"All the predictions that I have seen suggest that the S&P 500 cannot get much better than this. The longer that I do this, the more of a cynic I become of those who make stock market predictions with any accuracy. Firstly it tells me that your vision of the next 12 months is important and that you are only looking at a level, aggregate earnings and more broadly trying to predict what economic forecasts are going to do for the market."
To market, to market to buy a fat pig. You remember the mid eighties when there was big spiky hair, tighter than one needed jeans, weirdly tailored shirts and even stranger leather jackets with tassels? And that was just for the guys. Also half way there, to borrow a few lyrics from Bon Jovi's “Living on a prayer” is the calendar year. We are, in month terms over the halfway hump, it is one July today. Which means that it is the moment that everyone will reflect on the first half of the year. Emerging markets were melting down, remember? China was finished for about the one hundredth time.
The local equities market has added just over ten percent for the year. Over the seas and far away, the S&P 500 has returned 6.05 percent Year to Date. I remember the extreme anxiety over tapering, the market was going to plunge, remember? Because liquidity was removed from the financial system. Well, that did not happen. The taper, in other words the Federal Reserve buying fewer mortgage backed securities and US debt started in the month of January this year. The program has gone from 85 billion Dollars a month to 35 billion Dollars a month currently. In fact, since Ben Bernanke announced that the Fed would cut back their involvement, the 22nd of May last year, the broader market, the S&P 500 has rallied 17.56 percent.
There are still many people who believe that this is as good as it gets. They say that profit margins are at an all time high. I saw Henry Blodget of the Business Insider say that PE ratios were abnormally high, I saw Eddy Elfenbein of Crossing Wall Street say that at around 16 and a half times the market was hardly expensive. That is ultimately what makes a market in the end, the difference between the buyer and the seller of an asset. I for one have never been a fan of absolute market levels in determining whether you should buy or sell. You do not own a market level, you own real companies that has a price that reflects the future earnings of that business.
The local equities market managed to add those gains against the backdrop of the worst mining strike in South African history. As we have tried to explain many times, the local equities market does not represent the South African economy. Many equities markets do not have a proper representation of their respective economies. Aspen Pharma is a good example of what used to be a totally South African business and what is now a growing developing markets business with a home base, but not by profits. 71 percent of Aspen's operating profits were generated outside of this country. Talking Aspen, the share price rallied nearly four percent yesterday to gain back from the savage sell off on Friday. Perhaps just in time for the end of the first half of the year.
All the predictions that I have seen suggest that the S&P 500 cannot get much better than this. The longer that I do this, the more of a cynic I become of those who make stock market predictions with any accuracy. Firstly it tells me that your vision of the next 12 months is important and that you are only looking at a level, aggregate earnings and more broadly trying to predict what economic forecasts are going to do for the market.
More importantly, if you were able to predict the absolute level of the market with a better than even chance, gear up to the maximum level in your personal capacity, capture the family jewels, borrow against that (mortgage yourself to the hilt) and then put it on that prediction. Of course nobody knows what is going to happen, so my very point is that predictions are useful if everything remains constant. Which it almost never does. I have neither the time nor the skills to predict market levels with any degree of authority and I will concede that the folks that do engage as market strategists are far smarter than I am. We own businesses and the level of the market will not prevent a company from taking a strategic course for half a decade. Of course their share price, current, will see to it whether that company can raise money, should they use the equity route.
I think that for the purposes of retail investors, of which we mostly are exactly that, detailed and brilliantly prepared analyst reports are not written for us. They are rather written for institutional money, people who need a good mix between income and growth because their liabilities are normally greater than individuals engaged in growing their wealth. The very complicated models used to determine what earnings are likely to be in 2016 require a high degree of human brainpower, many hours of learning and that comes with huge responsibilities. Rewards too, many analysts are worked to the bone and remunerated accordingly.
The very first book written on Security Analysis was after a time of great stress, the great Benjamin Graham and David Dodd wrote a book by that same title. Perhaps another crisis of epic proportions will see the history of security analysis evolve from the very first analysis. I have read The Intelligent Investor, I have not read Security Analysis, perhaps I should put that on the list!! Some of the most famous investors that we know drew inspiration from Benjamin Graham and his own analysis, perhaps there is another model and another legend creating something different. Surely security analysis cannot be the one and only 1934 book? I think not, I think with many different choices there are very many different styles.
Byron's beats are back!
It was announced yesterday that Tencent have made another acquisition in the online retail sector. This time they have bought a 19.9% stake in a Nasdaq listed business called 58.com for $737 million. Here is a description of the company from Google Finance.
"58.com Inc. is a holding company. The Company is an online marketplace serving local merchants and consumers in China through its Website www.58.com and mobile applications. Its online marketplace enables local merchants and consumers to connect, share information and conduct business. The Company's online marketplace contains a range of information in approximately 380 cities, across diverse content categories, including housing, jobs, used goods, automotive, pets, tickets, yellow pages and other local services.
Its online marketing services include listing services, such as real-time bidding and priority listing, and marketing services through collaboration with third-party Internet companies in China. The listings on its online marketplace cover a range of content categories, such as housing, jobs, used goods, automotive, tickets, homecare and relocation, renovation, wedding, business services, travel, education, food, beauty, entertainment, franchise, and other local services."
Sorry for the long description. In simpler terms they are a lot like Gumtree which is an extremely useful service. What is so exciting about these businesses is their ability to push their hundreds of millions of users in directions that benefit them. Tencent can now direct all their users towards the 58.com site. That is an instant synergy which has a clear and obvious benefit without much effort.
We had an interesting discussion in the office today where the question was asked about Koos Bekkers influence in these decisions. He of course is a huge Naspers shareholder. His 1.1% stake in the company is worth north of $1.1bn. As you well know from Sasha's latest analysis of Naspers results, Tencent represents 94% of Naspers at the current share price. This means the Koos will keep a very close eye on what is happening at the company and I'd imagine a large part of his sabbatical will be spent in Hong Kong. And it is certainly no coincidence the Naspers themselves are also investing in similar types of online retail businesses.
I am sure you are very well aware that we fully back the influx into online retail. All four of us in the office have reaped the benefits and efficiencies of ordering goods online. Enough so to convince us that it is going to be a huge part of our future as consumers. Amazon dominate this market in the developed world but because the industry is still so new they have no time to focus on developing markets as of yet. Tencent and Naspers have plenty of gaps to exploit. I expect to see much more activity in this space.
Home again, home again, jiggety-jog. Mr. Market set a new all time record again this morning. In the famous words of Alfred E. Neuman, what me worry?
Sasha Naryshkine, Byron Lotter and Michael Treherne
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