To market, to market to buy a fat pig. What a day! The Russians thinking that the Syrians giving up their chemical weapons that the Syrians denied having post the Kerry gaffe (or was it?) gave stocks a boost globally. More importantly in the medium term ..... Wait, let us stop there, because John Maynard Keynes is famously quoted as saying: "But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again." So what does short, medium and long term actually mean? Different time frames for different people I suspect, if you are a high frequency trader long term could be a few hours. If you are Warren Buffett perhaps the short term is a couple of years.
So let us rewind and say that the Syrian chemical weapons crisis could have a diplomatic solution. And their civil war, the ongoing conflict in that country? Your guess is as good as mine really, that might just drag on and on. But immediately markets celebrated a "peaceful" resolution to the chemicals question, even though someone lied. Don't rule a strike out just yet, but hey, this is what it is. The oil price fell and markets from Frankfurt to Mexico City rallied. Our market rallied to a record high here in Jozi and by the close the index was at 43 and a half thousand points, up 1.8 percent on the day. Industrials led the charge, up 2.3 percent. But that stuff is all boring, you want to know about companies and the economy, share prices are one thing, the real inner workings of real businesses run by real people are another matter.
A really exciting event was a change of the guard over at the index which we know as the Dow Jones Industrial Average. It was cheered by almost everybody, except someone at Barron's who wrote this piece: Dow Index Changes Miss the Mark. In with Nike, Visa and Goldman Sachs and out with Bank of America, Hewlett-Packard and Alcoa. Alcoa had been in the index since 1959, but having read the Benjamin Graham book (I think edited by Jason Zweig, the WSJ journalist, the most recent version) Alcoa has never quite been investment grade. So, you could argue that it did not need to be there.
The fact of the matter is that Charles Dow, the co-founder of the business known as Dow Jones & Company (and the editor of the WSJ) developed the index. Which had twelve constituents initially. The calculation of the original index (which excluded financials and transportation stocks) was quite simply, add the twelve closing stock prices together and then divide by that number. Easy.
But on the 26th of February 1896, life was different. As this piece from Wiki suggests "The Industrial portion of the name is largely historical, as many of the modern 30 components have little or nothing to do with traditional heavy industry. The average is price-weighted, and to compensate for the effects of stock splits and other adjustments, it is currently a scaled average." Huh? There is a Dow divisor.
Simple. People evolve, companies evolve. Some companies become more important than others, because people prefer their services or products. A group of chaps decide what is important and what is not in the Dow30, and what reflects the US economy, in their opinion. The S&P 500 has no complicated formulas, but rather represents the stocks in the US by market capitalisation. A far easier way of doing things, no doubt. But elevation to the oldest and most watched index of them all is certainly an honour of sorts, and the stocks caught a bid.
And then perhaps the most exciting event of the evening (7pm local time here) was the Apple release of their new iOS, their two new phones and all the other goodies that went with it! The cheaper version of the phone (apparently not cheap enough for some) was met with a snide sideswipe from Nokia, who put out an ad that suggested that imitation was the sincerest form of flattery. They are suggesting the colours of course. If only it were true from a consumer behaviour point of view that they wanted Nokias and not iPhones.
Of course this is what Apple are banking on, a lower entry phone into emerging markets. I think that the rich peoples assumption that there are no people who can afford a more expensive handset in emerging markets is possibly unfounded. Electrification is one of those mesofacts, something that creeps up on you. As per Wiki: "In 1990 around 40 percent (2.2 billion) of the world's people still lacked power. Much of this increase over the past quarter century has been in India, facilitated by mass migration to slums in powered metropolitan areas. India was only 43% electrified in 1990 as opposed to about 75% in 2012. In 1979 37% of China's rural population lacked access to electricity entirely."
And from an associated paper on Chinese electrification: "As a developing country, China has introduced electricity access to over 900 million rural residents in over 50 years and has achieved an electricity access rate of as high as 98 percent." Wow. So tell me, do you think rich people living in the developed world embrace the same view that we do over here? Poor people are not what you think they are.
Middle classes across the globe are emerging with more buying power than ever before. And as such can both afford and can charge these phones as well. This coincides with this WSJ article from yesterday: Emerging Markets No Longer Submerged. That first line leads me to sigh heavily: "Rumors of the death of emerging-markets investing may have been greatly exaggerated.".
But back to the matter at hand, the new Phones and associated technological advancements that Apple have made. Here are some external views, first the Atlantic Wire: The iPhone 5S Is Here, It's Gold, and It's Got Fingerprint Technology. And then the Business Insider: The New iPhone Is 40X Faster Than The Original iPhone. That is all good.
The stock sold off, the reason that I saw is that emerging markets will not warm to the new cheaper phone. We will see. I think that these developments are positive. Once in the Apple ecosystem it is kind of hard to get out. iWork being free on all iOS devices I think is a large sideswipe in the direction of Microsoft too. If you do not own them, I would suggest that they are still very cheap, and you could and should own some more. At these levels they trade on an 8 times forward multiple ex the cash. Sounds dirt cheap to me.
Michael's musings takes a look at an exciting development and a company that has plenty of South African connections:
When Glencore and Xstrata merged in May 2013, forming the world's 4th largest mining company, it was announced that the merger would create cost saving synergies of $500 million. That figure has proved to be way off (surprisingly not too high but too low), with Glencore Xstrata announcing that the cost saving synergies will be at least $2 billion, with more savings to follow.
The CEO, Ivan Glasenberg, said "A significant portion of the synergies are in overhead costs at head and regional offices". Part of these synergies came from removing management layers and other savings in my opinion, come from Glencore imposing its work ethic on Xstrata. To describe the Glencore work ethic I think it is said best by Glasenberg himself, when asked if he had a work-life balance his response was "No. We work. You don't come here to take life easy. And we all got rich from it, so, you know, there's a benefit from it.".
Ivan Glasenberg is another South African who is making waves and like he says he has become rich from doing it. He owns 8.3% of Glencore Xstrata, putting the value of his shares at R57 billion, and was paid a R1.7 billion dividend in 2012.
Another announcement from Glencore Xstrata is that it is considering a secondary listing on the JSE, in the 4th quarter of the year, with its' primary listing still in London and other secondary listing in Hong Kong. The reason for the local listing is that they see Africa as an important and growing market for them, and they have all of the local Xstrata assets.
Glencore Xstrata will become an attractive alternative to the other mining stocks. The diversification from holding Glencore Xstrata will come from them not holding large iron ore assets like their peers, but instead having large copper assets. Further diversification comes from Glencore Xstrata having a trading business, because before the merger Glencore was primarily a trading company.
I would buy the company just on the work ethic of management, who own 25% of the company, so their interests and hard work are strongly aligned with other shareholders.
Home again, home again, jiggety-jog. It is 9/11 today, a day that New Yorkers have etched in their memories forever with the images of the two collapsing buildings. And, all the stories around those events that have made the event a yearly reminder as to an event that certainly changed many things. Those changes include air travel as well as no doubt technological advances in warfare leading to drones and the like. Warfare is evil (IMO), but there are many technological advances that are arise from boundaries being pushed with timelines and lives at risk.
I remember disbelieving as a crowd of us were staring at a TV (tube one) in the dealing room on the fifth floor of the then stock exchange at 17 Diagonal Street. An old timer said when I asked him what he thought would be the upshot of all of this (and I am sure I have told you this story before) could only answer "Very, very, very bad". Such was the disbelief on the ground. Driving home that day the radio station was full of the news, the buildings collapsed, there were all sorts of terrible (and stories of bravery) events that we all saw real time. I suspect that the advancement of technology does a lot to point us in the direction of peace. Long live YouTube and the internet in promoting the truth. Now I am getting all soppy, but spare a moment to remember that day.
Sasha Naryshkine and Michael Treherne
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