in December of 2012 (as per the table above), 1523 points currently is around 1475 points in December of 2012 (again referencing the table above), the difference in performance between the two is around 3650 points. Or roughly 71 percent lower on an inflation adjusted basis, I hope that my math is correct here, check it out. That is a complete wipe out in anyones language, because quite simply to get back to the levels before, you have to increase roughly 250 percent.

I suspect that the platinum producers might and could capture that former glory. For the time being however, there are many obstacles. And another obstacle could be put in place today, the use of labour brokers to obtain gainful employment might well be a thing of the past in South Africa, at least for now. Herman Mashaba in his capacity as chairman of the Free Market Foundation had this piece yesterday: Unemployed people need the services of labour brokers.

One of the three pillars of the Tripartite alliance, the trade union element, is vehemently against the use of labour brokers. Because COSATU's view is that Labour Broking gets in the way of creating permanent employment. Here is their answer: COSATU answers DA on labour brokers. Modern slavery is the term. I am not sure, it is an ideology debate that sees no middle ground, almost never actually.

But the reality for labour is that "things" might well look worse in the coming years, which is highlighted in a recent TED talk that I watched: Andrew McAfee: What will future jobs look like? Watching the piece on awful bandwidth that we are unfortunately subjected to is a little heart breaking, but lucky for us there is a transcripts piece, where McAfee explores the consequences of too many machines in our lives:

"The first are economic, and they're really nicely summarized in an apocryphal story about a back-and-forth between Henry Ford II and Walter Reuther, who was the head of the auto workers union. They were touring one of the new modern factories, and Ford playfully turns to Reuther and says, "Hey Walter, how are you going to get these robots to pay union dues?" And Reuther shoots back, "Hey Henry, how are you going to get them to buy cars?"

Reuther's problem in that anecdote is that it is tough to offer your labor to an economy that's full of machines, and we see this very clearly in the statistics. If you look over the past couple decades at the returns to capital -- in other words, corporate profits -- we see them going up, and we see that they're now at an all-time high. If we look at the returns to labor, in other words total wages paid out in the economy, we see them at an all-time low and heading very quickly in the opposite direction.

So this is clearly bad news for Reuther. It looks like it might be great news for Ford, but it's actually not. If you want to sell huge volumes of somewhat expensive goods to people, you really want a large, stable, prosperous middle class. We have had one of those in America for just about the entire postwar period. But the middle class is clearly under huge threat right now. We all know a lot of the statistics, but just to repeat one of them, median income in America has actually gone down over the past 15 years, and we're in danger of getting trapped in some vicious cycle where inequality and polarization continue to go up over time."

Again, I don't know what to take away from this, these TED talks are supposed to be insightful and helpful, I can understand why labour would push back here. I keep saying it, we will have to become smarter in time, because the machines are going to continue to do the labour intensive "stuff". But I am very sure that labour do not see it the same way.

What was that old line I remember in the Mad magazine when two old academic types were looking at a student protest? The students were protesting and shouting, "We shall overcome" and the professor turned to his academic friend and said, "that is fine, as long as they don't come over here!" It seems to be a slow news day, because the main news seemingly right now is a bunch of policeman and a few protestors and some journalists all in a standoff in a square in Istanbul. And a fixed camera with live visuals. The prime minister seemingly has had enough, and has sent in the police to take down the banners and clear the square, Taksim Gezi Park. And the stock exchange? Well, that is getting another punch in the guts, down two and a half percent as we speak (write). The stock market is down nearly 20 percent from the highs.

Whilst many might be uncomfortable with this type of behaviour, it is simply democracy at work. What is quite interesting however is that the prime minister is going to meet the organizers of the protest today, and perhaps try and understand their concerns. Or more likely tell them how the world is, according to him, I get that sense from his abrasive style. In fact, one of the core parts of the protest are an opposition to the authoritarian style of Prime Minister Recep Tayyip Erdogan. And a ban on alcohol. And something to do with public displays of affection, seemingly those libertarians are worried about an infringement on their freedoms. What I am most interested in is the perception translating into reality, and in particular what it means for the cost of funding that Turkey obtains in the open market.

And if you look at the four year graph, it seems the Turks have done a great job, and their ten year bond used to yield around 11 percent. Before this recent protest action it was closer to six percent. So currently at seven and a quarter, you can see how quickly the market can react. And with the prime minister threatening to crush the speculators, that had different motives. As we have been speaking/writing the market is actually trending higher. Well, not sure, perhaps the Turks will sort their stuff out soon, I just like the idea that democracy is being exercised, that indicates some progress, right?

Home again, home again, jiggety-jog. We are getting slaughtered here today, markets globally are selling off as the Japanese Yen continues to strengthen against the US Dollar. In Europe there is anxiety over the German Constitutional Court and their decision about whether the ECB can use the OMT legally. Even though they, the ECB, have never used the OMT. But having the ability to use the OMT is critical, because it implies that if needs be the ECB can pull the trigger and proceed. And chase the bond vigilantes away. That would be a good outcome. For now, as the BusinessInsider points out: Markets Turning Ugly: Yen Soars, Italy Tanks, Emerging Markets Get Hammered Again. Sigh.

Sasha Naryshkine and Byron Lotter

Email us

Follow Sasha and Byron on Twitter

011 022 5440

Monday 10 June 2013

Google looking to find their Waze

"So what do Waze do? Well, Byron actually showed me the application about 9 months ago, it helps make your life easier from a traffic flow point of view. Which makes Google a more perfect fit actually, rather than the other suitors who have been bandied around, Facebook and Apple were also suggested to have "wanted" Waze. We will see, I would like to see the announcement soon."

To market, to market to buy a fat pig. I read somewhere on Friday that the monthly non-farm payroll numbers was about the worst outcome ever for cable news networks. Imagine a number that met consensus. And now there is nothing to talk about. One of the busiest and most visible news junkies on Twitter Joe Weisenthal pronounced that this was a Goldilocks number. Meaning that the headline number was not too hot (too many jobs), nor too cold (too few jobs) and in fact just right, as in the bowls of porridge that the naughty little girl tasted. How the bears made the porridge or lived in a house, I am not that sure, but it's just a story.

But Joe had a bigger point than just pointing out that the number was inline with expectations, a number much stronger would (in the eyes of the short termers) be evidence presented to the Fed to retire their stimulus program earlier than anticipated. A number very weak would have meant that the Fed would have carried on their program for longer, I honestly don't think that is a good outcome. So a number meeting expectations means that the status quo remains.

If you want the full release, then check it out from the BLS: THE EMPLOYMENT SITUATION - MAY 2013. "Total nonfarm payroll employment increased by 175,000 in May, and the unemployment rate was essentially unchanged at 7.6 percent...... Employment rose in professional and business services, food services and drinking places, and retail trade." Some folks had also pointed out that May was a five week month and that might have explained a good number. Others also suggested that the sequester should have been having more of an impact, the fact that it wasn't was a good outcome. At least for now.

There is strong growth in the food services and drinking places sector, 337 thousand new jobs have been added there over the last year. Happy people are more merry, I guess they fill their bellies accordingly. But this is the part that I guess the market wants to see, a reduction of 14 thousand US Federal government jobs last month, 45 thousand fewer people employed by uncle Sam in the last three months. That is on course for an annual run rate (reduction) of 180 thousand fewer people in employment in government. But still, 20 million people employed by the government, is that too many? Well, perhaps, bearing in mind that there are only 8.6 million folks that are in the category "Self-employed workers, unincorporated". Now this number has shrunk in the last decade, it used to comfortably be above 10 million back then, but is lower now, nearly 1 million less nowadays. I wonder why....

Just before the release on Friday, in fact late Thursday, the Chicago Fed published a piece: Estimating the trend in employment growth, in which they said something that might have startled a few people: "For the unemployment rate to decline, the U.S. economy needs to generate above-trend job growth. We currently estimate trend employment growth to be around 80,000 jobs per month, and we expect it to decline over the remainder of the decade, due largely to changing labor force demographics and slower population growth."

That is interesting. So with a changing labour force participation rate, and a declining and slowing birth rate, the jobs picture will change. And perhaps not millions of jobs are needed in the long run. The past is not the same as the future and never will be, so sometimes suggesting that x needs to return to level y just to break even is not always the best analysis. Think of the changing job market. Nowadays self motivated individuals can change their circumstances without ever leaving their desk. One can apply for a job in a far away country, do a detailed CV online (LinkedIn) and make yourself public, have an interview via Skype and away you go. That exercise didn't exist 20 years ago. In turn machines are doing more labour intensive jobs than ever before. To stay ahead you are going to have to get cleverer.

It did not really register on the radar, but it is and was massive. BHP Billiton has completed sale of 8.33% interest in the East Browse JV and 20% interest in the West Browse JV, located offshore Western Australia, to PetroChina International Investment. For 1.63 billion Dollars. Wow. At 10.17 Rands to the US Dollar, that is over 16.5 billion ZAR. Bigger than HCI and Illovo. But when your combined market cap is around 163 billion Dollars (adding the two ADR's up), that is around one percent of their market cap. Perspective is needed sometimes for size and scale.

Which Waze is this going to go? And by that, I am talking about the business called Waze, an Israeli business that did not exist in 2007. Now, the talk of the town is that Google are the most successful bidder and are willing to pay somewhere in the region of 1 billion Dollars for the business that isn't (in human terms) at junior school yet. 80 whole employees, with 10 in California, the rest in Israel. Now before you say, Israel, what is that about, remember that Israel has outside of North America the highest number of listed companies on the NASDAQ, per territory. Israel has more university graduates as a percentage of their population than any other country in the world. Israel apparently produces more scientific papers per capita and files more patents per capita than any other country in the world. Seems like relatively low rainfall, clear air and moderate temperatures mixed in with clever people make the perfect cocktail for human ingenuity!

So what do Waze do? Well, Byron actually showed me the application about 9 months ago, it helps make your life easier from a traffic flow point of view. Which makes Google a more perfect fit actually, rather than the other suitors who have been bandied around, Facebook and Apple were also suggested to have "wanted" Waze. We will see, I would like to see the announcement soon. Check out the Time piece: Here's Why Google Wants to Buy Waze, a Red Hot Map App, for $1 Billion. Good for them! Here is to fostering innovation here locally, so that we can have an innovative information technology part of our economy.

I signed up to Waze (I had the app already) and got this little starter alert:

That is just "my area" and in the last week. Amazingly this is pretty much like the Wikipedia of traffic, with the community moderating. And yet another example of how the community as a collective makes life easier for each other. I wonder whether the intention, when the founders started Waze was to make the world easier to navigate and be the premier application globally (they actually won most innovative application for 2013), or the motivation was to make money. You will probably find that by starting off with trying to make the world easier, the second outcome came.

Byron beats the streets

business update from Sasol

Here is the release

In terms of financials there was not too much info given away. We will have to dig into that when the results come out. They do however give the average Rand Dollar price and average oil price received. Compared to March last year this is actually down 2%. The weaker rand has been offset by a weaker oil price.

There is also a lot of talk on macro influences in the update. Nothing new was said but there are many mentions of the unproductive and weak labour market we have in South Africa at the moment. This is causing above inflation cost increases to the business in South Africa which they are trying very hard to control. No wonder they have earmarked North America for their next big growth investment. Talking about their US investments they tell us some detailed information about their plans there.

"We are executing the front-end engineering and design (FEED) phase of the integrated, world-scale ethane cracker and downstream derivatives units, and will commence with FEED for the GTL and chemicals value-adds facility at Lake Charles in Louisiana during the second half of the 2013 calendar year."

So basically they are going to begin with an ethane cracker which produces ethylene. This will be used for many industrial functions and products. Only after that is decided on will they look at the GTL plant.

"The US GTL facility (estimated to cost between US$11 billion and US$14 billion) will produce at least a nominal 96 000 barrels per day (bbl/d) of product, with the potential to produce up to 10% more. The US GTL project will be delivered in two phases after the ethane cracker, with each phase comprising at least 48 000 bbl/d. The final investment decision for the US GTL project is expected to be taken within 18 to 24 months after that of the US ethane cracker.

Around 70% of the production of the GTL facility will be low-sulphur diesel, with naphtha and liquid petroleum gas (LPG) as co-products, and 30% of the production will be chemical products, including paraffin feedstock for linear alkyl benzene (LAB), wax products and synthetic base oils."

Very interesting. The GTL plans will only look to start producing around 2020 so patience will be key. The concept sounds amazing, implementation is vital and that is up to good management. As an investor you are entrusting management to do this right.

As far as current operations are concerned.

"We expect an overall solid production performance for the 2013 financial year with our production guidance remaining unchanged:

Sasol Synfuels volume guidance based on current performance is anticipated to be at the top end of the previously guided range of 7,2 to 7,4 million tons for the full year;

The full year average utilisation rate at ORYX GTL in Qatar, taking into account the statutory shutdown, is expected to be approximately 80% of nameplate capacity;

Full year production at ASPC in Iran will be approximately 80% of nameplate capacity; and

Our shale gas venture in Canada will continue to show increased production compared to the prior year due to the new wells coming on stream. At present we are stabilising our production, as we have slowed down the drilling of additional wells.

We remain on track to deliver on our expectations for improved operational performance."

We remain happy and confident to hold this stock for a very long time. Management are proactive and ambitious while using their strong base here in SA to expand around the world. On top of that we are bullish about the future demand for energy, that is of course key for the future of this business.

Home again, home again, jiggety-jog. Stocks are slightly higher now, the Rand has weakened significantly, property stocks are getting messed up again. Higher rate environment coming soon I guess, that is not the greatest news, but inevitable with imported inflation accounting for another 200 basis points, as the Rand has weakened by around 16 odd percent to the US Dollar this year alone.

Sasha Naryshkine and Byron Lotter

Email us

Follow Sasha and Byron on Twitter

011 022 5440

Friday 7 June 2013

Hashtag guessing time

"I often say that at the time, on the day, people remember the minute details of the jobs report versus consensus (important), but ask them the same number from six months ago, nope, can't remember. The health of the US consumer is directly linked to the health of the global economy. Roughly 70 percent of US GDP is linked to consumption, and that includes consuming financial and healthcare services. Both of those sectors have risen sharply over the last three decades."

To market, to market to buy a fat pig. Markets are mixed at the open here, the late rally in the US overnight has been countered with some caution ahead of the nonfarm payrolls today, we discuss that in what I guess we could call detail. There were some comments from the local reserve bank governor of the state of the pitch, I mean economy and the words that she had were pretty stern, I am not entirely sure whether they will fall on deaf ears or not. Well, at least she said that there would be no rate cut any time soon, and warned about the ratings agencies adjusting their view on South Africa sooner rather than later if some structural reforms were not on the cards. The reserve bank governor was speaking at the BER conference, I presume down in the windy and wet Cape (at least at this time of the year).

There was a presentation on the BER website that I downloaded and perused (you can't read a presentation), and there were some good points made. For instance the tapering by the Fed, the suggestion is that we would see more outflows from the local bond market. Gee, I am not 100 percent that is all true, obviously the Transnet bond issuance and "flop" suggests maybe that Mr. Market is not quite receptive to parastatal debt. I eventually found the speech that governor Marcus gave, and found that in fact it was Sandton, and not the wet and windy Cape. At this time of the year. At this time of the year we are having the most incredible weather. We really are. You can download it here: Conference Papers, titled "The implications of the global financial crisis for monetary policy".

I had a read through the speech you will see where the risks were identified by Gill Marcus:

"South Africa has to contend with these issues at a time of heightened vulnerability. The current account deficit has to be financed, particularly at a time of uncertainty with respect to global capital flows. This is compounded by a real threat of downgrades from the ratings agencies while non-residents already hold a sizeable proportion of both domestic government bond (around 38 per cent) and domestic equities (around 42 per cent). The country also has a relatively low level of foreign exchange reserves. Household debt ratios remain high, while the fiscal deficit leaves limited fiscal room to respond to a further deterioration in the economy. Electricity supply constraints have also emerged as a risk to the growth outlook."

But then the juicy parts, at least the ones that have been unpicked by the media where the governor refers to "weak competitiveness, a poor skills profile and an educational system that, in parts, is dysfunctional, low domestic savings, low investment, uncompetitive product and labour markets and spatial distortions." I guess we did know that already, but this was presented whilst wearing her governor hat. The stinging part comes at the end: "There is clear recognition that South Africa faces significant challenges; what is required is decisive leadership that consistently demonstrates a coordinated plan of action to address them." And then of course, how would this help? Well, in the governors mind: "This will go a long way to restoring confidence, credibility and trust."

I guess that the president is well aware of these issues. Whether or not there is the political will or ideology change that will see us away from this particular path, seemingly a bad one. Elections are next year. I am not suggesting that an economic slump could displace the ruling party, but stranger things have most definitely happened. Right now politics has descended to toilet levels again, and I mean that figuratively. But, I do not want to offend anyone, and as they say in the classics, keep politics and religion out of any good gathering and we will almost always get along.

Jobs day. Jobs Friday. This is undoubtedly the most important day for equities markets, until ........ ummmm ..... the next jobs number. I often say that at the time, on the day, people remember the minute details of the jobs report versus consensus (important), but ask them the same number from six months ago, nope, can't remember. The health of the US consumer is directly linked to the health of the global economy. Roughly 70 percent of US GDP is linked to consumption, and that includes consuming financial and healthcare services. Both of those sectors have risen sharply over the last three decades. And those sectors should continue to contribute more and more over time, as people live longer and have to manage their finances better.

So the nature of the jobs change, not quickly, but rather slowly and at a pace that is barely noticeable. For instance, according to Wikipedia, there are 2.2 million registered farms in the USA. Which produce millions of tons of corn, soybeans and are "home" to tens of millions of cattle, hogs and hundreds of millions of chickens. As you can imagine mechanisation and better farming techniques have improved yields and because of industrialisation more and more people live in urban areas, that trend globally still continues. I am getting to my point. Why the report is called the non-farm payrolls is probably for historic reasons, when there were more migrant seasonal workers on the land. From nearly 3 in 4 people living and surviving by agricultural means 140 odd years ago in the USA to around two percent of the entire workforce, the change is mind blowing. Absolutely mind blowing. Plus, more importantly for the US economy, the pay is poor in rural areas.

I remember and found an oldish article that was republished by a favourite of mine, Mark Perry, an article titled The "Decline or Demise" of U.S. Farming?. One of the paragraphs struck me again:

"From a high of almost 9% of GDP in 1948, the agriculture sector's share of total output has declined steadily and fell below 1% by 2002. And yet we produce more food today than at any time in history and it's cheaper as a share of disposable income than ever before. Thanks to productivity gains, farm employment today represents only about 2.5% of total employment compared to more than 12% of America's workforce in 1950."

So even since our grandparents time, the world has changed dramatically. I guess that is why everyone is so keen for the Chinese to move from an agricultural based economy to a consumption based one. According to Wikipedia, there are still 300 million Chinese farmers, that is nearly equal to the entire US population. Technological improvements have also seen runaway larger crops to feed a growing urban population. But if the Chinese are to reach the same levels of employment on farms with greater mechanisation and at the same levels of the Americans, then by my crude maths that means 280 million odd folks will have to make their ways to the cities. Gasp.

So the US consumer still rules the roost, and the larger the number of people in formal employment in the USA, the better for the rest of the globe. Until the spending and consumption patterns of the collective Chinese are more important, the more people in employment in the US, the more the financial world will focus on what the late Mark Haines used to refer to as the financial capital of the universe. Wall Street, stocks and their reaction to the jobs number. Perhaps in a decade or two we can all get excited about statistics China (which once had a chequered past, remember?) releasing the monthly employment number outside the democratic (hopefully) labour department headquarters in Beijing. I presume Beijing will still be the capital.

And I suspect on this chart that the world will be more awash with red: Current Worldwide Annual Meat Consumption per capita. Another interesting overnight piece to read: A rare meat success in Africa. Zambeef, just cast your minds back a few months or so where Rainbow Chickens bought a stake in the Zambeef operation Zamchick, half of that actually. But that is another story, for another time.

For the scoreboard watchers the expectations are as follows, the headline number around 165 thousand to 170 thousand new jobs added for the month of May. The unemployment rate is set to stay exactly the same at 7.5 percent. There is even a hashtag on Twitter: #nfpguesses, where even you can put your best foot forward relative to the rest of the guesses and estimates out there. Personally I get excited about the report like everyone else and share their excitement and disappointment with the number, for a about an hour or so. But also, getting sucked into a number that huge and making it your everything, that is a mistake too. Bring on 14:30 our time!

Mario Draghi. He has to be the most suave central banker on the planet. Well, of the ones that I see on my screens often. Sanusi Lamido Sanusi, the Nigerian Reserve Bank governor is also very smooth, but I get the sense that ECB president Mario Draghi is wickedly funny. I get that sense with Ben Bernanke too, I suppose that they are sharp because they are wildly smart and have accepted jobs with huge responsibilities out of their obligations to society. And the way that I quantify that is to often show folks that Ben Bernanke earns less in his current job as the Federal Reserve chairman than as an academic at Princeton. Yes, you heard that right, less now than before. But yet....... when offered a job of such responsibility and an urge to serve, Bernanke took it, because it is an honour to serve. BUT!! Before you jump down my throat and point out that he makes an absolute bomb on textbook royalties. And I guess people want his textbooks more because he is the Fed chairman.

Anyhow, we are getting off the subject/topic of Mario Draghi and the ECB rate meeting and subsequent press announcement. Marketwatch was updating from the event: Live blog of news conference by ECB President Mario Draghi. So because he did not offer anything new, the market reacted a little negatively. And I think that there is some time for him to bask in the sun and appreciate what it is exactly that he has achieved. Good things. Because just remind me, how many countries have left the single currency bloc ....... Oh, none!

In fact, as we pointed out a couple of days ago, Latvia, a cold country with less than 2.1 million people is about to adopt the Euro. And by about to, I mean adoption of the common currency is set for the 1st of January 2014. In fact since the financial crisis Estonia and now Latvia have joined the Euro. Now in the region is probably the weirdest and strangest thing, there is a Russian territory called the Kaliningrad Oblast, where nearly one million people live and operate in mostly an economic free zone. The place used to belong to Germany, but since the end of World War II, the Russians have it as their own. I suspect that territory will stick out as not part of the Euro.

So, Mario Draghi might well be remembered as the guy that saved the Euro, or rephrase, led the recovery with that speech that galvanised the bureaucrats into action and not just speaking about it. Perhaps everyone was tired of looking for Merkel and Sarkozy (at the time) to solve their problems, Draghi himself was fed up and took the lead. And the rest, as they say, is history. Be disappointed yesterday that maybe you heard nothing new, but be very grateful that the same guy was the man who glued it all together again.

Byron beats the streets

Household net worth in the US has reached $70.3 trillion.

If you include home prices net wealth increased $3 trillion from January through to March this year alone according to the Fed in an announcement yesterday. This has helped stem the impact of increasing taxes. Remember the fiscal cliff everyone was talking about last year. Who would have known that the increase in taxes would have been forgotten because home prices increased so nicely? Sometimes good things happen at just the right time.

When the US consumer is feeling wealthy, the rest of the world benefits because they consume in a big way. And this is why of course more money is flowing into that market and away from emerging markets. It is a natural balancing act. I wouldn't be too concerned. As the flow continues towards the developed world, asset prices will increase and yields will go down. Anyone searching for yield will then look to the developing markets again. That is just short term flows in money. The long term picture of a strong US consumer is very positive for big exporting nations such as China, Germany and Japan.

The long term picture for developing nations has not changed either. Huge populations entering the middle class and becoming consumers, striving to replicate a standard of living that citizens of the US can afford. I can assure you that even though money flows have been leaving the developing world, businesses have not. The big multi-national companies are not that short sited. Plus moving money around is a lot easier than moving businesses. Visa, Nike, L'Oreal, GE and the like still have their eye on the ball. Same with the local businesses here. And that is who we prefer to align ourselves with.

Home again, home again, jiggety-jog. Markets are in wait and see mode. We are running on the treadmill here and someone is cranking up the steepness, that is where I think we are right now. That number might not be too important to me in the longer term, but for the short termers, this is a make or break. At least for the next few hours. Pity about that fielding and running between the wickets yesterday.

Sasha Naryshkine and Byron Lotter

Email us

Follow Sasha and Byron on Twitter

011 022 5440