Money with a dash of Funny: October 2013

Thursday 31 October 2013

Turns out Facebook and mobile are a like

"Q3 revenue when measured against the corresponding quarter last year increased 60 percent to 2.02 billion Dollars, topping that number for the very first time. Monthly active users registered 1.19 billion. Roughly 56.6 US cents per user per month. That sounds like next to nothing, if you think about it, the company generates not even 1 Dollar per user per month. OK, firstly, who are these users?"

To market, to market to buy a fat pig. Markets in New York slid from the record open, and oh yes, there was the FOMC announcement. Which I guess was a non event in some regards, doing the same. So Ben Bernanke will retire in a few months time as the chair of the Fed (if all things go according to plan) and then Janet Yellen will proceed as before. Easy. A non event as Professor Eugene Fama suggested, thinking that the impact of QE has been completely overstated. And even going so far to suggest that it has not had the desired impact.

The interaction that we pointed out yesterday when Eugene Fama basically took Rick Santelli apart does two things. Firstly, Fama is currently the recipient of the Nobel economics prize. So the assumption is that he must know what is going on, right? And by him telling Rick in no uncertain terms that QE has little impact. And so everyone droning on and on and on and on about easy money and liquidity sloshing around and so on, what will happen when folks realise that the recovery has been less induced by (by completely supported of course) the Federal Reserve, and more by companies having done better. When the Fed is finished their tapering of their bond buying program in two years or so from now, what will then happen? I can assure you that your guess is better than mine. Too much emphasis is placed on what the Fed is going to do and where interest rates are going to be in a couple of years, when energy should be focused on what businesses are creating new services and products that investors can get a piece of right now.

I read a book titled "It Was a Very Good Year: Extraordinary Moments in Stock Market History". In one of the years profiled by the author, I cannot remember the exact year but it was sometime around the late 1950's, the market participants were so anxious about what William McChesney Martin and the Fed were going to do next. Martin of course coined the phrase remove the punchbowl. If you are going to time your investments (which should be retirement in nature) around what the Fed are or are not going to do, then you are barking up the wrong lamppost. I mean tree. What are the Fed going to say or do in 45 days time? Who knows, who cares! Do you remember what Alan Greenspan said in 1995 and what the market did from there for those three months after? Probably not.

Facebook reported numbers last evening. 49 percent of revenue came from mobile, let us call it half. And I remember when everyone would get completely anxious that yes, Facebook would struggle to monetise mobile. Here is a headline from Fortune's website from July last year, which is hardly a long time ago:

Now having seen these results and with the benefit of hindsight, Facebook knew more than Fortune. In four quarters their number of daily mobile users have gone from 329 to 507 million users, I admit that I am one of those. But back to mobile. That is why there is Zuck and that is why there is Fortune magazine, with all due respect. I am not suggesting that an enduring brand, the publication first hit the news stands in 1930. So this is over 80 years old, whilst Facebook is zoning in on their first decade, having started in a dorm room. The parent company for Fortune is Time Warner inc., which has a market capitalisation of 63 billion Dollars. Facebook? 119 billion Dollars, nearly double.

Headlines I expect to see on Facebook, Fortune struggles to monetise their online offering. This is a case of new versus old, newer media forms where anyone can be an author ~~with an ill informed dangerous opinions~~ versus someone who has had their story overseen by an editor. That aside, and it is dangerous of course to believe everything that you read whether edited or not, you know the point I am trying to make. New media enables anyone to put their opinion across in a less formalised manner, sometimes with dire consequences, you know the old think before you speak.

OK, but to the results specifically. Here they are, you are able to peruse them, thanks to the wonder of the internet: Third Quarter 2013 Results. Q3 revenue when measured against the corresponding quarter last year increased 60 percent to 2.02 billion Dollars, topping that number for the very first time. Monthly active users registered 1.19 billion. Roughly 56.6 US cents per user per month. That sounds like next to nothing, if you think about it, the company generates not even 1 Dollar per user per month. OK, firstly, who are these users? Check, from the presentation (Quarterly Earnings Slides) that came with the results:

The growth in their numbers outside of the US and Europe has been pretty astonishing. In 24 months, the rest of the world Facebook users have doubled and some more. I am guessing that is people like ourselves. The number of Asian users has also nearly doubled in 24 months. These are daily active users of course, more interesting than the folks who are browsing by monthly, having a check. But what remains very important to me, anyhow, is that those users have not yet been monetised as aggressively as the one in the US. Check out this slide:

Revenue growth in the US has been huge, but their base was so much higher. I think that is what I am trying to get across. Think about Facebook from an advertisers point of view. I am not the best active user, but the company has a very good idea of who's posts I like. But some of my friends (yes, I have some) have long lists of their movie likes, their book likes, their TV series likes, their music likes, the businesses that they like and the list goes on. Facebook knows more about your activities than almost all other advertisers globally. If you change your status to engaged from in a relationship, that triggers a response for wedding photographers to advertise, you become a different audience.

What amazes me is that the Zuck thinks (at 29 years old) that his work is a long, long way away from being done, and that is reflected in the release: "(W)e're prepared for the next phase of our company, as we work to bring the next five billion people online and into the knowledge economy." Be clear here, there is NO Facebook in North Korea.

After hours the price was wild, really wild, up a lot, and then off a lot from being up a lot. To basically around 2 percent up as we speak. Why? Because on the conference call the CFO said that teens were not that active users anymore, younger teens at that. Wow. Personally, the way I see it, the folks paying the bills and holding the credit cards are not the young teens. And more users globally will continue to adopt and advertise through these channels. I have not met a single person who has advertised on Facebook yet. Paul has however and he said the experience (for that specific corporation) was absolutely fabulous. Real time money exchange and real time money out with an amazing backend. So there you have it then. The platform is young. The users are still not that sophisticated. But the advertisers are adopting at a rapid rate. This is not for the faint hearted, trades on a crazy multiple and no doubt will take time to make serious money. It will.

Starbucks released their finest brew in results ever last evening, post the market. This is the 42nd year of operation, the business was founded in 1971. The very first store opened in a spot in the Pike Place Market in the city of Seattle. I suppose that is a place that you desperately need coffee, or so you would think. In reality the city receives less rainfall than New York, or Boston or Washington DC. Fact. BUT, 150 days of the year the city gets some form of precipitation. Seattle is cloudy for 201 days a year, partly cloudy for 93 days a year. 70 sunny days a year. So now you know how the idea of Starbucks came about, a wonderful warm environment in which to drink your favourite brew and escape the cool weather outside. We will explore these results tomorrow when we have more time, like a good cup of coffee with friends, you do not want to rush anything!

Home again, home again, jiggety-jog. This is an ancient quote from Lao Tzu, who lived thousands of years ago. Yes, around 6 centuries BC. "Those who have knowledge, don't predict. Those who predict, don't have knowledge." Now I don't really do quotes, because I believe individuals must get their own preppy pieces together and live by those principles. Michael, who sits over the desk from me, is always pulling his hair out (he is still young and has lots of it) as he just can't get how and why ordinary folks cannot separate the core philosophy of trading and investing. They are not the same thing. When you understand that simple concept, you will find your inner investing Zen!! For now, just stay the course with the quality, do not overthink movements in share prices, worry more about what the companies do. Oh yes, and it is Halloween. Which is the day before All Saints Day, tomorrow. Hallowmas

Sasha Naryshkine and Michael Treherne

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Tuesday 29 October 2013

Apple seeds growth

"The worrywarts will point out the obvious, even though there have been growth in iPhone sales, the other products have been slipping, or in the case of the iPods, not even worth mentioning! But also, the fact that the average selling price of the iPhone fell 6.6 percent must be worrying at some level. This current quarter hardly caught any of the sales of the newer products, only ten days of sales of the iPhone 5C and 5S. And in the current quarter that we are in, the first quarter of their 2014 financial year, the company anticipates that they will generate revenue of between 55 and 58 billion Dollars. To put that into perspective, the quarter past, the one that we are talking about now, saw sales of 37.5 billion Dollars. The expectations are for a whopping 20 billion more in festive season sales! Wow."

To market, to market to buy a fat pig. I have been away for a few days, on the South Coast, with the kids on half term. Apologies for the down time, we will make it up to you as best as we can. Often the time away from the screens (you always have your emails nowadays) is a time for reflection. And I am pretty sure that if I asked you on the 1st of January if you would take an average year (15 percent for the market is average), I suspect that we would have taken it with both hands. This year has not been without its dramas, the most recent being the US government shutdown and the debt ceiling debate. We came into the year with the automatic cuts, those automatic cuts became reality, as the US budget attempts to slash 1.1 trillion Dollars in spend all the way through to 2021. And all the while the Tea Party types have demanded more and more. Discretionary spend as a percentage of US GDP is set to fall to 5.5 percent (of a projected much larger GDP) by 2023, from as much as 8.3 percent last year. So with all these concessions, in a sense, you would think that the relationships between left and right of centre would be a little more amicable.

What history has taught us however is that the masses become uneasy when there is an economic downturn, looking for someone to blame, and turning to people who seemingly have radical answers to their economic dilemmas. Look at the Golden Dawn in Greece (they have just had their funding pulled) who increased their number of votes from 4500 to 440,000 in 16 years, from 1996 to 2012, most of that recently. It is far easier to blame immigrants than the system, right? It is far easier to blame foreign workers than take a little time for self reflection, right? If there was more to do, i.e. more work to go around, there would be more economic prosperity and less time to think about who is to blame.

As decent a year as we have had over year, the Americans have had an exceptional one, valuations at the beginning of the year were way too cheap, stock prices have seen multiple expansion. The same, or modestly better earnings but investors willing to pay higher multiples on the basis that the worst of the storms have passed. The S&P 500 is up 23 and a half percent year to date. The NASDAQ is up a whopping 30 and a half percent year to date, but it has definitely not been a tide that has raised all of the tech boats. The Apple share price has hardly budged this year, but yet it makes up the largest part of the tech sector. Google and Amazon have rallied (both around 43 percent year to date), Microsoft and Intel have had really good years in the face of lower PC sales. Surprising, but true.

Facebook (at a little over one and one third of a percent of the NASDAQ) is up 88 percent year to date. And reports numbers post the bell tomorrow. Not bad for a company that a year ago had "investors" worried that they could not monetise mobile. Pfff... investors my foot. The entire issued share capital of Facebook turns over every 290 trading days, and that would include the shareholders who do nothing. Zuck owns 426 million Facebook shares, with an option to acquire another 60 million shares. The way that I read the annual report, those are exercisable at 6 cents. Yes, 6 cents. Let us just say that it would be dumb for the Zuck not to. Not great for other shareholders, but good for him, through the A and B shares arrangement Zuckerberg maintains voting control. More on this company in a couple of days time when their results are released. It will be interesting to see their monthly active users trends.

Hey Apple. Remember the annoying orange? The little animated fruit that laughed at the demise of the other fruit around it? This is not it. This is a write-up on the fourth quarter of the Apple results, which were released after the closing bell last evening. Here goes, you can read along as we try and explain: iPhone Sales Grow 26% to Establish New September Quarter Record, with the key product sales numbers being as per the release:

The Company sold 33.8 million iPhones, a record for the September quarter, compared to 26.9 million in the year-ago quarter. Apple also sold 14.1 million iPads during the quarter, compared to 14 million in the year-ago quarter. The Company sold 4.6 million Macs, compared to 4.9 million in the year-ago quarter.

And since then, Apple announced that they would return cash to shareholders, an astonishing 36 billion Dollars. An amount that is larger than the market capitalisation of Anglo American. Or even Sasol. Marginally less than the whole of MTN. The original announcement of what the company would do with their cash pile came in March (the 19th, that is my birthday, diarise please) of last year, 2012. So it has been a little over a year and a half since the grand announcement.

If the buyback program were completed today, as far as I read, that would retire roughly 8 percent of the shares in issue at the current share price. And to think that if you add the cash and cash equivalents, short term marketable securities and long term marketable securities, you get to a number of nearly 147 billion US dollars. After that 36 billion buyback and reintroduction of the dividend. Remembering that the dividend is currently 3.05 US dollars per quarter, the current yield being 2.3 percent per annum, at the closing price last evening. Tim Cook suggested that the current program would be revisited during the first quarter of next year. Which if you needed reminding, today is the 303rd day of the calendar year. There are only 63 days remaining inside of this calendar year!!! Today is also exactly a year on from the landing of Hurricane Sandy on the East Coast of the US, which caused 70 billion Dollars worth of damage, and the loss of 286 lives.

The worrywarts will point out the obvious, even though there have been growth in iPhone sales, the other products have been slipping, or in the case of the iPods, not even worth mentioning! But also, the fact that the average selling price of the iPhone fell 6.6 percent must be worrying at some level. This current quarter hardly caught any of the sales of the newer products, only ten days of sales of the iPhone 5C and 5S. And in the current quarter that we are in, the first quarter of their 2014 financial year, the company anticipates that they will generate revenue of between 55 and 58 billion Dollars. To put that into perspective, the quarter past, the one that we are talking about now, saw sales of 37.5 billion Dollars. The expectations are for a whopping 20 billion more in festive season sales! Wow.

Sales of iPhones only? Well, not entirely, this is what Tim Cook, the CEO anticipates: We're excited to go into the holidays with our new iPhone 5c and iPhone 5s, iOS 7, the new iPad mini with Retina Display and the incredibly thin and light iPad Air, new MacBook Pros, the radical new Mac Pro, OS X Mavericks and the next generation iWork and iLife apps for OS X and iOS. iPad sales have been flat, and the newer fresher models could possibly wow folks to upgrade at Christmas time.

Margins have levelled out at 37 percent, but are comfortably off the highs. Again, the worrywarts will point out that Apple will continue to have to discount their phones, or search for more revenue by selling a cheaper phone, obviously something much cheaper than currently. But that is not going to be the plan I suspect. Apple are in the business of selling products that people really want. Well crafted and at the top end of the range. I am pretty sure that BMW and Daimler battle with this too. Ironically Apple generates more in annual sales than Daimler. Most of the companies globally that are ahead of Apple on the annual revenue list are the oil and gas businesses as well as utilities, energy is still the most important business by global sales!

Where to next though for Apple? I suspect that the company will continue to be hugely profitable, generating huge excesses of cash that will continue to be returned to shareholders either through share buybacks and increasing dividend payments. The company continues to invest nearly 1 billion Dollars a quarter in research and development, looking for better ways to maximise their current product offering and future product offering. Earnings for the full year ahead are expected to register a high teens growth, 18-19 percent. Expect EPS around 48 Dollars a share. We continue to accumulate the stock, but are always mindful that the next disruptive consumer device is just around the corner!

Michael's musings. When is it too expensive? (Part 1)

With markets locally and over the ocean reaching record highs, doomsday sayers are getting a larger audience from people who are anxious. At what point do you as investor start to say, the market is too high and it is a bubble that is just waiting to pop?

What is the reason for a high P/E ratio? There are a number of reasons, the first is due to stable earnings and dividend payments from a company. If a company is a big player in a stable sector that is expected to continue to be viable for the foreseeable future, investors are willing to pay more for that companies earnings because the earnings are 'certain'.

The next reason for a high P/E ratio is due to high growth being expected in the earnings. Using my Google example from my piece a couple of weeks ago; Google shortly after listing in 2004 had a P/E of 93, since then up until the end of 2012, their earnings have grown by 1468% and the share price has grown by 245% (based on current prices the share price is up 420%).

Taking Netflix as an example, Goldman Sachs has forecast their revenue to rise by 50% from the end of 2012 to the end of 2014, and forecast earnings to go from 0.2 to 5.41 over the same period (very impressive earnings growth!). Given those assumptions, Goldman Sachs is willing to pay $360 for the stock, but as results come in they are either going to be higher or lower than their forecast resulting in a marked change in the value of the share.

In this case, the share price will change for two reasons, the first is an earnings rerating (change in P/E ratio) and the second is due to that multiple being applied to a different earnings figure. If we assume that earnings grew faster than expected, the share price will increase because investors will give the share a higher P/E ratio and then because the earnings base is higher; the share gets a double bump up.

Given the mix of certainty and expected growth, certain sectors in the market go thought cycles of favour and disfavour. As a sector comes into favour its mix of certainty and growth has improved, resulting in an earnings rerating, so investors are willing to pay a higher earnings multiple for a stock. Large returns are normally made over a short period of time when a stock get an earnings rerating.

Part 2 will cover how P/E ratios relate to the broader market, and if we think that things are getting "over heated"

Home again, home again, jiggety-jog. Markets are flat. There is terrible news. The Europeans have clicked over to daylight savings, which means we get an hour less trade in the morning. And an hour less in the afternoon when the US change over to their daylight savings program. This is worse than contemplating what it is that you must wear for Halloween. Sigh, why do we involve ourselves in a tradition that is spreading globally. The US National Retail Federation suggest that Halloween spending by US consumers is expected to be 6.9 billion Dollars this year, costumes (including for furry friends) is expected to be 2.6 billion on its own. Oh, how much is 6.9 billion Dollars? The combined economic output of both Malawi and Somalia. more or less. Don't beat up on Malawi.

Sasha Naryshkine and Michael Treherne

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Wednesday 23 October 2013

Apple speed, light weight

"The new iPad Air is going to weigh one pound, which is 453 grams to you and I, be 20 percent thinner than the iPad 2 and it has the same chip as the recently launched iPhone 5S. Faster, lighter, better battery time. And have a ten inch screen, that is 25.4 centimetres to you and I! And much, much better graphics than ever before. What is also interesting to note, by Apple's calculations, is that the iPad is used 4 times more than any other tablet."

To market, to market to buy a fat pig. OK, the very late and delayed jobs report was a bit of a downer. The headline number, the number of jobs created for the month of September was 148 thousand, the unemployment rate was lower at 7.2 percent. The participation rate was flat, possibly indicating that it had bottomed out. And perhaps the anxiety around the baby boomers coming out of the workforce. Over one-third of those unemployed have been so for more than half a year. If you read these numbers here in South Africa you would be forgiven for having a warm glow come over you, but in America they demand more. And expect more. So that is why when the government healthcare portal doesn't work, they hake a song and a dance and a noise about it. If you demand excellence, strangely you end up with that. If you accept mediocrity, you get worse than that, really. At the end of the day it is about accountability.

The theory was that a worse jobs number would continue to delay the end of the Fed's taper, which I guess is good news for stocks in the very short term. I am not too sure why it is helpful, but I guess that an easy monetary bias will be maintained. More of the same with Janet Yellen, she is certainly very short, but I am sure packs the greatest of economic punches. I think that she will surprise everyone, positively of course. After all was said and done, the S&P 500 closed at another record high. Always be asking, is it expensive?

Many people warn of the lost quarter of a century from 1929 to 1954 as the time it took for the Dow Jones to reach the same level prior to the most famous stock market wipeout of October 1929 and the subsequent resulting great depression as a great example of what can happen. True, it can. Back in 1929 some financial institutions were trading at more than 4 times book. Valuations were crazy, there was mega leverage and the SEC did not even exist yet. The Fed had few powers and were new. 10 thousand banks failed during that time and deposits were wiped out, as much as 140 billion Dollars. That is equal to 1,854 trillion Dollars in todays money. Ask yourself, how was there not civil unrest of epic proportions? There were of course, and many a shanty town and uprising were quashed by police, but having presented that number, you would have thought it would have been more. Hence, Bernanke the student of the era was not prepared to have a repeat. So, the lesser of the two evils has been government intervention and broad based central bank stimulus.

It is a company that serves 69 million customers daily in over 34 thousand restaurants in 118 countries (obviously around the world). The company provides jobs for 1.8 million people globally, third only in a commercial sense to WalMart and China Railway Engineering corp. The Chinese Army and the US Defense dept employ more people than those commercial ventures. It is a company that opens 28 new restaurants a week around the world. You guessed it, McDonald's, who reported numbers on Monday that I guess failed to impress Mr. Market. Year to date sales are only two percent higher, net income is up 3 percent, whilst EPS is up 5 percent. Earnings per share for the quarter were 6 percent better (7 excluding the currency translation) at 1.52 Dollars. One cent negative currency translation for the quarter, three cents so far this year!

Europe and America were OK, from a sales perspective, if not at all inspiring, with the major disappointment being China, Japan and Australia. Why? Well, the release suggests an ongoing challenging environment. The only main new menu innovation was the mighty wings launch in Atlanta, you guessed it, chicken wings! The lack of acceleration in sales has promoted a few broker price target downgrades, and all around negative sentiment.

A little history and background to cheer you up a little. Everyone knows who Ray Kroc was, but perhaps Fred Turner, or plain old "Fred" who died at the beginning of the year, is considered by many internally as the person who set the standards for quality. Fred was a stickler for size and quantities and many of the systems he put in place (the 30 something employee at McDonald's) around sizes and consistency still remain today. Ray Kroc's wife (Joan, 26 years his junior), when she died in 2003 left 1.6 billion Dollars to the Salvation Army. Wow.

I found something amazing. Number of shares in issue in 1996 or McDonalds was 1,389 million. Ten years later it was 1,204 million (as per the 2006 annual report, page 20). In that time, earnings per share increased from 1.08 Dollars to 2.30, whilst the dividend rose a whopping 85 cents a year, to 1 buck from 15 cents in 1996. Systemwide stores grew from below 21 thousand in 1996 to 31.6 thousand in 2006. Fast forward to the 2012 annual report, page 9 (things were super sized back then) and the number of shares in issue is just a whicker over a billion, 1,003 million in issue.

In 16 years, the number of shares in issue have been reduced by a whopping 386 million. Earnings per share last year clocked 5.36 Dollars and the dividend rose to 2.87 Dollars. Over the last three years however, 107.8 million shares, roughly 36 million a year. There are now under 1 billion shares in issue. At this rate in a few (that is three) years time the number of shares in issue over a two decade period would have reduced by nearly one third. That is amazing, truly amazing. Another amazing fact about McDonald's is that the dividend has risen each and every year since they starting paying one back in 1976. The current quarterly payout is 81 cents (raised 5 percent in September) to bring the annual payout to 3.24 percent. At the current share price (95.28) that is a yield of 3.4 percent on the button. With a rough 5 percent increase in earnings, McDonald's is hardly cheap at 16.9 times forward, especially if they are only growing earnings at single digits.

I feel inclined suggest that one leaves the investment alone, there is a fabulous yield underpin and the brand is amazing. The store presence is still growing at an astonishing rate, 1 store rolled out roughly every six hours, somewhere around the world. The plan is to be in each and every neighbourhood. For the time being the sales momentum seems more like soggy fries than the delicious (must eat hot) fries that they normally sell. There is no way that this company is transformative in any way whatsoever, you could argue that the menu changes slowly to adapt to the ever aware society, in terms of health priorities. They are doing that, offering apples instead of fries with their happy meals, watch this short Bloomberg video: McTaco? McOmelette? Meet McDonald's Top Chef Dan Coudreaut. Interesting, isn't it?

Accumulate on weakness, that is the perfect time to be adding to a solid company, when most people are not really paying that much attention, and have lost the faith.

Another company with a fabulous last decade, a spotty prior decade, but the original maker of the home computer, . The new iPad Air is going to weigh one pound, which is 453 grams to you and I, be 20 percent thinner than the iPad 2 and it has the same chip as the recently launched iPhone 5S. Faster, lighter, better battery time. And have a ten inch screen, that is 25.4 centimetres to you and I! And much, much better graphics than ever before. What is also interesting to note, by Apple's calculations, is that the iPad is used 4 times more than any other tablet. Tim Cook in the presentation last evening our time (which I "watched" here -> Apple's Fall Product Event) said that the market was skeptical that the iPad could compete against the netbook (remember the small laptops), what has subsequently happened is that they, Apple, have sold 170 million iPads. Let the consumer decide, right?

A new iPad mini was announced too, a better processor, better graphics and of course a better battery life. To be brutally honest, I think that for most home users an iPad is all they need, mail, the internet and apps for doing different and out there things of their particular interest. I have seen with my own eyes people make the shift seamlessly and enjoy the product experience a whole lot more. I know that the product is a beautiful one, people who have them tell others how wonderful it it, to the point where it becomes a little nauseating, hence the term Apple fanboy. Fangirl sounds a little derogatory, or not? These beautiful products are available in major territories (where rich people live and the demand is high) in early to mid November. Here, I guess hopefully by Christmas.

At the beginning of the product launch event, and the company has a tendency to do this, they unveiled the newer Mac's. The kind that is allergic to cheese and pickles. Rather the seemingly overpriced laptops. But I will let you in on a secret, they are probably worth every single cent. The updates are few and far between, the move is easier than you think, but more importantly the performance (better) is absolutely astonishing. I am amazed by the quality each and every day of my Mac. It is truly a beautiful machine that deserves more airtime and the users prior were all right. The first few weeks are hard, you make mistakes, but I tell you, it is worth it. So on that note, I cannot wait for the new operating system, OS X Mavericks is what it is called. I will let you know how it goes!

The stock price? Tell me that you cared more about the product release than the share price and I might have to look at you funny. Well, Apple closed (including the after hours move) around flat. I guess that the market got it right then, moving north in recent days ahead of the product launch, expect another one in around two months time.

Sharing is caring. Here it is, there are around two weeks left for public comments around shale gas legislation in this country, here is a great article about it from the US: The shale-gas boom won't do much for climate change. But it will make us richer. Good. And create jobs. Much needed jobs.

Home again, home again, jiggety-jog. Stocks are lower here! We ran out of time to cover the superb production numbers from BHP Billiton yesterday, we will do that tomorrow. The stock is zoning in on their all time high, somewhere around 323 ZAR if memory serves me correct.

Sasha Naryshkine

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Tuesday 22 October 2013

Taxing issues

"There are 13.7 million registered tax payers, of those 5.8 million are liable to submit a tax return and of those 5.8 million only 5.1 million submitted a tax return. SARS doesn't say what happened to the 700 000 people who didn't submit."

To market, to market to buy a fat pig. That is eight days in a row for the JSE to have been higher. Wow. Thanks mostly to US markets, which saw the S&P 500 register the most modest of gains last evening (does 0.16 points count?). But I guess that means that is another closing high. Should we be very concerned about the new highs? High after high, it sounds like a dangerous Quentin Tarantino masterpiece. The truth is that the underlying index constituents, the companies themselves, ultimately set the levels of quoted levels. Telling someone x or y index is at a specific level is as useful as telling people the gold spot price on the radio. How are those things useful for ordinary people?

But, if you tell someone that a specific company launched product x or y, well, now you have their attention. And what that is going to do to sales and profits, now you are talking. Identifying businesses that are going to change the way we do simple things and staying the course is of course more important than identifying the companies that can't evolve because their product is becoming less attractive, but it is critical to note that all these businesses make up the index. Always be thinking!

OK, so what has really changed other than the market mood? Are earnings set to race ahead? Sort of, but those predictions can always dashed, if we run into some headwinds from here all the way through to next year. So whilst we can be confident that there is less likely a scenario of the Eurozone splitting up, a marginal periphery country (like Greece) leaving, a hard landing in China or runaway inflation as a result of central bank stimulus, those scenarios have not yet reach the apocalyptic proportions we were led to believe by the finger waggers (krokodils?). In truth nothing has been done on Capitol Hill, other than delaying matters again, but the one thing that you can be sure of is that politicians are less likely to bumble and fumble this time, it is an election year next year.

General Electric reported their third quarter earnings on Friday, which was in market terms so long ago that people have forgotten already. Well, not really, but you get where I am going. This is possibly one of the most recognisable companies globally that is not an out and out consumer stock, and is associated with Thomas Edison and his inventions. It is indeed a company that traces its roots back to the US industrial revolution, post the civil war there of course, where many corporations had to catch up to their European counterparts, for obvious reasons. There were of course three extra founders, Charles Coffin, Elihu Thomson and Edwin Houston. I had also never heard that name, Elihu. It is a biblical name apparently, I was not paying enough attention in RE classes at school, apologies Reverend de Gruchy. What a nice guy he is! Three of them were engineers and inventors, the other, Coffin was a shoe salesman and businessman. Hey, the intellectuals need the business types to make sure that they run on an even keel.

A quick run through the numbers here, for the quarter for GE. Revenues of 35.7 billion Dollars. Oh, why do all of that when you can give a graphical breakdown of the divisions! Their revenues and profits, so that you can see which ones are more important than the others.

GE Capital as you can see is an enormously profitable business. The parent company, as per the earnings call transcript, in which CEO Jeff Immelt had his prepared comment will receive around 6.5 billion Dollars in dividends from GE Capital. Wow. But this business is not exactly (at least the retail end of the market) what GE envisaged, I remember CEO Jeff Immelt commenting that they wanted the business to be only around a 30 percent contributor, they were not quite sure that the financial crisis was going to be the reason that GE Capital was going to shrink. Of course he meant that tongue in cheek.

Earnings, on a per share basis clocked 36 cents, a penny ahead of estimates. GE continues to pay 19 cents a quarter in dividends, less than 10 years ago, when it was 20 cents a quarter, peaking in 2008 at 31 cents a share, per quarter. That subsequently plunged to 10 cents a quarter during the dark days of late 2008 and early 2009, but as you can see, it has been ticking back up slowly but surely. During the course of this financial year, 18 billion Dollars will be returned to client through buybacks and dividend payments (around 2 billion a quarter). So the metrics currently are that GE trades on a 18 and a half multiple with a 2.9 percent dividend yield. Still cheaper than some of their global peers, United Technology is the obvious comparison, Philips and Toshiba perhaps less so.

Why own GE? Just because they are a diversified and are an enduring and hardy business, the longest surviving Dow Jones Industrial constituent, that should tell you everything you need to know, right? Perhaps a value unlock of the retail portion of their GE Money business, that would give the share price a lift. But perhaps more importantly, the quality of the operating divisions, that is why you want to own GE. General Electric has some high quality service businesses operating in the sweet spot of healthcare, aviation (more about selling the equipment to the marginal businesses that operate airlines), transportation (locomotives), energy management (smart platforms), appliances and of course GE Capital. GE Capital has the leasing and lending business to commercial clients, the consumer segment (136 billion Dollars worth of assets) and the real estate business. There are quality businesses operating in the power and energy generation space, healthcare, transportation, these are all growing areas of the developed and developing world economies.

GE Capital, expect some big announcements there, on the conference call, Jeff Immelt had this to say with regards to a question prompted by Scott Davis, a Barclays Capital analyst, referencing a WSJ article about GE spinning off their credit card business: You know, Scott, these things always take a little bit of time, but we are still planning staged exits of the value-maximizing platforms of GE Capital. We have got a big meeting set November 15 with Keith and Jeff; I think there will be more clarity at that time on the Capital side. And we continue -- and the rest of the Company continue to look at ways to make the Company more streamlined and more effective. But you are going to see those in good time. I think we just want to be thorough in our planning, and you will get a lot more details soon. So stand by for announcements in the coming weeks!

We continue to accumulate the stock at current levels.

I am a subscriber to many aggregators of web content, there are several that I find very interesting. I think that the likes of Josh Brown, Joe Weisenthal at the BusinessInsider, heck, even Time business does a great job. All of these people present their own ideas and thoughts, as well as adding various stories seen all over the inter-webs. The inter-webs is a big and intimidating place. We used to have a section called shorts, more specifically Bart's shorts and digest this. But that was too cryptic, you remember that Bart Simpson used to say, eat my shorts? That is where it came from. An interesting factoid, you remember the nutty professor from Back to the Future movies, "Doc"? Well, the character, played by Christopher Lloyd was voiced by Dan Castellaneta, the voice of Homer Simpson. One a clever eccentric scientist and the other a simpleton nuclear power plant safety inspector from Springfield. Where is this bit going? I would like to share some interesting bits (no more than five) of what I read that I had to share. That is where we are going. So, here goes, to paraphrase a big friendly purple dinosaur Sharing is caring.

Apple is set to unveil new iPads today, according to familiar people, I mean people familiar with the company, or something like that: Apple to Refresh IPads Amid Challenges for Tablet Share. And believe it or not, the Microsoft Surface 2 goes on sale today. And Nokia unveiled a tablet. Guess which one is capturing the headlines.......

This is always worth a rehash in light of dumb comments that I hear day in and day out from some folks, who should know better. Central bank stimulus being referred to as free or easy money. What? I asked Michael if he had seen any of this free stuff, and he said no. Me neither I said. So once again, a rehash: Where Does "Cash" Come From?

Michael sent me this simple piece, saying that Starbucks is still a buy on this basis: 11 Reasons Why You Should Drink Coffee Every Day. I am still mindful that coffee is a drug, the only (currently) daytime drug that people do not frown upon. Smoke outside. Drink a glass of wine at lunchtime? Phew, that is stretching it a little far, this is not (southern) Europe. But coffee, that is still OK. For now.

Michael's musings! Paying our dues

SARS has released the stats for the tax year ending Feb 2012. It can be found here http://www.sars.gov.za/AllDocs/Documents/Tax%20Stats/TStats%202013%20Highlights%20WEB.pdf

There are 13.7 million registered tax payers, of those 5.8 million are liable to submit a tax return and of those 5.8 million only 5.1 million submitted a tax return. SARS doesn't say what happened to the 700 000 people who didn't submit.

The income categories for the 5.1 million are; 0 - 60 000 (620 000); 60 001 – 120 000 (1.1 million); 120 001 – 500 000 (2.8 million); 500 001+ (427 000). Of these assessed tax payers they had a total income of R1 trillion and a tax liability of R206 billion, meaning that the average taxpaying South African pays 20% of their income to the taxman. According to Stats SA there are 13.6 million employed people in the economy, which translates to; of the employed population only 33% of people make enough to pay tax, or the inverse 67% of employed people earn less than R 60 000 a year.

When it comes to companies' income tax, there are 266 companies with a taxable income more than R200 million, put into percentage terms, 0.2% of companies' with a positive taxable income, contribute 58.2% of the tax collected. I was a bit shocked at this figure, but after thinking about it, the figure makes sense, I just don't like it. In order to have a stronger middle class and less unemployed people, there has to be a greater contribution from smaller companies'. A positive though in the companies' numbers was that about 100 000 of the 600 000 companies that were assessed, were Small Business Corporations, so hopefully those 15% grow and graduate to being normal tax payers.

From these stats it is clear that South Africa is a society of two worlds. If you are a skilled worker, it means that you are earning better than around 70% of the labour force, and if you are unskilled you are earning very little. Sasha and I were having a discussion yesterday about how do you get out of the low income earning category if all your income goes to transport and food, and we couldn't come up with a solution. If you are in the middle class, you have the opportunity to invest your money in order to increase your net wealth (it just takes discipline), but many South African are not able to do that.

On a brighter note, 70% of assessed people got a refund, so hopefully that was you.

Home again, home again, jiggety-jog. It is the 22nd of October today. Which means that it is non farm payrolls day, right? Well, that second part (and first part once off) is all true. The September non farm payrolls number will be released today, very late, but you know why, this was as a result of the government shutdown. Which is now over. That undoubtably will be the main event of the day.

Sasha Naryshkine and Michael Treherne

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Friday 18 October 2013

Google giddyups

"The numbers quickly for the quarter, those are important: 14.9 billion Dollars of revenue (the Google segment represents 92 percent of that), 10.74 Dollars Non-GAAP EPS for the quarter, 56,52 billion Dollars of cash on hand, which represents at the market close 19 percent of their market cap. Paid clicks increased 26 percent versus the comparable quarter last year, and 8 percent more than the prior quarter. Motorola continues to make a loss, registering an operating loss of as much as 248 million Dollars. I suppose that is "OK" when compared to the overall operating income for the third quarter was 3.44 billion Dollars. 23 percent of revenues, so you can see that the margins for a pure advertiser with some pretty nifty algorithms is a pretty good business!"

To market, to market to buy a fat pig. There was a Chinese rating agency which downgraded the US credit rating yesterday, yes, I kid you not, a crowd called Dagong Global Credit Rating. I guess in time these downgrades from an increasingly important China on the global economic scale will mean that the market might react more violently to these. But then again the Dollar (although weakening) is still King. The Euro is certainly attracting a lot of attention, it turns out that all the armchair experts suggesting that the economic bloc should separate, or throw Greece to wolves or any other such ideas were wrong. Wrong. But yet nobody takes those folks to task, because now they talk about being anxious about the next Fed move.

The shutdown of Government in DC and the debt ceiling being raised is now such old news. What always amazes me is that market participants are referred to as "investors". Let me make one thing clear, investors don't change their minds every ten seconds based on the news flows. As Paul also said, if you sold stocks because you thought that there would not a deal reached, then perhaps it is time to participate in another line of business. Really. Markets are about companies, and not about the Fed, even though interest rates matter to companies. Markets are not about the government, although policies matter to companies when they make investment decisions. But if you are going to make an investment, you cannot be doing it for a few days/weeks, right? Or am I wrong?

Anyhows, markets are making progress today, the relief (I am told) of politicians coming to their senses. Our local market is closing in on 45 thousand points. The S&P 500 closed at a record high last evening (1733) and the futures are pointing higher. Anxiety? It certainly did not seem like it. The other "big" news was that the Chinese economy in the third quarter grew by 7.8 percent. I guess that is pleasing, but the rate of growth has to slow as the absolute size of the economy grows. If you continue to grow at eight percent per annum, your economy would double every 8 years and 9 months, more or less. How is it possible that anyone expects the growth rates to remain at historically elevated levels? Recency bias must have everything to do with this. The expectation (humans are brilliant at pattern recognition) that the future will continue along in the same way that the recent past has unfolded is far easier to comprehend than earth shattering changes to look forward to. Meh, another look on another day. Talking of that and short term thinking, we have the non-farm payrolls being released on Tuesday. For the month of September, remember that the Labor Department could NOT get those numbers out, as a result of the shutdown, rather late than never!

Google reported third quarter results last evening after the market closed. You can download them and have a look here: Google Inc. Announces Third Quarter 2013 Results. Revenues and earnings top estimates. The business as we will discuss shortly is essentially an online advertising platform. As a customer, you get the ability to bid for space on the web, ahead of people offering a similar service. If you want to know what the real nitty gritty about this company and how it all works: Advertising on Google AdWords: An overview. You can have a lot more pointed advert to people who are searching for that very product or service. As you can see, this is very attractive to both sides of a potential transaction, as both a searcher and advertiser.

The numbers quickly for the quarter, those are important: 14.9 billion Dollars of revenue (the Google segment represents 92 percent of that), 10.74 Dollars Non-GAAP EPS for the quarter, 56,52 billion Dollars of cash on hand, which represents at the market close 19 percent of their market cap. Paid clicks increased 26 percent versus the comparable quarter last year, and 8 percent more than the prior quarter. Motorola continues to make a loss, registering an operating loss of as much as 248 million Dollars. I suppose that is "OK" when compared to the overall operating income for the third quarter was 3.44 billion Dollars. 23 percent of revenues, so you can see that the margins for a pure advertiser with some pretty nifty algorithms is a pretty good business! What we don't even mention and what they don't mention (except in the annual report) is that the Android operating system sits on roughly two-thirds of all smartphones. But two-thirds of all Android users don't pay for applications, that was some info I found, using a Google search. In the release the word Android is not mentioned. In the slide show it appears once. At least in the annual report it appears 13 times!

This business however is only 15 years old. And has been listed for only a little over 9 years, it is a young business, but is exceptionally well known for a business that is that small, possibly because it is synonymous with internet search. With a market capitalisation of nearly 300 billion Dollars and the wealth created for many over less than a decade, this is certainly an example of the new industrialisation of America. The name Larry Page, Sergey Brin (the founders) and executive chairman Dr. Eric Schmidt are household names, not only in America, but also across the globe in both tech and financial world. The name Google itself is a misspelling of the world googol, which as per the Wiki listing on the name: refers to the number represented by a 1 followed by one-hundred zeros. Or, 10 to the power of 100. 10¹⁰⁰

In the very first founders letter Sergey and Larry had this to say about the company:

As a private company, we have concentrated on the long term, and this has served us well. As a public company, we will do the same. In our opinion, outside pressures too often tempt companies to sacrifice long term opportunities to meet quarterly market expectations. Sometimes this pressure has caused companies to manipulate financial results in order to "make their quarter." In Warren Buffett's words, "We won't 'smooth' quarterly or annual results: If earnings figures are lumpy when they reach headquarters, they will be lumpy when they reach you."

Why is that important? Because it is. It really is. Jack Welch was accused of smoothing earnings, it suddenly struck me that I had read that last year, and then yes, I found it (using a Google search): GE's Jack Welch Knows About Cooking the Books. But that is another story entirely. Those three key individuals are very important to investors and to the company. In the annual report they are referred to on a first name basis. Plus, the three of them have 92 percent of the more important voting stock. There is a segment under business risks in the last annual report which is headed: If we were to lose the services of Larry, Sergey, Eric, or other key personnel, we may not be able to execute our business strategy.

Wow. So that is why there was all the fuss about Sergey Brin when found to be having a relationship with a Google British executive, whilst he was married. He still is, on both fronts. C'mon Sergey, C'mon. Eric Schmidt has been called a serial womaniser, with a whole string of mistresses. Wow. Larry? Well, believe it or not, Larry Page once dated Marissa Mayer, the Yahoo! CEO. I guess he has the better job. But should this worry you, or should you separate individual lives from the geniuses mentioned in the annual report as being key to executing their business strategy? What do you think?

Larry, Sergey and Eric effectively have 65 percent of the voting power. They will determine the way that the company is driven (driverless cars and the like) over the coming decades. You are essentially leveraging off their expertise and the way that they see the world and the trends unfolding in front of them. Google has many different businesses, but only one real contributor. Therein I think lies a big opportunity, that still exists. Driverless cars. Google glasses. The Nexus tablet. Google + and the app store, I nearly forgot to mention them monetizing YouTube, which my kids absolutely love! They have plenty of lines in the water, trying to connect the world and make information more seamlessly available. There is more and more daily. Cisco reckons that there will be 121 exabytes (28 trillion MP3's or 30 billion DVD's) in global IP traffic by 2017. Amazing. So there will be more to search.

The stock price in the aftermarket reacted positively to this earnings beat, I am pretty sure we will see some upgrades coming. In the aftermarket (premarket) Google is trading at 963 Dollars. Closing in on that 1000 Dollar mark. For as long as I can remember the stock looks expensive. You are always going to pay up for quality. We will continue to accumulate what is a high quality company that is able to continue to offer transformative services to their ever increasing customer base. The tip of the iceberg in terms of usage, that is the way that I look at it. Buy.

Michael's musings. African Investment Shopping

Yesterday Shoprite announced that they have retraced the decision to fire 3000 striking workers in Zambia, based on the government there threatening to revoke their trading licence. The back storey is that the workers were illegally striking due to wages and working conditions, Shoprite then issued two ultimatums for the workers to return to work before they fired them.

I agree that jobs are important, but as quickly as those 3000 people leave, Shoprite is going to have to hire to replace them; so how many jobs will actually be lost in the economy? The bigger problem is the message that the Zambian government is sending to international investors. As an investor do you want to put your money in a country that you are seen as the 'enemy', just out to exploit labour, in a country where your investment is not secure because government does as it will? I understand that from Africa's past, were Africa was exploited by 1st world countries, we are predisposed to seeing investors as the enemy, but that view needs to change, most of the other developing countries that we are competing with for capital, also have legacy issues with 1st world countries.

What African leaders need to realise is that we are living more and more in a global village, and if we are not competitive globally, capital will not flow into Africa. Why do we need the capital inflow? Capital allows economies to grow, which then hire all the unemployed people that governments are trying to 'protect', international investors also bring with them skills, which is almost more important than the money itself.

I am not saying that we need to let ourselves be exploited by international investors, and the way to avoid that from happening is by having laws. In the Shoprite case, Zambia has laws governing minimum wages and the conditions for striking, there are laws in place, let them take their course. For an investor, stability and certainty are more important than anything else, so rather have a higher minimum wage with the certainty that government will not interfere in the economy, than the uncertainty created by threatening to pull a trading licence.

Home again, home again, jiggety-jog. I saw this pice, amazing: Average 401(k) account balances nearly double since crisis. Doubled. and more importantly, people make mistakes around their retirement savings often with disastrous implications. So forget (for a second) the debate around the debt that the United States has, if people see their own personal retirement savings double in half a decade, how much more likely is that to make you feel? Positive of course. And the knock on impact. Markets are higher. More record setting here today. That is a good thing for you and I. We again ran short of time, the Google results trumped the other ones that we spoke about yesterday. But we will work on that and eventually get them to you!

Sasha Naryshkine and Michael Treherne

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Thursday 17 October 2013

Bitter tea

"I guess the long and the short of it all is that the shenanigans did not really move the needle, in other words, the market called the politicians bluff. There were a few short term victims, well, more than a few, some hundreds of thousands of non-essential workers who had no job for over two weeks. And according to a little graphic of a poll that I saw, in which the question was asked, will you vote for your incumbent in your congressional district next year, the answer overwhelmingly was "no way". Too early to tell had more votes than yes, which clocked only 19 percent."

To market, to market to buy a fat pig. Saved by the bell, or last chance saloon, you take your pick, but when push came to shove the politicians actually stood together and voted ahead of the date that Jack Lew had signalled was the day. A deal is a deal, and I guess it was always anticipated. So why the wait? What did the Republicans get out of it? Anything? The one concession was a means test for a tax credit where income has to be four times less than the poverty rate. Or something along those lines. Hardly sounds like a win to me, sounds like 17 odd days stupidly spent drumming up support for (seemingly) nothing in particular. Pfff....

I guess the long and the short of it all is that the shenanigans did not really move the needle, in other words, the market called the politicians bluff. There were a few short term victims, well, more than a few, some hundreds of thousands of non-essential workers who had no job for over two weeks. And according to a little graphic of a poll that I saw, in which the question was asked, will you vote for your incumbent in your congressional district next year, the answer overwhelmingly was "no way". Too early to tell had more votes than yes, which clocked only 19 percent. Phew. The losers in all of this were also the networks, I heard about 1000 times people confused that the markets were "not reacting" to such dire and potentially catastrophic news. No news actually.

So a whole lot of wasted time and effort wondering what the impact of a default would be, because in reality would you want to be a politician that failed to reach a deal and send the US at the core into the unknown? Would you really want to be that person, or collective, blamed for decades thereafter? Maybe, if you are at the core of the leadership struggle to capture the Republican party, as this WSJ piece points out: Was the Point Republicans Made in the Shutdown Worth the Price?. This was getting rather tiresome really, and as we suspected will pass. The FT has this take: Defeat has bitter taste for Tea Party. Bitter tea is never tasty for anyone, especially tea that is cold and bitter.

Although, look out for the ides of January, because that is potentially the start of another shutdown, should law makers fail to reach another budget deal. The debt ceiling is effectively suspended until 7 February. Oh, today is the 17th of October, there are a mere 75 days until the end of the year. We are on day 291 of this year, so next week Sunday will mark day 300. You can put that Spartan fellow in that movie on your calendar. Oh, and it was Jacques Kallis' birthday yesterday, possibly the most impressive cricketer of our generation, say what you want about Sobers (whom I never saw), but Kallis has a better bowling average, more wicket, and an equally good batting average. This is however not the forum for that discussion. So we won't talk about the average showing over the last three days either.

OK, so birthdays, debt ceilings, budget extensions and chest puffing out of the way (for now), we can return to the business of business. And by doing that we are here to do, watch the businesses closely and identify changes and opportunities. There is a reason why some businesses have been around for decades and in some cases centuries. The world's six oldest businesses still in operation are all Japanese. The oldest is a construction company, Kongo Gumi which can trace it's roots back to 578. Speciality? Building Buddhist temples. The family lost control in 2006, when the business was bought by a bigger conglomerate. So then perhaps the "record" belongs to Nisiyama Onsen Keiunkan, a hotel in the smallest town (by population) in Japan. That is quite some statistic, oldest hotel in the world in the smallest town in Japan. It looks stunning, the little town of Hayakawa. And how to marry old with new? Give the hotel an entry on Tripadvisor: Nishiyama Onsen Horaikan. Two reviews suggest that the place was excellent. 20 rooms. Class is permanent you see.

Enough fun, back to business. Did you see that Angela Ahrendts announced that she is quitting Burberry (the business she has run for 7 years so far) to join Apple, as head of their retail division. We have all be thinking over the last few days in the office and the conclusion that we came to was that people can shout from the rooftops suggesting that Apple should be looking to have an offering to the bottom end of the market, but who cares if it is a soft luxury item, right. Should you care as a shareholder that they concentrate on solid margins and superior products? Steve Jobs apparently compared Apple to BMW and Mercedes Benz. No matter how many or few you sell, you still want the luxurious and enduring qualities that attract your customers, old and new. Here is an outstanding piece from the FT (sorry, subscription only): The control freak formula at Apple and Burberry. Ahrendts is a tall individual, six foot three, and has all the qualities that Apple are looking for!

At the same time the news is filtering through that the consumer thinks the same thing. How so? Well, simple enough, the "cheaper" version of the phone has not reached the sales figures as of yet, but the more expensive 5s model is the one that everyone wants. I guess if you are spending that much money on a phone you might as well get the most expensive version, not so? The expectation levels have risen furiously, with the models suggesting that 50 million phones will be sold in the holiday quarter. So you see. The customer might always be right then, and the chattering classes are almost always just chattering. What I am trying to say is that perhaps this is NOT the worst news, fewer plastic phones, more classic phones. The next event from the company is on the 22nd where new iPad versions (both the mini and the large) are expected to be released.

Michael's musings. They are back, he is feeling slightly better. What is a Hot Stock?

As most of you will know, Paul does a daily show called Hot Stoxx on CNBC Africa (channel 410 on DStv), where he uses CFDs, to purchase a portfolio using leverage, with the portfolio up around 60% for the year ending in October.

I want to highlight the differences between the Hot Stoxx portfolio and what we do here at Vestact on a daily basis. The first difference is that the Hot Stoxx portfolio uses CFDs instead of buying the stocks outright, they use CFD's due to the main sponsor of the show being a CFD provider.

A Contract For Difference (CFD) is an instrument that allows you to have leveraged (geared) exposure to the market. In simpler terms, if you have R10 000 with 5 times gearing, it means that you have exposure to the market of R50 000, meaning that your gains/losses will be 5 times greater with the CFD, than if you had just used your R10 000 to buy shares. With a CFD you can lose more than you started with.

The next big difference between owning shares and CFDs is their cost structure and tax implications. CFD's cost about 50% less to purchase than shares because they doesn't have STT and STRATE costs that a share would have, but you pay interest on the borrowed funds. Back to our example of having R10 000 cash, but R50 000 market exposure, meaning that the borrowed amount is R40 000; with a CFD the interest on that R40 000 is paid on a daily basis. The next difference comes with tax; when regularly buying and selling, which is normally the case with a CFD, you would pay income tax on profits instead of capital gains as is the case with shares held for a longer period. Having said that, most people who trade CFDs never get to pay tax because due to the leverage available to them, they wipe their portfolios out in a short period of time; you need profits to pay tax on.

The next difference is the time periods that they are held for. Due to Hot Stoxx being more trading as opposed to investing, the holding periods are a lot shorter than our desired holding period of 'forever'.

If the Hot Stoxx portfolio is up 60% then why don't we follow that approach all the time? The trade ideas for the show come from the work and research that we do here on a daily basis, so you still get good returns here but over a longer period of time, with lower risk. The reason for the high rate of return is that using a CFD is a more risky way of doing things, and for that added risk you are receiving a higher rate of return. Trading is higher risk with higher return, where investing has lower risk with lower returns, each having a place to play in the financial markets.

So don't get confused between trading and investing, the only thing that they have in common is that they both do something with shares, but that is where the similarities stop.

Home again, home again, jiggety-jog. Stocks are lower after the ~~not so~~ grand deal. Mr Market had expected this yesterday anyhow, so now it is onto business as usual. Coming in the next few days will be a detailed analysis of SABMiller and their trading update, with results themselves expected on the 21st of November. And then IBM results, which disappointed somewhat, but one of the recent and bigger shareholders, Warren Buffett was on the box yesterday and he said that he was not overly concerned. We can have a look at those two bits of news, the market reacting in different ways to two completely different companies.

Sasha Naryshkine and Michael Treherne

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Tuesday 15 October 2013

Not so healthy

"In the US however, the spend to GDP is far higher and much higher on a per capita basis, around 8250 Dollars per person, whilst in France it is just shy of 4000 dollars per person, half. Here in South Africa it is 930 dollars per capita, but as a percentage of GDP it is 9.2 percent. What can we say about about public health system other than if it were so good that there would not be this incredible desire for better private services. Healthcare is a very emotive issue, because when it is you, your mind changes very quickly!"

To market, to market to buy a fat pig. I sat here yesterday and heard more people on the business channels talking about entitlements and that America has a spending problem. Probably true. What is also true is that they spend more on healthcare as a percentage of GDP (around 18 percent) than any other nation, and that includes the French, who of course have universal health care. The French spend around 11 percent of their GDP on healthcare, which is really high, but still manage to deliver world class healthcare to their citizens. The national health insurance plan in France has a pay in rate of around 25 percent. Meaning that around three quarters is subsidised in normal run of the mill type stuff, but the high cost stuff almost entirely. But everyone is covered.

In the US however, the spend to GDP is far higher and much higher on a per capita basis, around 8250 Dollars per person, whilst in France it is just shy of 4000 dollars per person, half. Here in South Africa it is 930 dollars per capita, but as a percentage of GDP it is 9.2 percent. What can we say about about public health system other than if it were so good that there would not be this incredible desire for better private services. Healthcare is a very emotive issue, because when it is you, your mind changes very quickly!

There were 323 medical aid benefit options as at March 31 2013, 178 being open schemes (to the public) and the rest being restricted scheme options. The average increase in contributions across these schemes was 9.7 percent. Add in the money part and you are talking about even more emotions here! And the fastest growing ailments amongst South Africans covered by medical insurance? Hypertension, Hyperlipidaemia, Diabetes mellitus type 2 and Hypothyroidism. Diet and stress related, too much eating and not enough exercise, type 2 diabetes condition in South Africa grew by 84 percent from 2006 to 2011 and now affects 22.1 per 1000 folks covered. Wow. Where am I getting this all from? Here -> Council for medical schemes annual report 2012-2013. In 2012 there were 8,679,473 beneficiaries of medical aids in South Africa, including the 3,815,431 million principal members.

But what does that have to do with Washington DC? Well.......... and this is the point that I always make, if Americans were a LOT healthier, they would need to spend less on medical ailments. Chronic disease in the US accounts for 75 percent of health care costs -> US Preventative Medicine, National Situation. And those chronic diseases account for 70 percent of all deaths in America. Preventable. But I ask you with tears in my eyes, who is going to stand up and tell Americans the truth? Nobody wants to hear that there is a difficult path ahead. As per that page: Five chronic diseases - heart disease, cancer, stroke, chronic obstructive pulmonary disease (e.g., asthma, bronchitis, emphysema), and diabetes—cause more than two-thirds of all deaths each year.

And the other huge spending issue never gets airtime. Military spend. 19 percent of the budget, compared to 23 percent for Medicare and Medicaid. And only 6 percent on interest payments for outstanding debt. So tell me, which ones are the "problem"? The discretionary spend of 17 percent? Or the other elephant in the room, military spend. Nobody wants to stand up and say, we spend too much on military spend and too much of medical programs because we are unhealthy. How popular is the truth? Not so much.

Anyhow, raising the debt limit is the first obstacle, and of course the most pressing right now. And there seems to be some progress in that department, according to the lead story in the WSJ: Senate Leaders in Striking Distance of a Deal. I suspect a day or two, this has gone on about 15 days longer than we thought around here! I do hope that the voters remember when the midterm elections come along. Those not in office must be licking their lips at the prospect of pointing out to their voting base how things don't get done.

Holdsport. This is a tricky investment theme, but one that I think has legs, no pun intended. For all of the reasons that we have mentioned above, more people are starting to take their health seriously as the best alternative to living a healthy life. It is far better to prevent the diseases than to battle them. Think about when you walk into the pharmacy, there are rows of health supplements and equally slimming products. We all want to be in shape and recognise that by being out there participating in sports and related activities that we can live a longer and healthier life. Truth. Sporting apparel and equipment is a much more competitive market than it used to be, there are loads of choices.

But at the same time people do not mind wearing the big brand names in apparel as fashion items, Nike, Adidas, Puma, Under Armour, Reebok, even Billabong and Quiksilver in the watersports arena, and then there are the niche brands like The North Face. Manchester United (Nike) and Real Madrid (Adidas) sell 1.4 million shirts apiece each year. Wow. Someone needs to sell them, as well as the other football teams that we love so much, FC Barcelona, Chelsea FC, Liverpool, Arsenal, AC Milan, Inter Milan, Bayern Munich and the list goes on, I apologise if you missed your football team, I did not mean to.

So what is it exactly that Holdsport does? Well, they have three businesses, the biggest by a country mile is the Sportsmans Warehouse brand, which sells approximately 1 billion Rand worth of sporting equipment and apparel each and every year. Or roughly 2.739 million Rand worth of sporting equipment each and every day (if it were open all day long, every day of the year), it is not really that much if you think about it. Their other major business is the smaller Outdoor Warehouse, where you can buy your camping and related equipment. This division as of the half year results was responsible for 22.5 percent of group sales (141.9 million out of 630.9 million ZAR in total), whilst the bigger Sportsmans Warehouse constituted 72.6 percent of group sales. The third business, is the niche sporting equipment, under the First Ascent brand, and includes the recently acquired smaller CapeStorm. Performance brands for outdoor sports, think mountain biking, trail running, hiking, paddling, even skiing. That division is tiny and accounts for only 4.9 percent of total sales, or 30.9 million ZAR.

There are only 35 Sportsmans Warehouse outlets, 19 Outdoor Warehouse locations, whilst the performance brands have quite a good quality online presence. Holdsport do not own any of their properties, they lease them all, I suspect that this gives them the flexibility that they need to be in the locations that they want. They have however recently built a distribution centre, a 50:50 with Redefine properties, a fairly sizeable transaction for Holdsport, having invested over 72 million ZAR (including in this half currently) on warehousing in the Cape for their retail distribution centre and more recently (September this year, that is last month) the company started constructing a smaller warehouse for their performance brands. Right next door to the finished retail distribution centre.

The weakening Rand is not necessarily positive for their business, nor is it for their suppliers, because the knock on impact to your pocket. You and I will have to pay more for our favourite sporting goods, apparel and the like. But as a sporting nation with wonderful outdoor weather, a growing middle class and a relatively small market with lots of potential, I do think that the pretty low growth rates seen thus far will turn. The company has compelling investment fundamentals, the stock trades on a 12 multiple with a yield of around 4.9 percent (forward). Potentially cheap for someone to take out, although if you cast your mind back, Massmart tried and failed at the competitions authority hurdle. So it would have to be an outsider. But I suspect that is not what the management are thinking, they only recently brought this back to market. Kevin Hodgson, the CEO is a significant shareholder, as much as 12.5 percent. Another reason to hold them, management (and Coronation with odd 25 percent) are in waist deep. Accumulate on weakness!

Michael's musings. What the Nobel's are telling us.

Yesterday the Economic Nobel prize winners were announced in Sweden, there are three winners this year. This year's winners are Eugene Fama, Lars Peter Hansen & Robert Shiller. They are being awarded for their individual contribution to the understanding of how asset prices, with Fama and Shiller's work contradicting each other at times. The basics of their work is that Fama says that markets are efficient, meaning that trying to beat the market with an actively managed portfolio is futile. Shiller's research on the other hand says that investors are irrational, meaning that there is room for active managers, and lastly Hansen's contribution has been in the development of academic financial models, which uses less assumptions when compiling financial analysis.

For us as fund managers, it is Fama's and Shiller's work that is of interest to us. According to Fama the best way to make returns on your money over the long run, is to use a passive index following fund. His basis for saying this is that, according to his research, markets are 'correctly' priced at all times, so having a professional do stock picking for you, they are essentially guessing what to put your money in. The example used by him is that paying a stock picker for getting a call right is like paying someone for guessing a coin toss correctly; I'm paraphrasing but you get the gist of what he is saying.

Shiller's research points to markets not being correctly priced all the time, with one of his most compelling examples being the dot come bubble. His research has been one of Fama's biggest opponents. By giving the Nobel Prize to two people with opposing work, it shows us that finance is not a fine art yet.

What does all this mean for us? In my opinion stocks are fairly priced most of the time, but share prices do get it wrong some of the time, when our emotions get the better of us. Looking at stock prices with that assumption, most of Fama and Shiller's work tie into each other. If stocks are fairly prices then it means that quality stocks are going to be more expensive than other stocks, so paying for quality. Also if our emotions have got the better of us pushing share prices to extremes, ignore the moves because emotions will be short lived, prices will return to their "correct" value. Fama's research points towards the buy and hold strategy which we prescribe to here at Vestact.

Home again, home again, jiggety-jog. Mr. Market is up on the basis that a deal is near in Washington, an extension of the debate really. We will have to see how it pans out over the rest of the day, but I suspect that in the end we will get the desired result. Nobody wants to go over the edge here.

Sasha Naryshkine and Michael Treherne

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Thursday 10 October 2013

China oils up

"According to Wiki, San Marino has a motor vehicle to 1000 population ownership of 1263, whilst the US is a close(ish) third at 797 per 1000 people. China is at 85. BELOW Swaziland. In South Africa at 165, we are around double China. So congestion on Chinese roads, you have seen the pictures, it is nothing! Germany is at 572. To get to the level of Germany, or any of the other European states, that would mean that Chinese motor vehicle ownership would have to increase six fold."

To market, to market to buy a fat pig. Whoa. I was surprised with the reaction to the Janet Yellen nomination and that it was given so much airtime, but then again, there have only been 14 Fed chair's before her. So it was the biggest news yesterday by far, even if this was anticipated. And of course when Larry Summers announced that his hat was not in the ring for the job a while back, 16 September actually, Yellen almost had the job in the bag. Remember that the Senate still have to give this a stamp of approval. She no doubt will get the job, Jim Cramer gave his two cents worth on the floor and said, well, what more does the Senate need? Does she need to go to the moon, or win a Nobel prize, to which Carl Quintanilla replied, there is one in that household already.

To be fair to Jim, he suggested that the Nobel prize be for medicine, meaning that Yellen would have more credentials than anyone else before her. Jim also shouted, what, does she need to cure cancer before she gets the job. So everyone thinks she is the best person for the job. And in the middle of this nomination process there is still a whole lot of political chest puffing in Washington DC. At least, according to one reason that I read from Cullen Roche, Janet Yellen is a woman which, given the amount of testosterone running (ruining?) Washington these days, might be a nice thing. Agreed!

Paul is good at making predictions. Which is very good in our industry, being able to identify trends that are making waves. Identifying trends and being able to invest accordingly is importunity. And that means avoiding investments that are in terminal decline. With the advent of the motor vehicle and the changing transportation trends, you need to make sure that you do not invest in leather companies that manufacture saddles. I would imagine that a saddle was an important part of life 150 years ago. Less in fact, the US Leather company was in the Dow Jones Industrial Average in 1896. By 1905 it was out of the index. After a few mergers it remains that only original Dow constituent to have liquidated. But that took until 1952. But I am getting off the point here. From what Paul has read his thinking (and those of others) is that what happens in the US with politics in the modern era is that politicians closely watch the polls. There and not here (think of the e-tolls in Jozi).

Check this out, from the people that essentially are the polls, Gallup: Republican Party Favorability Sinks to Record Low. Yes. Record low. Granted the polls were not around when Herbert Hoover (a Republican) was president back in 1931, these polls are measured from when Gallup starting collecting data in 1992. So if the Republicans thought that this was a way of winning votes back in the mid term elections, as a result of conservative types, then good luck with that, because the broader population absolutely hates this idea. So this is why Paul thinks that in a few days time, insiders will tell Paul Cruz (the junior senator from Texas that is a rabble rouser) that this is a bad idea. And that they should abandon this course. And then caving on the matter will be even less flattering. Expect Barron's and the like to have a cover articles pointing to the confusion amongst the republicans, as soon as next week. And asking the same question since the last elections, "time for a makeover". Phew, let us hope that Paul is right and that this impasse is resolved sooner, rather than later.

Although....... this must present buying a buying opportunity. If shares have sold off five percent on the chance of a default (the same chance more or less of Lloyd Christmas getting together with Mary Samsonite), and let us face it, the chances are very, very remote, then surely this should be a buying opportunity? Or are stocks too expensive? Well, once again we get into what is more important for markets than anything else. Earnings. So we will get there real health of the US economy and once again we can determine whether or not companies are more optimistic about the future, or less optimistic. I am pretty sure that the negative image of the US capitol will have knock on economic implications. I am pretty sure that is an opportunity in itself.

Wow. Via the Sinocism newsletter that I subscribe to came the FT story that The new gas guzzler on the planet is China, having overtaken the US as the world's biggest importer of oil. This is according to the US government's Energy Information Administration. My next question was when I read that piece of news was, hold on a second here, government agency, are they not supposed to be away from work? Perhaps, but this could be part of the key employees that monitor energy needs and energy needs are without a doubt part of our lives. It was not too long ago in history that we relied on horses and carts to ferry us around, the steam engine changed that.

Now we have electricity, something that we take for granted. Energy needs are still going to be massive as more and more people require services that rich people deem essential. Handsets, smart ones at that, that suck an enormous amount of data. An application by the name of Locket, installed on quite a few Android devices pays the users for basically using their "lock screen" as an advertising board. More pointed advertising you cannot get. BUT!!! This app also reveals a dark side of humans. We are using our phones like crazy. On average, folks check their phones 110 times a day, done from real users, around 150 thousand in total were measured with this app. One user checked their phone 900 times a day. Obsessive compulsive.

But back to that all important story of the Chinese being the biggest importers of oil on the planet. Because the implications for Geopolitical policing and policies have meant that China will eventually have to assume the role of watchdog, whether they like it or not. Because of how energy prices will have an ever bigger and bigger impact on the Chinese (they are a net importer of oil) trade balance. So unless the Chinese can find a way to move away from gas guzzling motor vehicles back to the "grid" and public transport. According to Wiki, San Marino has a motor vehicle to 1000 population ownership of 1263, whilst the US is a close(ish) third at 797 per 1000 people. China is at 85. BELOW Swaziland. In South Africa at 165, we are around double China. So congestion on Chinese roads, you have seen the pictures, it is nothing! Germany is at 572. To get to the level of Germany, or any of the other European states, that would mean that Chinese motor vehicle ownership would have to increase six fold.

That is in absolute numbers an increase of 660 million motor vehicles. That is more than ten times the number of registered vehicles in China, as of 2009, that is right, only 62 million then, the predictorbots suggest that China will be at 200 million by the turn of the next decade. The lastly monthly data that we had was July, in which 1.24 million vehicles were sold. Or what we sell here by way of new cars in 21 months. Or differently put, their market for new cars is 21 times bigger than ours and GROWING by around 10 percent per annum. Wow. Just wow. The FT article suggests that there could be around a 50 percent growth in Chinese oil imports over the next six years. And now you know why!

Home again, home again, jiggety-jog. Market are higher. Apparently a deal of sorts is closer, amongst the politicians of course. Deals are happening all the time here. OK, maybe in Nigeria! In the automotive industry! It is hot out there! Really hot. Take care and use sunscreen.

Sasha Naryshkine

Tuesday 8 October 2013

Debt (ob)scenes

"Who really owns US debt though? We are almost always led to believe that it is the Chinese, that is what the politicians would like the general public to believe that the US is indebted to China, and yes, they are to some extent. South Africa actually owns (owned at the end of July 2013) 13.8 billion Dollars worth of US Treasuries, that is worth a pretty penny in Rands. China however is the biggest foreign holder of US Treasuries, as at the end of July it was 1,277 trillion Dollars. Japan lagged at 1,135 trillion Dollars, all total foreign ownership was 5,590 trillion Dollars."

To market, to market to buy a fat pig. Mr. Market here locally was pulled lower by the telecommunication stocks, Vodacom slumped over 6 percent, MTN sank 3 percent and a bit, whilst "competitor" (and that is being generous) Telkom was lifted 5 percent on the day. I listened to a local TV station which suggested that "investors" had pulled their money out of the mobile companies in favour of Telkom. Hmmmm... obviously the reporter was not paying attention to abnormal volumes on all of them, Telkom traded 89 million Rand, but Vodacom alone traded a whopping 454 million Rand and MTN traded a massive 2.132 billion ZAR. So no, that is wrong.

"Investors" did not take the proceeds of their sales (and there are buyers too of course) from Vodacom and MTN and invest it into Telkom. Besides, the fellow is missing something here. For each and every share sold, there is a buyer. And for every share bought, there has to be a seller. Simple, right? Well, some people just don't get that. The price of course is where the balance of buyers and sellers meet in the middle, there can never be more sellers than buyers, even though in this industry we love to use that term.

After the dust had settled the ALSI had sunk nearly half a percent, with pretty much all sectors selling off. On a lack of a resolution in Washington DC, and seemingly no end in sight? For now that is, of course. There are of course two separate issues here, one the budget being approved and two, the debt ceiling being raised (it has happened 104 times before, so why not now?), but the two are somehow linked in a way. You need to borrow money in order to fund your shortfalls, and the US government has picked up the slack over the last five years whilst business has pulled away and back their spending. More on that below.

I liked this: What is the Debt Ceiling and Why Does it Matter? Cullen is clever, and he has a way of putting things into real English that is understandable. Not gobbledygook. What is key here to this shutdown is that there is a small subset of Republicans who are Tea Party types, as much as 25-50 out of the 232 seats that they have in the House. So that does not sound like enough to actually sway things, but it is enough to hold progress on a vote up. Why must us market types try and understand what politics is doing in the US and why it impacts us here? All this is short term posturing to gain leverage over the others, Americans will decide who gets to fill the seats of the house and one third of the senate next year. I am sure that they will be heavily opinionated this time around!

It suddenly occurred to me however that the default, if it were to happen, would it be significant? I mean, what are the pending interest payments that the US Treasury needs to make? Luckily there are people with loads of resources who have worked this out already, this chart is courtesy of the BusinessInsider's chart of the day, which comes from a Goldman Sachs research team.

The first interest payment is due on the 31st of October. Halloween. The next big interest payment (in yellow) is due on the 15th of November, over five weeks away from now, and that is a big one, 30 billion Dollars. But before that is something even more important. A whopping 70 billion Dollars needs to be paid out on the 1st of November for Social Security, Medicare/Medicaid, Federal salaries and "other". If that is missed, then it impacts on all Americans. According to the Social Security Administration website, 58 million people receive Social benefits in America. 39 percent of the income of elderly Americans is derived from the program. Nearly half (46 percent) of unmarried persons rely on Social Security for 90% or more of their income. Wow. And I am pretty sure that many of them vote for the conservative party in the US. Those folks are NOT going to be impressed if the money doesn't flow. Even if (as Wall Streeters have suggested) that the Treasury prioritises interest ahead of other expenses. Yes, I am sure that the person on Main Street will be thrilled with that! But not really.

Who really owns US debt though? We are almost always led to believe that it is the Chinese, that is what the politicians would like the general public to believe that the US is indebted to China, and yes, they are to some extent. South Africa actually owns (owned at the end of July 2013) 13.8 billion Dollars worth of US Treasuries, that is worth a pretty penny in Rands. China however is the biggest foreign holder of US Treasuries, as at the end of July it was 1,277 trillion Dollars. Japan lagged at 1,135 trillion Dollars, all total foreign ownership was 5,590 trillion Dollars. Sizeable. BUT, only around one third of all US debt. Yes. The rest (around two thirds) is owned internally by US pension funds, government pensions, ordinary Americans using it as a savings mechanism. So this is definitely a case of cutting off your nose to spite your face.

But everyone is expecting cracks to appear. And also looking for a grand solution at the same time, to resolve the two issues, approve the budget and more importantly in the long run to raise the debt ceiling. But Cullen makes the point about the debt ceiling in that first article that I pointed you to, why should you have to come back every second year and deal with this fractious issue. Boring. I suppose that there is another election in-between now and then, that could help! Keep calm and carry on!

Michael's musings! Saving the world one kindle at a time

Yesterday, I got delivery of my new kindle and I didn’t even have to leave my desk, from ordering to signing for the delivery. I was expecting it to make my life a bit easier, because I am normally reading a couple of books at a time, and to have them all in my laptop bag is cumbersome. The true impact of it has been much more than that, on me and the economy.

So how does a Kindle push our economy forward? By using a Kindle; which is the most efficient way to read; saves resources that can then be used in other areas of our economy. The first saving from the Kindle comes when ordering, it took me about 30min online to do research and to order, which saved me time because I didn’t have to drive (saving petrol) to a shop, and money because I could compare prices (using Naspers' Price Check website) to find the cheapest supplier.

The next saving comes from using the device itself because I can buy the books online, which also has a time saving, has a quality impact because I can read many reviews about the book and then only buy the best, an environmental saving due to not needing paper and a monetary saving because most kindle books are cheaper (40% in my case) than normal books.

Technology allows us to do more with less, which is good for humanity and by extension the economy. For investing it means that your money needs to be in companies that are run efficiently and are in industries that 'efficient' for society because if they are not, it is a matter of time until they are left behind and relegated to the pages (electronic pages) of history.

Home again, home again, jiggety-jog. Markets are marginally lower here, as you may have come to expect. There comes a moment in the coming days that if you have extra funds that you must start to commit them. This budget impasse will be resolved. The debt ceiling will be raised. And then we can focus on the "stuff" that really matters. Earnings. Of which we have started, Alcoa reports next week, but nobody cares anymore. Because that company is no longer in the Dow. I mean that in a *nice* way, nobody cares. Of course they care.

Sasha Naryshkine and Michael Treherne

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