"Ironically, the more economic freedoms and choices you have, the less the state interferes with the economy and the more liberal they are, the richer everyone in society gets, including the bottom ten percent. Plus life expectancy is raised when you have more economic freedoms."
To market, to market to buy a fat pig. Resource stocks flew, the underlying commodity prices recovering from a steep sell off. The commodities index, iShares S&P GSCI, which tells a story recently, not as "bad" as it has been in the past however:
From a period of really quiet and relative stability, if there is such a thing in commodities markets, the index has seen a tumultuous time of it, see on the far right end of the graph from Google Finance. I remember reading somewhere that before this period of a nearly 20 percent drop in the oil price, the market for black gold had been the most stable since the 1970's. The reference to black gold of course is the Asterix sojourns in the deserts of the middle east. Wiki suggests that the inspiration for the book, Asterix and the Black Gold (the 2nd that Albert Uderzo had written alone, after the death of his mate Rene Goscinny) was part James Bond, part biblical tales.
Bond aside, back to the market,
The scoreboard looked rather awful at the end of the day, it was looking good mid afternoon with a modest recovery, a flurry of
No! What happened at Luxottica? Another management disagreement with the founder and major shareholder no doubt, Leonardo Del Vecchio, taking the co-CEO role from Enrico Cavatorta, who quit. Another company director, Roger Abravanel also quit. The board is revolting against Del Vecchio. Del Vecchio has not filled some key positions, some independent board members are threatening to quit unless the roles of co-CEO's are filled. For the time being, the other co-CEO who was set to be beside Enrico Cavatorta in the sharing role, Massimo Vian, he has been suspended by the board. There seems to be a corporate governance breakdown, that is what the two independent directors are alluding to. Perhaps the founder and main shareholder, Leonardo Del Vecchio, who owns more than 60 percent of the company is flexing his muscles a little too much.
The people buying sunglasses probably have little idea who owns the business and how it is run, the fact that the major shareholder (yes, the founder too) is possibly proving to be more than a little prickly. The statement, which deals with the I am in charge until further notice, when a suitable candidate is found, is followed by a sales update and profit guidance for the third quarter, which was inline with the markets expectations:
The Board acknowledged the Group performance of the third quarter, which shows a strong free cash flow generation, sales growth in line with the first half of the year at constant exchange rates and an expected increase in net income of approximately 10%.
I like the business a lot, it falls into a category of both healthcare and consumers globally trading up to fashionable and affordable luxury in eyewear. Perhaps the most noticeable of all luxury items, they sit squarely on your head. Protection of the eyes, it does a job too. I think that whilst the corporate governance issues are sorting themselves out, whilst the board is looking for someone to run the business, the company continues to "do well". Clearly shareholder influences will impact on the business, too much interference will see the company lose out to their competition. This is a negative event that has sent the stock plunging 9 percent, it is however an opportunity for us.
We have the Economic Freedom Fighters in South Africa, who certainly stir the pot and can been seen as rabble rousers, they are (as per their declaration) inspired by the Cuban July 26 Movement. Really, you can read for yourself, it must be said that the grammar would not have gotten past Byron here -> DECLARATION OF THE ECONOMIC FREEDOM FIGHTERS NATIONAL ASSEMBLY ON WHAT IS TO BE DONE-26 - 27 JULY 2013:
"Cuba remains an inspiration because with a very low GDP per capita income. Cuba is amongst the best countries in terms of healthcare, education, low infant mortality rates, life expectancy and other vital social services. This is a sign that the revolution was about the emancipation of the people, not the enrichment of few individuals who callously and rapaciously redirect State resources for self-enrichment."
It is not a surprise to me that inside of the Economic Freedom of the World: 2014 Annual Report the countries with the worst economic policies, price controls, disregard for personal and property rights (seizing of private assets), complete price controls, limited access to proper credit markets and lack of trade freedoms find themselves at the bottom of the list. Sound familiar? Check out the bottom of the list, from Chapter one, a snapshot of exhibit 1.2:
The biggest friends of the Venezuelans? The Cubans!!! Who do not even appear on the list, as a result of no work being able to take place in that country. The "independent" research is provided in each country by an organisation or body, in the case of Venezuela it is a crowd by the name of CEDICE - The Center for the Dissemination of Economic Knowledge. Locally, as a measure of these bodies, the Free Market Foundation provides the information. Some of course would argue that the work the FMF does is biased and sits squarely with business.
For comparisons sake, see who is at the top of this list:
Hong Kong comes out tops. You might argue that there are limited political freedoms, comparatively speaking, you'd be right. I read with interest via Bill Bishop's Sinocism email -> Cultural reflection can improve modern governance: Xi, that Chinese President Xi Jinping said via the state media platform: "the socialist path with Chinese characteristics is determined by cultural and historical factors." Huh?
I am getting to a point here, and the conclusion will be swift. I was first brought to this economic freedoms via Mark J Perry, who contributes for the South African version of the FMF, who captured two important graphs, the same ones I will reproduce here and add another that I thought was of interest:
Ironically, the more economic freedoms and choices you have, the less the state interferes with the economy and the more liberal they are, the richer everyone in society gets, including the bottom ten percent. Plus life expectancy is raised when you have more economic freedoms.
The conclusion is simple, for me at least. Whilst the noble idea of creating a society that is equal would mean socialist utopia, the truth is that we are individuals with different circumstances, personalities, talents and skills. Buffett is right, the winners of the ovarian lottery (those born into better households) have a far better chance of making it further in life, it matters to whom you are born, it does not mean that is limiting.
It was of course the beloved Nelson Mandela who said: "Education is the most powerful weapon which you can use to change the world." To achieve economic freedoms you need more accountability for all, less state interference and perhaps the only thing that the EFF and I agree on, a quality education of the highest order, although if the private sector does a better job, then by all means, outsource the entire department of education. Now that would open up a can of worms!
If the EFF really wanted economic freedoms, luxury goods for all and a higher quality of living, they would provide the platform for economic freedoms and not ideas that time and time again have failed. Be more Mauritius and less Venezuela. And in case you had any doubt with regards to economic policies and the will of ordinary people, ask yourself, which direction do the boats with illegal immigrants go, from Cuba to the USA, or the USA to Cuba?
I have been dying to stick this piece in to my message, I just did not have the context, now I think I do with the above economic freedoms and Venezuela being bottom of the list. I asked the client in question, who visited Venezuela, if I could use his piece, anonymously of course. I have deleted extracts of a personal nature, changed the names of the people involved. You can quite quickly draw your own conclusions to the well written piece.
I write to you from the open air pub/dining area of the Posada Los Pinos, Santa Elena de Uairen, South Eastern Venezuela. I doubt you have had many, if any, correspondence from this remote part of the world!
My immediate view is of an untidy courtyard ringed with poorly maintained buildings, the customary re-inforcing steel sticking out of the planned 2nd floor. Venezuelan children play in a small pool and the foliage in the yard is tropical. The ambient is about 28 degrees and humid. Bright coloured paint with Amazonian themes adorn the 5 modest rooms on the one side. The beer comes in a 220ml green bottle and is beautifully cold. The official cost of a beer is ZAR80 [50 Bolivar], but we pay ZAR8 [yes, eight]. Venezuela's economy has essentially collapsed and the open black market on the streets is paying 70 Bolivars for 1 US$ - a Zimbabwe story if ever I have seen one!
When booking the flights it became apparent that we were flying to a remote spot and more so, to an unpopular country - no direct flights! So it was that we flew SAA to Sao Paulo, Sao Paulo to Manaus in the Amazon, Manaus to Boa Vista in Northern Brazil and then by private taxi for 3 hours to Santa Elena de Uairen - a 30 hour journey.
Apart from the vague knowledge that Malema thinks Chavez did his country proud, I had no idea of what to expect in Venezuela. My son indicated in his brief correspondence that south eastern Venezuela was an interesting place in that it had splendid scenery, was home to the highest waterfall in the world [980 odd meters with a free fall of 800 meters] - Angel Falls. He was not exaggerating! The Gran Sabana area is a remarkable place. It has mountains [Tepuy] at a height of about 2600 meters and the surrounding flat country [500 meters] is a haven of dense jungle, grass plains and magnificent black water rivers. Access to the central area is by light aircraft only - vehicles in the main resort are airlifted in and out.
Angel Falls drains the biggest tepuy [we flew across in a Cessna in about 15 minutes - how big is that?] and the Falls thus appear to come out of the sky. It is not a river dropping altitude like most falls - it is a flat mountain top with water pouring off the edges. Many of the falls come out of the cliffs midway down - basically underground aqueducts discharging into the big valleys below. It rains like an tropical place - frequently and suddenly, accompanied by thunder and lightning. Yes, we have now been to Angel Falls.
A 6 hour [return] "boat" ride into a remote valley and thereafter a 4 hour hike [return] to the base of the Falls. Incredible experience. The boat is a 12 meter canoe made by the locals out of local timber, powered by a 50hp Yamaha! The boat ride is understated! I have spent a lot of time on rivers and nothing rivals the skill of the helmsman and ability of these craft to climb rapids, negotiate tight bends between massive boulders and stay upright. Yes, we got wet!
Many of the tourists were local Venezuelans and we thus made new friends quickly. I would guess the V tourist is more affluent and I sensed a clear despondency about the state of their country. Words like chaos; trapped; queues; corruption; currency; work; education and the like are common! My brief readings indicate that V is a country that enjoyed relative stability from about 1960 to 1980 and then started to decline steadily until Chavez came to power in the late 90's, and finished the job properly. It appears that his is a government that defeated both business and labour in its quest to control! Who then was his support? The uneducated and the rural it appears. Ring any bells?
Santa Elena de Uairen was a shock. It is remote but the main town of the region and the border town to Brazil. It is run down and poor, not dissimilar to some of the towns on the main road north of Maputo on Mozambique. Chinese products abound. Cars out of the 80's, no road signs, unmaintained buildings, poor hygiene, poorly stocked shelves. A distinguishing feature was the well equipped 4x4's [mostly Landcruiser] that were enroute to the Gran Sabana etc. The V's are keen campers and adventurers if they can afford it. With free fuel, V8's abound. Despite all this, the people are friendly and we felt safe.
Things that we are reading, that we think you should be too
Given that the market has had a tough time as of late - What Are the Odds We're Heading For Another Crash?. "Were it not for the occasional correction or bear market stocks wouldn't offer a risk premium over bonds and cash."
Lower oil prices have come about due to the fracking revolution in the US but Fracking is an expensive way to get oil out of the ground - Lower oil prices. How low will the oil price drop before some Fracking operations are not profitable?
A light hearted piece comparing the stock market to dating - The Boardroom and the Bedroom
Then lastly, the Nobel prize for economics was handed out yesterday to someone you probably have never heard of - The 2014 Nobel Laureate in economics is Jean Tirole. The article gives a background of the man and his work.
Home again, home again, jiggety-jog. Asian markets are looking more than a little average, the Nikkei 225 is below 15 thousand for the first time in over two months, US futures are presenting another modestly higher opening. Earnings today are expected from Citigroup, from JNJ (very NB), JP Morgan and Wells Fargo, those are the big ones. Those will do a lot to calm the nerves of the nervous, some chamomile tea perhaps.
Sasha Naryshkine, Byron Lotter and Michael Treherne
Follow Sasha, Byron and Michael on Twitter
011 022 5440
wickets sellers in the afternoon session saw the bears on top again! What does that line even mean, can I retract that?! No. At the end of the session the S&P 500 had given up 1.65 percent to 1874! Year to date? Marginal gains of the lowest order. I field many calls of anxious and not so anxious clients, I always assure them that this is how it works in equity markets, they are volatile. It still is the best mechanism for saving, being direct in the quality companies that happen to have lower prices. Same companies, lower prices.
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