Money with a dash of Funny: February 2016

Monday 29 February 2016

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"If your life insurance payouts don't happen (before they become more expensive to keep), then the company is more profitable. And all this they do by changing your behaviour, getting you to raise your heart rate 5 or so times a week, drive better and eat better. It seems so simple, and with all the data that they have collected recently, it is working."

To market to market to buy a fat pig The Oscar goes to ... OK, that is all good and well, if you haven't heard by now, Leo finally won. For a movie that he grunts in. I haven't seen it yet, I don't get out much, sorry. There are no investing Oscars, perhaps Buffett and Berkshire would have the most nominations and wins if there were. The Al Pacino, Jack Nicholson and Robert De Niro rolled into one. Or if acting was one category, gender neutral, Buffett would be the Meryl Streep of investing.

Perhaps the reason that there is no Oscars for investing is that the markets measure you, that is your award. Mr. Market is measured from year to year. The market decides on what the price a security or bond or level is supposed to be, relative to the risk assumed. The Rand has suffered from a bout of weakness recently as a result of political meddling, or seemingly political interference. I for one hope this is resolved quickly. There are some things that you cannot change, politics is certainly in that category.

On Friday in Jozi, Jozi, stocks closed much higher, up over two percent on the day. In large part thanks to a stronger finish on Wall Street the session prior, also the weaker Rand boosted some of the Rand hedges. Barclays Africa (which may need a name change) fell on the worst kept secret in town, that the parent company is looking to divest from their stake down here, as part of their global introspection. The announcement is supposedly going to come tomorrow, 1 March. Remember that this is a day that comes around once every four years, leap day. They (Barclays) own 62.3 percent of the locally listed entity. The only question is, who is the buyer? And what is the price? Eish, tough decisions in a tough time.

Stocks across the ocean, in New York, New York, were mixed, tech stocks ended the session marginally higher, whilst the S&P 500 closed down one-fifth (nearly) and the Dow Jones Industrials closed down a little over one-third on the day. Oil prices continue to be the goto for sentiment, Chinese markets are in meltdown mode this morning. Eish. Not to worry, read the Buffett note lower on optimism in general.

Company corner

Discovery, that company that we had a short look at on Friday deserves a better look. Bright, our newest and best colleague, was supposed to go, time definitely got the better of him. He is young, and that is what you need in the industry, young people who understand and know the history of the stock market, yet their lived experiences don't include the big drawdowns. I suspect that as you go on, it becomes that you are more cynical, in general. That is why it is refreshing when older people become more optimistic as their lived experiences actually improve in time. Just an observation actually, I could tell through the Adrian Gore presentation of the results that they are very proud of their business and their achievements.

In this set of interim results, it became apparent that Discovery are investing hard in their business. An intent from their side to enter banking, 13 percent of earnings was spent in this last 6 months to end December. There is a banking licence application process ongoing, recruitment of quality staff and of course the building of the infrastructure for the fully-fledged retail bank. Thinking out loud here, the bank is going to possibly have the virtual branch model, not too dissimilar to Investec. I think.

The insurance business, short term that is, has flattened a little. As we pointed out Friday, Discovery chases quality business. What is also interesting is that through the broker network the quality of the business is better. i.e. they have a lower loss ratio when signed on by a broker network. Perhaps it is easier to terminate a relationship with an institution than it is with an organisation. You don't "know" the institution, you do the broker.

Discovery is a behavioural changing business, they try and take your habits and try and mend (and bend) them towards better behaviour. Better behaviour for your health, in terms of eating better and getting rewards back on your basket of healthy foods, better driving in terms of braking/acceleration/speeding/night driving, and of course the big one, exercise. The take up of the Discovery Watch is a testament to that, the fact that people are prepared to pair their health vitals with the company, that will lead to the business incentivising their members more.

The more sedentary you are, the more likely you are to have lifestyle dread diseases. If the company can (in the words of Virgin Active, a partner of theirs) make you "get off your arse today" and get you to exercise for small rewards, then it is in their interest long term. If your life insurance payouts don't happen (before they become more expensive to keep), then the company is more profitable. And all this they do by changing your behaviour, getting you to raise your heart rate 5 or so times a week, drive better and eat better. It seems so simple, and with all the data that they have collected recently, it is working. See the below image.

It is amazing at how quick they can tell that someone is changing their behaviour (12 months) and how people are being cross sold across the product lines. i.e. four-fifths of their insure products already had another Discovery product. Quite possibly the starting point is with the Health product.

I think that this is a business that hasn't even scratched the surface. The health and wellness theme is huge, I see more people buying sporting equipment than ever before, I see more people concerned about what they eat than at any other stage in history. The stock always looks perpetually expensive, it is however a growth company, and we are always prepared to pay up for quality. Discovery remains a buy in our book. At the full year stage we will have a look at the valuations in more detail.

Drop everything! Read the Buffett message over the weekend. First, go to the Berkshire Hathaway website. Per Dollar market capitalisation this must be the worst corporate website in the world. The worst looking of course. The information that you get from the Berkshire Annual Report is amongst the finest in the industry. The simplicity of the writing is genius. Thanks Uncle Warren for everything, most of the folks reading are not even shareholders. The shareholders over the 5 decades have been made very rich.

Berkshire does some interesting things. Rephrase, they have commitment, long holding periods, and more patience than most. They still remain true to their values, they are passionate about sweating the detail. Buffett points out the differences between his style and the fellows over at 3G Capital (the chaps behind the SABMiller buyout), suggesting that they (3g) sweat costs. 3G and Berkshire are partners in the Kraft Heinz investment. See what Uncle Warren says about their (3G Capital) "style", perhaps this is more insight into how they will integrate SABMiller into AB InBev:

"Their method, at which they have been extraordinarily successful, is to buy companies that offer an opportunity for eliminating many unnecessary costs and then - very promptly - to make the moves that will get the job done. Their actions significantly boost productivity, the all-important factor in America's economic growth over the past 240 years. Without more output of desired goods and services per working hour - that's the measure of productivity gains - an economy inevitably stagnates."

At the corner of everything is doing the same, or more, with less. Farming is a great example of how humanity uses the same amount of land to gain far greater yields over time. Same land and square area, more mouths to feed, far greater and better outcome. Last and only other point that I think is worth sharing about the US economy, Uncle Warren is ever the optimist (and realist). First the background, he talks about the average GDP per capita in the US being 6 times in real terms higher than when he was born in 1930. And then he suggest how commentators bemoan the 2 percent per annum GDP growth. Warren then sticks it into perspective:

"America's population is growing about .8% per year (.5% from births minus deaths and .3% from net migration). Thus 2% of overall growth produces about 1.2% of per capita growth. That may not sound impressive. But in a single generation of, say, 25 years, that rate of growth leads to a gain of 34.4% in real GDP per capita. (Compounding's effects produce the excess over the percentage that would result by simply multiplying 25 x 1.2%.) In turn, that 34.4% gain will produce a staggering $19,000 increase in real GDP per capita for the next generation. Were that to be distributed equally, the gain would be $76,000 annually for a family of four. Today's politicians need not shed tears for tomorrow's children."

Obviously, as he points out, those who have the skills will be better off than others, lobbying in the capital of the nation will always be a growth industry. Sad, true. And then lastly, for all the doomsayers, who keep pointing out that the US is finished, too much debt, too much crass consumerism and so on, a simple line still holds true: "For 240 years it's been a terrible mistake to bet against America, and now is no time to start."

So the guy is amazing. He, and Charlie Munger, continue to invest and grow the business as he has done for longer than most Wall Streeters have been alive. That in itself is an unparalleled record, perhaps some of the Hedge Funders of today may get close to that record should they avoid huge pitfalls over decades. The only question I ever have is the one that can never be answered. If Berkshire Hathaway over five decades had a three times dividend cover policy (i.e. pay out one-third of earnings as dividends), what would the long term returns have been? Obviously Berkshire wouldn't have been able to use the cashflows to acquire and bolt on complimentary businesses. Berkshire seem to love the people they work with.

The stock market has sold the stock off 10.39 percent over the last 12 months. Over five years the stock is up a staggering 55 percent. No yield. Ever. You get your upside if you sell the stock. And then pay the taxes. Don't ever sell is his message I think. Obviously you may have to at some stage. It is not a stock that we actively recommend. You could of course own the B class shares (131 Dollars apiece), unless you are in the business of buying one A class share, 198,190.50 Dollars apiece. At the current exchange rate that equals 3,195,798.82 Rand a share. Why, oh why, Grandad did you not buy a few back in the late 60's? More on reaction below in links:

Linkfest, lap it up

Over the weekend Buffett published his annual shareholders letter, here are a few bloggers views on the man and his letter.

Ben Carlson looks at peoples reactions to Buffett himself - The Buffett Backlash

Cullen Roche reminds us that one of the themes in Buffett's letters over the years is that the world is not ending and that the future looks bright - Warren Buffett's Greatest Strength. Cullen signs off with the following observation:

"In a period of global economic weakness and excessive short-termism, it can be helpful to be reminded that there will always be challenges in the short-term. And while it would be irrational to be excessively optimistic all the time, it's useful to remember that the greatest deterrent to most people's wealth accumulation remains their excessive focus not on what can go right in the future, but on what might go wrong."

Some fun facts from Business Insider - 14 stunning facts about Warren Buffett and his wealth

Home again, home again, jiggety-jog. The Indian budget is ongoing. This country no doubt has the ability to grow at a pace and use resources to an extent that China did in the last decade, being a democracy without the central planning capability (and possibly resources) on that sort of scale is just too hard. Talking about things that are too hard, the Chinese market has halved since June last year. Well, nearly, down 48 percent as we speak. Another large swoon today as the Yuan is weakened by the authorities.

And in the biggest news of the day, (for me at least) Starbucks is opening up shop in Italy. Yes, the country that Howard Schultz visited in order to gain insight into coffee culture, he is there and competing. It may be a war of the simple caffe against (and I found this online): "A venti, half-whole milk, one quarter 1%, one quarter non-fat, extra hot, split quad shots (1 1/2 shots decaf, 2 1/2 shots regular), no foam latte, with whip, 2 packets of splenda, 1 sugar in the raw, a touch of vanilla syrup and 3 short sprinkles of cinnamon." What the hell? Just throw some milk with my espresso, that is it!

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Thursday 25 February 2016

Soldiering on

"Back to the Wien piece, in the part about China he points out that the country still creates 10 million jobs per annum. And as they balance their economy to shift to more consumer focus, less on capital expenditure, there will be hiccups along the way. He is positive on China and expects, like a lot of people, for growth to moderate somewhat, somewhere in the four to five percent region."

To market to market to buy a fat pig It must be tough to be a short term strategist. Imagine having to explain that a six percent fall in the Shanghai markets did not have an impact on global markets, and that a rising oil price supports stocks currently. That is the trade at the moment, stocks go up as a result of which way the oil price moves. Which is kind of nuts, if you think about it. Recent numbers from China have reaffirmed that there is no falling off a cliff, the more I read, the more consensus is forming that China is just going to be OK. A good piece from an old timer in the industry (I mean that with respect), Byron Wien in Barron's: There Won't Be a Bear Market.

Wien was once upon a time the most read analyst on Wall Street, according to Wikipedia, which also suggests that in 2000 most of his calls were the right ones. I guess there was, thinking back, only one call back then. Stocks, and in particular anything to do with the internet, is woefully overvalued. Wien releases a 10 surprises each year, a tradition that goes back 3 decades. Once something has traction, it becomes hard to either break or give up. Like the annual chairman letter from Warren Buffett, that is set to be released this weekend. For all professional and amateur investors who take themselves seriously, this is one of the most exciting events of the year. This is it, Buffett, the billionaire next door is going to tell us how it is. Human nature dictates that we love to hear from someone who holds the secret sauce, or at least we think that they hold the secret sauce. More on that letter Monday.

Back to the Wien piece, in the part about China he points out that the country still creates 10 million jobs per annum. And as they balance their economy to shift to more consumer focus, less on capital expenditure, there will be hiccups along the way. He is positive on China and expects, like a lot of people, for growth to moderate somewhat, somewhere in the four to five percent region. I guess as the base gets bigger and bigger, it does become harder for growth rates to maintain those eye popping numbers of yesteryear. I like the conclusion, stocks are not expensive, he thinks stocks may be a little oversold here, notwithstanding the recent rally. He also uses something called the "Ned Davis Crowd Sentiment Indicator" to determine whether or not people are beat up about stocks, currently we are at 2012 levels, not 2009. I agree. 2008/2009 was horrible, this feels a little more like the Europeans fumbling around in the dark about Greece.

Markets quick sticks, local stocks enjoyed a solid day of gains, all in all the Jozi all share index gained around four-fifths of a percent on the day. Resources and financials have been pretty volatile over the last 12 odd weeks, they certainly did not show any more signs of letting that volatility slip yesterday, in the plus column Anglo American and Shoprite were the big winners on the day, in the minus column (and we will come to it in a moment) was Discovery and AB InBev, both of those companies had results yesterday. On balance there were some pretty strong moves across the board, there definitely is a sign that some confidence is returning.

Over the seas and far away in New York, New York, stocks enjoyed another big day of gains, thanks to that oil price. And I guess returning confidence. "Things" are not finished, there was a very good read on durable goods for the month of January, that was double what the market expected. The headline number showed a 4.9 percent increase on the comparable number from last year, certainly Americans would not be buying/ordering washing machines and the like (aeroplanes in there too) if they thought the future was glum. Mind you, the December number was rubbish, down 4.6 percent, so perhaps you are dealing with a very volatile subset of numbers here. In fact, having a look at a long term graph tells you very little, if anything about this set of numbers. All I know is that the headline number is huge, enormous: "New orders for manufactured durable goods in January increased $11.1 billion or 4.9 percent to $237.5 billion, the U.S. Census Bureau announced today." 237 billion Dollars for one month? That is massive.

Company corner

Discovery released half year numbers yesterday morning, remembering that their trading statement had spooked the market a little earlier in the month -> Discovery Trading update. The numbers themselves at face value look a little unappealing, what they are doing here however is building a bigger global business and on the verge of a bank. What is still most impressive is that when Adrian Gore delivers, he speaks with the same enthusiasm and energy each time.

During the presentation (which we watched on TV here in the office), Gore displayed a couple of new initiatives, one included doctors inside of the network where the appointments could be made by finding one inside of your smartphone map, directions there, notification time of how long you're likely to wait when you get there, magazine suggestions on your smartphone, scripts sent directly to the pharmacy and delivered to your home/work and then lastly, an Uber-like star rating system for the Doc. You could see that he is genuinely excited about these products and innovations, I suspect that their core clientele will be receptive to this technology. Talking of which, their relationship with Apple and the Apple watch is pretty impressive, so far they have sold 170 thousand units, and as it is linked to the Discovery credit card, that definitely helps their business.

The company has been great at cross selling, selling you insurance, both life and short term if you are a medical aid customer, selling you investment products, they are simply great at getting you into their ecosystem. I for one know that their products are more expensive, Adrian Gore did say that they do not compete on price. It is about the quality of the product. We will have another closer look today and release a comprehensive look on Monday. For the time being we think that this current share price weakness represents a big opportunity, the business is in growth mode and is investing heavily in the future.

Linkfest, lap it up

Seeing as today is Friday we decided to give you pictures instead of links to blogs, enjoy.

More than half of the globes population is still not on the internet, which means that if you are reading this you are in the minority globally - 4 reasons 4 billion people are still offline

Of the people who are not on the internet here is how many have never even heard of it. I was amazed to see that 75% of the people not online in Nigeria, had never even heard of the internet!

Here is the cost breakdown for remote station site costs, as you can see it is normally twice as expensive. The station costs twice as much and services far few people so on a cost per user basis it is far more costly than a station situated in an urban area. Note how Nigeria only has a few regions of high population density, which indicates the capital spend from MTN to help get the country connected.

Then lastly, here is a great graph from Conrad Hackett, the stat man. Smart phones are data hungry machines, so the areas where there is low smartphone penetration offers high growth potential for mobile network operators.

Home again, home again, jiggety-jog. Markets across Asia are higher, Shanghai is up nearly one percent, Hong Kong stocks are up 1.6 percent, whilst Japanese stocks are up around half a percent on the day. I also saw after some good results that Baidu was up over ten percent after market, there is the small matter of the G20 meetings over the weekend in China, methinks Shanghai. Finance ministers and central bank governors, Minister Gordhan has had a pretty busy week, you would say. Expect a better start to the day.

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On a Budget

"Whilst every economist would have worked feverishly on the budget and their summaries, and what it may mean ahead, perhaps the cheerfulness of the recovery leading to higher collections is a little overdone. Treasury growth forecasts are more rosy than those of the IMF, Michael points out."

To market to market to buy a fat pig The Vestact budget special is below. We did our best. We are equity guys. So markets, and specifically equities markets are important to us and our clients, and whist the budget impacts on people and their ability to spend freely (or not), that filters through to companies. Companies work around regulation. I was snooping yesterday around the history of taxation, Chinese written literature (and the preservation thereof) is around 3000 years old, there is of course references to taxation there. The word only appears in english literature officially around the 14th century. Augustus of Rome, you have him to thank for inheritance tax, Julius Caesar, you have him to thank for sales tax, or VAT as we know it here. Benjamin Franklin said you can be certain of death and taxes, his reward was to find his face (and completely awful hairstyle) on the 100 Dollar bills. What kind of hairstyle is that sports lovers?

Our Rand weakened after the budget speech sending markets better on the day, stocks still closed down nearly 0.9 percent. Sliders (not the burger kind) included Anglo American, down over ten percent on the day, BHP Billiton also fell sharply, Glencore fell over ten percent. In the winners column were the precious metals stocks, GoldFields and AngloGold Ashanti were up over ten percent. Is there an instrument that measures volatility on the commodity producers? Jeepers, that thing would be on fire.

Stocks across the world, in New York, New York, traded from the depths of despair to much higher on the session, tech stocks closed the session up 0.87 percent after all was said and done. I said (on the very exclusive Vestact WhatsApp group) that I was researching the correlation between rising oil prices and Facebook. I was of course being sarcastic, a terrible character trait apparently. The S&P 500 ended the day up 0.44 percent, with the Dow Jones Industrial up around one third of a percent.

The reason for the about turn in stocks was an oil price ramping up. At the same time as the market was turning and the oil price was increasing, an "alert" flashed up on my mobile screen, saying that oil could "crash" to 20 Dollars and stay there. Something like that. And then the oil price was increasing. JP Morgan reported some stresses in energy loans (JPMorgan Says Long-Term $25 Oil Means $1.5 Billion Reserve Boost), impacting their core business. You see, it has a knock on impact everywhere, lower energy prices. At the same time however, the wealth transfer into the hands of consumers globally is an excellent outcome. I always think that it would be better spent.

Across the seas this morning out East, Chinese stocks markets in Shanghai are getting smoked, down nearly 6 percent at one stage. Why? Small caps are getting trashed, the overnight repurchase rate jumped sharply, which is a sign of credit tightening. More cash and fewer shares this week please. Man, those markets are incredibly volatile, it is crazy. Government in that part of the world are willing to run a larger deficit, cutting corporate tax rates and encouraging investment. Sigh. Japanese stocks are up sharply, obviously in response to the strong US rally. US stock futures are mixed, slightly lower. Hey {insert sarcasm}, the oil price could swing stocks any old way today!

Vestact budget "special"

We know you are budgeted out. However .... it was budget day yesterday. Like we said, everyone hypes it up as the most important thing ever, ask them what they remember from last year and there is a whole lot of head scratching going on. It is almost like the non-farm payrolls number (that comes around every month), where the numbers and the data is so important, and then all of a sudden it is not. Although in fairness, this is seemingly a more important budget than before. Simply as a result of the outcome may be a ratings downgrade, and whilst we can sit here and say we don't really care that much for Moody's, Fitch and Standard & Poor's, the mandates of big bond funds are to buy and hold investment grade bonds, and if you are not there, you exclude potential buyers.

Whilst every economist would have worked feverishly on the budget and their summaries, and what it may mean ahead, perhaps the cheerfulness of the recovery leading to higher collections is a little overdone. Treasury growth forecasts are more rosy than those of the IMF, Michael points out. I am guessing that government (and most organisations for that matter) believe in their ability to score on the revenues front and contain their own costs at the same time. I did watch a few market commentators yesterday, talking about our own fiscal cliff and the like. The suggestion is that if we keep up the current borrowing pace and increases in social security and government employment (and costs of running big government), there will only be place for servicing interest and those other two items by 2026. Low growth = lower tax collection = revenue projections must be lowered = higher taxes to support big government = lower economic activities, then repeat the cycle.

I think what this budget has in it is no big tax increases, in an election year I would like to think that voters would be more sensitive to that. There is a "soda tax" to be implemented in due course and a tyre tax, I can't really understand that one. Higher house prices, those in excess of 10 million Rand see a transfer duty payable of a whopping 13 percent (up from 11, a new band here), the duty itself would buy you the average sized house in South Africa. When one thinks about it like that, it seems pretty hefty.

The best collection method, at the fuel pumps, saw a 30 cent hike. I still think that whilst it is not quite a user pay method, it is the best collection. You can't ask the petrol pump attendant to ignore the taxation part when you are filling up. The current levies and taxes (or the old one) was 423.33 cents up here on the highveld, an extra 30 cents, you do the math to see that it is comfortably ahead of inflation. In fact, as a motorist and someone who fills up, per litre you pay less than half for the actual basic fuel price. Up here in Gauteng we pay 12.15 ZAR for 93 Octane Unleaded fuel. (see Octane rating for your daily Chemistry lesson).

Herewith the breakdown, visually, via SAPIA. So there you go, now you know where cents go when you fill up.

OK, the other thing that I noticed was that State Owned Entities (SOE's) had assets valued (using what valuation, I am not too sure) at 1 trillion Rand with state guarantees on SOE debt of 467 billion Rand. There must of course be other debts associated with these entities. The speech pointed out that the value was 27 percent of GDP. Would you think that Transnet, SAA, Eskom, Denel, Safcol and Alexcor were all worth 1 trillion Rand? Ummmm .... not so sure, call me a cynic. Total government debt is projected to cross the 2 trillion Rand market for the first time next year, that is net government debt -> (according to the speech).

Here is where treasury expects to collect all of their taxes:

And here is how your taxes will be spent. The biggest component in the budget is education with basic education taking 15% of the budget and then servicing debt being the fasted growing expense going forward. A ratings downgrade would mean that the debt servicing expense will grow even faster.

Growth is the one component that will make or break the budget and solve a whole host of other social problems, the forecast for 3 years out is only 2.4%. Given that 20% of our GDP is from "Finance, real estate & business services", I would like to see government policies that set us up as a global services/skills centre. When multi-nationals look at South Africa we are still seen as a low cost centre, add to that some basic training, fast internet and less cumbersome labour laws and I think that we will see a stream of FDI. One way to address our very high youth unemployment.

Company corner

MTN released a statement yesterday which the market responded to in a Goldilocks way. Not the best via the website white labelling: MTN-update on fine imposed and cautionary renewal. In short, the company will make "without prejudice good faith" a payment of 250 million Dollars. At the unicorn rate (the official rate) that is 50 billion Naira, at the street rate i.e the real life rate of 370 Naira to the Dollar, that is equal to 92.5 billion Naira. I swear, you cannot make this up, National newspapers are talking about the parallel rate in Nigeria on their websites: Nigerians Shun Money Transfer Agencies as Exchange Rate Gap Widens, the quote:

"THIS DAY learnt that on advice of friends and family members in the country, Nigerians that live abroad now prefer to send dollar cash and other foreign currencies to the country, so that the beneficiary would be able to convert it at the black market rate at higher value. This, they do by giving the cash to anyone coming into the country to help them deliver to the beneficiaries."

I love the way that the newspaper learnt this. Friends and family taking part in the illicit trade of currency, the shock and horror of it all. What the article does point out is that Nigerians send back home around 21 billion Dollars a year, making it the 6th largest recipient of such diaspora remittances. Wow. To put this number into context, it is around 50 percent more than our entire education budget here in South Africa. If the rate of the Naira were to float freely, what impact would that have on the official inflation rate? And more importantly, what does this mean for MTN? I suspect that prices would adjust. And perhaps the country would get stronger inflows.

Anyhow, for our purposes, what does this actually mean? It means that MTN have accepted that there is likely to be some larger fine, and to appease the authorities and to come to a speedy conclusion, they have paid some money over. I guess this is progress, I suspect however until it is "solved" it will not be and there will still be an overhang of sorts. We continue to hold and monitor the situation, the poor share price underperformance is certainly testing the nerve of the most tenacious and patient "buy and hold" crowd.

Home again, home again, jiggety-jog. The Rand is weaker today, stocks are trading up sharply as a result of catchup, Discovery have results this morning, we will analyse this and report back. And of course the biggest news of the day for hipsters is that the Lumineers have pre released a song (called Ophelia) ahead of their whole album release on the 8th of April. Are you as excited as me? You bet yourself I am, that is my genre of music, even if I don't drink craft coffee or have a long beard. Byron is wearing a a borderline hipster shirt today. Talking Byron, wish him huge amounts of happiness and luck ahead of him getting married NEXT Saturday.

Sent to you by Sasha and Michael on behalf of team Vestact.

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Tuesday 23 February 2016

Aspen and the Bolivars

"Year to date the stock is still down 6.62 percent, the move yesterday was up nearly nine and a half percent. The stock is up over 21 percent in less than two weeks. As we pointed out, the stock is still down year to date and over the last 12 months the stock is down over 31 percent. 5 years? Up 246 percent."

Blunders, Episode 2 watch the latest instalment. If you would like to get an email delivered to your inbox, then sign up here: Blunder Alert!

To market to market to buy a fat pig It is budget day today. And whilst most of you may think that it is the most important day of the year for us, it is not. I know that it impacts on all of our lives, higher taxation is not fun for anyone. Although as many have pointed out, a ratings downgrade leading to higher borrowing costs and lower Dollar wealth is worse for those with capital. It does matter what Mr. Market thinks about your ability to meet your obligations. In a world of choices, you can choose investment x or y, investable money thinks in only one dimension.

Switzerland has negative bond yields on their 10 year debt government issue. I can't quite wrap my head around that. Ireland, the country that has made a monster comeback after being in the PIIGS (Portugal/Italy/Ireland/Greece/Spain) category of distressed sovereigns, sees their 10 year bond yield 0.91 percent. True story. Italy, 1.53 percent. Portugal, 3.3 percent. Spain, 1.66 percent. And Greece, 10.26 percent. And us, down here at the tip of the continent? The R186 yield (matures in 2026) is 9.15 percent. It was yielding 9.64 percent nearly a month ago.

Portugal is not just a little safer than us, they have the Draghi bazooka behind them, this is why we need to be prudent. We don't have such luxuries. Our peers globally? According to Bloomberg data -> Rates & Bonds, Brazilian 10 year government issued bonds yield 6.63 percent, Indian government bonds have yields of 7.82 percent. So if I look at it at face value, our bonds are compensating the market for taking risk and lending us money, we are closer to riskier countries like Greece than we are to Brazil. When you look at it that way it feels bad. And perhaps it ought to.

So whilst we watch and it has a direct bearing on all of us, as investors, in truth there is nothing that any of us can do about the budget. And my point about the day not being the most important is due to the fact that we only have control over the investments we pick. And that is what is more important to us, the companies we own, their financial health, their prospects and their positioning. We can choose here. Things you can't choose, your parents, where you were born, what economic class you are born into, your name. And whilst you can change your economic class with much perseverance, I suspect that changing your name may be the easiest thing to do on this list. Choosing companies to own, that is far easier.

The doubled edged sword that is the currency. Rand investments in companies that have their listings in either Europe or the UK have been very attractive recently, over the last few days it became apparent that this is not always one way traffic. The Pound Sterling has been taken to the cleaners on the possibility of the United Kingdom exiting the European Union. I can't imagine anyone would find it a favourable outcome, perhaps one eyed bigots. Stealing what jobs? Morons.

In Rand terms, the two day performance has seen the Rand to the Pound strengthen from 21.97 to the Pound on Monday to 21.27 currently. On the currency. That is nearly 4 percent. In fairness, the Rand and other emerging market countries have been catching a bid in the face of the prospects of rising interest rates, the improvement in commodity prices and a general feeling that emerging market stocks are perhaps too cheap, on a relative basis. My point is that whilst you may feel like you own a "good one" as it is a Rand hedge, what matters the most is the business in the long run. The Rand may well do an about turn if the high road scenario returns. Stay tuned for the budget speech, we certainly are not going to give a hugely detailed analysis, leave that to the experts.

Markets in Jozi, Jozi were under pressure yesterday, led lower by the resource stocks which were down nearly two and a half percent on the day. The other sector that continues to slide and slip are the financials, as a collective those stocks were down just over two and one-quarter of a percent. The All Share was down 1.41 percent by the end of the session, stocks have lost around two and a half percent over the last two sessions.

Over the seas and far away, stocks in New York, New York slid along with the oil price. Again, that correlation which drives me dilly, oil prices and equity markets. It will break, I just don't know when. Energy stocks as a whole slid three and a one quarter of a percent, pushing the broader market S&P 500 down one and one-quarter of a percent down. The nerds of NASDAQ lost nearly a percent and a half as Apple and Microsoft dragged the index lower.

Why did the oil price turn and head south? We had pointed out earlier in the week that the Saudi oil minister was talking at an oil conference in Houston, his comments were hardly favourable for the oil price. Many are expecting oil prices to remain depressed, and that may well drag many marginal businesses with it. Saudi Oil minister Ali al-Naimi ruled out cuts in production, the upshot of it all was an oil price falling 4.5 percent on the day. Iranian comments about oil freeze on production as being "ridiculous". Which means that they don't agree. You would normally expect consumer discretionary stocks to rally on that news, right? No, consumer cyclical stocks as a whole fell nearly 0.4 percent. I guess less than the rest of the market.

Company corner

Finally. And by that I mean the share price of Aspen Pharma moving northwards in a serious manner. Year to date the stock is still down 6.62 percent, the move yesterday was up nearly nine and a half percent. The stock is up over 21 percent in less than two weeks. As we pointed out, the stock is still down year to date and over the last 12 months the stock is down over 31 percent. 5 years? Up 246 percent. As ever with stocks, it depends where you draw your line in the sand when measuring performance. Why has the stock moved so much in the last little while? Yesterday the company released a trading update, we can do a copy and paste of the table from the SENS announcement:

Nice graphics skills, right? Learnt everything I know from Paint Shop Pro version 3 I think, more than just a while back. Nowadays since I have been using a Mac for a number of years now, I use Pixelmator. That name always reminds me of the hillbilly tow truck from Cars. OK, what does this mean, why is there a discrepancy between the different numbers? They (Aspen) say the following: "In order to provide Aspen shareholders with clear comparability of the financial performance of the ongoing underlying business, a measure described as comparable NHEPS has been determined by excluding the contribution from the Divestments." NHEPS being normalised headline earnings per share.

They have decided to do the right thing. And by that I mean take the real rate on the streets (most people refer to this as the black market rate, I'd like to think people are betting at setting markets than governments) in Venezuela. The company fleshes it out:

"The economic situation in Venezuela has deteriorated over the 6 months to 31 December 2015 and the Venezuelan authorities have increasingly limited authorisations to pay for pharmaceutical imports using the official CENCOEX rate during this period of Venezuelan Bolivars ("VEF") 6.30 per USD. As a consequence of the limited payment approvals and the uncertain economic and political situation in Venezuela, Aspen has concluded that it would be more appropriate to apply the SIMADI exchange rate of VEF 200 per USD to report the Venezuelan business financial position, results of its operations and cash flows for the 6 months ended 31 December 2015. This has resulted in a once-off currency devaluation loss on foreign denominated liabilities of R841 million."

How badly has the official rate changed from the real market rate? This is a graphic (very graphic) picture of the divergence of the street rate of the Bolivar to the US dollar, versus the made up rate by the socialist folks who live with their heads in cloud cuckoo land. I am sorry, let me rephrase that, the black market rate versus the official rate. Here is the best hedge I can think of. Take your Dollars, swap them to Bolivars at the ~~black market~~ real rate. Go to the government bank and try and swap your Bolivars to Dollars at the ~~official rate~~ unicorn rate. If you are successful, repeat. Over and over. In reality, this is impossible, you cannot do it. As you can see as per the graph below, 200 Bolivars to the Dollar being wrong. See this graph below from the Economist article: Venezuela: a nation in a state.

Wow. Venezuela is not likely to default this year, but if the oil price stays lower for longer, it is inevitable. The Venezuelans owe the Chinese 17 billion Dollars. If the Venezuelans do default, it would be the second biggest default of all time, after the Greek restructuring in 2012. So there may well be more pain to be experienced in this geography. Herewith, from the final year presentation, you can see that Venezuela is an important contributor to the overall revenue of Aspen, the fifth largest here.

I will be interested to see when the company reports numbers on the 3rd of March. For the time being the company seems to have beaten market expectations handsomely. We will report back then on the company and their prospects, which we still continue to believe is one of the best opportunities in our local market.

Linkfest, lap it up

Which LSM do you fall into? Here is a quick test to give you a general idea - LSM Calculator. LSM stands for Living Standards Measure, it gives you a score based on what things you have access to. Doing the test makes you realise some of things you take for granted.

The next economy that commodity producers are looking at to help boost prices is India, who many would argue has under performed its potential over the last decade or two - The next big shift in the global oil market is underway, and it centers on India. India is forecast to overtake China in 2022 as the worlds most populous country but as you can see below, India is still well behind the US and China in terms of oil demand.

A new gimmick for your coffee machine, the ability to order from your cellphone - Why does this Nespresso machine have Bluetooth? Unless the coffee was brought to me by a robot I am not sure that I would ever use this function, walking to the machine, pushing "start", waiting 30seconds and then taking your coffee is not exactly time consuming.

Home again, home again, jiggety-jog. Stocks across Asia are mixed, Shanghai is up over half a percent, Japanese stocks are off their worst levels, down still over three-quarters of a percent, whilst stocks in Hong Kong are down one and one-third of a percent. We should start mixed here, I am guessing there will be action on the currency later in the day, and possibly also on the stocks that would be consumer facing. Stand by!

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Monday 22 February 2016

Is Sainsburied?

" I think that unless the fellows from Sainsbury can stick their neck out further and find more cash (and no shares) in order to beat the Steinhoff offer, the Frankfurt listed company will win this bidding round."

Blunders, Episode 2 watch the latest instalment. If you would like to get an email delivered to your inbox, then sign up here: Blunder Alert!

To market to market to buy a fat pig It is and was all happening yesterday. Another day of strong gains for oil prices saw stocks up smartly, I am not too sure how that correlation works. I for one think that it is a massive blessing for global consumers to have a glut of oil and much lower prices. Remember that report from late January (The Oil Crash Is Kicking Off One of the Largest Wealth Transfers in Human History), where Bank of American Merrill Lynch analyst Francisco Blanch suggested that there is a 3 trillion Dollar transfer of wealth a year from the oil producers to the consumer. That cannot be bad, right? So when oil prices go down, and people spend less on energy and have more money to spend on other things, that bodes well for consumer related activities?

Believe it or not, the SAME fellow stuck out a note last Friday, covered here by the BusinessInsider: A deadly combination of 2 things has wiped out $3 trillion from stocks. That sounds like a terrible thing. Whilst the 3 trillion Dollars transfer of wealth is a yearly thing, stocks losing their value by this much has an impact on retirement savings. The inability of companies to pay higher dividends (or some, none at all) means that pensioners with some of their savings in oil and gas companies have less to spend as their income is diminished, even if their gasoline bills are lower. It is of course a double edged sword.

It still puzzles me when I read headlines like this: U.S. Stocks Rise With Oil as S&P 500 Rallies to Six-Week High. Energy stocks as a whole in New York, New York, rose over two and three-quarters of a percent, basic materials stocks rose over three percent on the day, propelling the broader market S&P 500 to 1945, up 1.45 percent on the day. And back at levels last seen in the first trading week of the year. Stocks are now "only" down 4.8 percent for the year, and most of that was the first three trading sessions of the year, the opening week of January was particularly brutal. Tech stocks have been beaten up more, and notwithstanding a great 10 days, the nerds of NASDAQ are still down nearly 9 percent year to date.

Phew, January and the first half of February have been heavy going. And as a result of global warming the Santa Claus rally was cancelled, the S&P over the last 12 months is down nearly 8 percent. It hasn't been easy to be a stock investor, in fact, as the Capital Spectator points out, over the last year of trading days (252 days), the only asset class that is up are US bonds. See via this article, Will Last Week's Rebound Make It Two In A Row This Week? there is a nice graphic, showing this:

The two asset classes that have been smashed out of sight are both emerging markets in Dollar terms, down nearly 25 percent and the commodities basket which is down over 30 percent. Foreign stocks, the index that is named VEA is the third worst performing asset class, WORSE THAN US JUNK BONDS!! I had to put that in caps. Do you think that it is that bad in Europe? I personally don't, I still believe that this is the year of the comeback in Europe.

Onto local markets, in Jozi, Jozi, yesterday stocks closed up just over one-third of a percent. Glencore and Anglo American were at the top of the leaderboard, BHP Billiton and South32 not too far behind them. On the flip side were stocks that either had businesses in the UK or were listed there, SABMiller and Discovery feeling the heat from a potential "Brexit". I suspect that as we near the date and the vote is seemingly tighter, stocks will retreat a little. The risks of Britain leaving the zone I guess are around even odds at the moment, I don't see how it can be helpful for the country in the medium to long term, or the short term. I guess the government just needs to ask the people. Such is life.

Relevant for Steinhoff shareholders here, Sainsbury applied to the Takeover panel for an extension to meet the Steinhoff offer, rather than rushing anything, to which they (the Takeover panel) obliged. Both companies have until the 18th of March to table their final offer. I think that unless the fellows from Sainsbury can stick their neck out further and find more cash (and no shares) in order to beat the Steinhoff offer, the Frankfurt listed company will win this bidding round. In other news, Sainsbury has a market cap of less than 5 billion Pounds, which is 6.98 billion Euros. So a 1.4 billion and some more premium for Sainsbury is a lot bigger bite than for Steinhoff, which has a market cap of nearly 19 billion Euros. You read right, Steinhoff is three times bigger than Sainsbury. Sainsbury have brought their Sopwith Camel, whilst Marcus Jooste has a F-16.

Linkfest, lap it up

We are 5 years into 4G being rolled out globally and now the talk shifts to 5G - Ericsson, Nokia offer contrasting timelines for 5G network upgrades. The timeframes seem to be around 5 years until 5G rolls out on large scale.

Cullen Roche has a look at us incorrectly focusing on doom and gloom due to our survival instinct instead of looking at what the longer term holds for us - Let's Talk About the Bubble in Catastrophizing

Wearable tech is now an established consumer segment and Apple stores are now competing with the likes of Swatch - Smartwatches Push Past Swiss Watches for the First Time.

You will find more statistics at Statista

Home again, home again, jiggety-jog. Stocks are lower across Asia as oil prices have fallen. There have been results this morning from Imperial, BHP Billiton, AECI, Aveng and Curro, as well as Wilson Bayly. There is no doubt going to be a huge wave of results over the coming weeks, many of the December year end (and half year) companies are going to be pushing it hard here. We should start mixed today.

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Steinhoff Pounding it

"We saw the Steinhoff news on Friday, there is confirmation this morning that the company is offering the Home Retail Group (HRG) shareholder a total offer of 175 pence a share. The Home Retail Group website says on the Investor Relations page: "Despite challenges in our markets, we’ve maintained our multi-channel leadership position and continue to be the UK’s leading home and general merchandise retailer.""

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To market to market to buy a fat pig Phew, we took a proper beating on Friday. Inside of the ALSI 40 I am afraid the winners were sparse, only two precious metal stocks in the form of Amplats and AngloGold Ashanti showed any gains, MTN was at the bottom of the pile by a country mile, the stock ended the session 18 percent lower than where they started. There were and are serious concerns around Nigeria, their largest operating territory in terms of subscribers, results next week will reveal a little more on what they can do around the regulatory environment. I am afraid that until we get some sort of resolution, the overhang will continue to weigh on the stock. Meanwhile the regulatory environment is starting to impact on their profitability, it has been more than a little tough, it has been plain horrible.

There was also selling in the financial and bank stocks, with inflation outside of the band for the first time in a long time, the Reserve Bank has shown their willingness to hike rates as and when they see fit, it is not the best news for what is an already distressed South African consumer. I suppose it is all part of the cycles, growth and lack thereof, interest rates heading in the wrong direction for those people who have cash on hand. Do you remember that ABSA (I think ABSA) advert from the late 90's, where the family were trying their best to hold onto their home as interest rates rocketed. A husband and wife, with their two children had a home lassoed, and it was drifting into the sky, a bit like that movie UP. Michael sent me the link, courtesy of TradingEconomics, here is a history of South African interest rates since 1998 (all the data that they have):

Remember when the Repo rate was over 20 percent? No wonder that advert was talking about holding tight to your home. The cost of debt back then was exorbitant. To service a 1 million Rand mortgage, over twenty years at a prime interest rate of 25 percent was nearly 21 thousand Rand a month. Fast forward to 2012, at prime of around eight and a half percent, the same repayments over twenty years per million Rand would be just over eight and a half thousand Rand.

Present day, with prime being 10.25 percent, repayments per 1 million Rand of home loan debt equals just shy of 10 thousand Rand. So whilst you can be forgiven for thinking that it has gotten tough lately, in a context of a pretty volatile (and a period of much higher inflation in the past) environment, is still historically low. We also forget that inflation was in excess of 8 percent in 2009. Remember? Forgot? So I guess these are just natural cycles, emerging markets are not in favour (again) and as such we, along with Turkey, Russia, Brazil and Indonesia, all of those countries are out of favour. The EM vortex.

Over the seas and far away, stocks in New York closed the session much higher than where they started, the S&P 500 closed the session out almost flat, a fraction of a point lower. It was still enough for the best week of the year so far and the rally over the last 7 or so trading sessions has been enough to pare back half of the losses of the year so far. The nerds of NASDAQ had a good session, up nearly four-tenths of a percent on the day, energy stocks continue to take a little heat, US inventories at a nearly 9 decade high. We are awash with oil.

Not only is there loads of it around, I read a pretty interesting article over the weekend: Commodity Slump Puts Dry-Bulk Shipping on Hold. Wow, if you can't read it (subscriber paywall), shipping brokers estimate that 7 percent of the global fleet (nearly 700 ships) are currently standing idle. Going nowhere. Not doing anything. And the Baltic Dry Bulk Index is trading near a multi decade low, the index was down 12 days ago at a 31 year low. It is up over two percent since then, 315 is where the index is now. Over one year the index is down nearly 40 percent. It is not surprising then I guess that Grindrod is down 52 percent over the last 12 months. AP Moeller Maersk is down 41 percent over the last 12 months. You get the picture. Whether it has turned the corner or not, that remains to be seen.

This week the Saudi oil minister and the OPEC chief speaks today and tomorrow, we should get some insight into what the course of action (if any) from them is. There are results from some heavy hitting US retailers, that should again give some useful insight into the health of the US consumer. I am looking forward to that! And then, on the local front of course we have the budget speech, that is possibly the most exciting thing to talk about.

Company corner

We saw the Steinhoff news on Friday, there is confirmation this morning that the company is offering the Home Retail Group (HRG) shareholder a total offer of 175 pence a share. The Home Retail Group website says on the Investor Relations page: "Despite challenges in our markets, we’ve maintained our multi-channel leadership position and continue to be the UK’s leading home and general merchandise retailer." I see. It is a sizeable business, in terms of its depth across the length and breadth of the United Kingdom, over 1000 stores employing 47 thousand folks and selling 90 thousand plus products.

They (HRG) have two brands, Argos, which sells anything from hair dryers to Jimmy Choos and Homebase, which sells everything from paint to plumbing equipment. Homeware and retail, that sounds about right up the alley of Steinhoff. Added to this is a pretty sizeable Financial Services arm, that offers credit to their shoppers. According to the HRG website, they have 1.5 million active card holders and this is the UK's biggest store card business. This is the split of sales and profits:

So how much is 175 pence a share? It is roughly a 15 percent premium to the current share price, 1.4 billion Pounds. The stock is up over 50 percent year to date on the fact that Sainsbury are also bidding for HRG. Steinhoff's bid is 111 million Pounds more than Sainsbury's, around 8.5 percent higher. Also ongoing in the background is the fact that HRG is selling Homebase to Wesfarmers. Complicated. What is also interesting to note is that whilst the Steinhoff offer is higher, it is all cash, whilst Sainsbury's bid is a mix of cash and scrip. In terms of UK company law, Sainsbury have to "put up or shut up" by the close of business tomorrow.

How big is this in terms of Steinhoff's market cap? 1.4 billion Pounds = 1.8 billion Euros. The Steinhoff market cap is 18 billion Euros in Frankfurt, this is one-tenth of their market cap, a sizeable deal by any stretch of the imagination. This signals that Marcus Jooste is really intent on growing and building this empire. We watch and wait to see firstly whether or not Sainsbury will counter, what is most important to remember is whether or not the HRG shareholders WANT this deal to happen. The shareholders have been long suffering, down 38 percent over ten years, down 34 percent over 5 years. Down 15 percent over 2 years. With the 50 percent uptick year to date, this is very tempting.

Linkfest, lap it up

Business Insider did a great experiment, what would your portfolio look like if you invested monthly from the market peak in 2007 - Here's the smartest way to invest in stocks if you're convinced the market will keep crashing. If you assume that you can not predict short term market movements and that over the long run the stock market will continue to rise due to human innovation and population growth, then dollar cost averaging is the best way to invest. If you are not investing monthly/ quarterly in stocks then you are missing a trick.

This seems to be a step backwards from the Chinese government, new regulations for mobile payments industry will be a huge knock to growth rates - Alibaba and Tencent’s booming mobile payments businesses could hit a speed bump in China

Home again, home again, jiggety-jog. Congrats to Paul for setting a PB over the weekend, 3h11 for a marathon or in layman terms running 42km at around 4:30 /km! Stocks are up smartly this morning, commodity stocks are up the most. Shanghai stocks are up sharply, stocks in Hong Kong are "doing well", as are stocks in Tokyo. Saved? I guess most of the issues remain, I am guessing that as we lead into June the 23rd, and with the Brexit scenario raring its head, we may get some market pushback. In market terms that is light years away however.

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Friday 19 February 2016

IT and Healthcare

"I want to copy and paste an important paragraph from the last published annual report, that underscores why we want to continue to own this business: "Size matters because health care is the largest sector in almost all worldwide economies. It has tremendous complexities, breadth and reach. Our size alone is of no value without vision, agility and real skills." Deteriorating individual health does not know creed, race, colour or economic background. Obviously the more resources you have, the greater the ability to deal with healthcare problems."

There is a new episode. Watch the second instalment of Business Blunders on the Vestact TV YouTube channel, remember to share the video. Blunders - Episode 2. Sign up, if you have not already, so that you never miss a beat: Blunder Alert!

To market to market to buy a fat pig We started up and away, stocks however slipped during the course of the day and we slid to the worst levels of the day at the close. Do you want to know why the rand is strong? Is it as a result of some politician saying something here or there? No. Whilst ordinary people think that this is the case, see the Dollar index -> U.S. Dollar Index (DXY), trading near the weakest levels in three months. Ahhh .... Please don't be the person that associates whatever someone does in parliament or what the president says about the state of the nation as being reflected in the level of the Rand.

Bernie Sanders and Donald Trump (god help him) are the polarised left and right of the US, do you see the Dollar plunging? Apparently Donald Trump makes people nervous, that is what Bright's hero Howard Marks of Oaktree Capital said on Bloomberg yesterday. President Obama said he had faith in the US people to not elect him. The Pope and Trump are saying things about each other. It is all happening. Only in a modern world. Do you see the Euro falling or the gold price spiking, or Dollar tanking as the Pope, Donald Trump, Barrack Obama, Bernie Sanders speak openly about "stuff"? When our president speaks in parliament, the Rand isn't going to do this or that, ok?

Our currency (and all other currencies) will trade as a function of global markets view of emerging markets (and all other markets), and their ability to grow (or in this case, stave off contraction). Commodity prices are set by supply and demand. And the latest CPI data, outside of the range, suggests another rate hike looming. Which may be another reason that the Rand is catching a bid. Equally, commodity prices have ticked up a little recently.

If your main customer and consumer of commodities (China) is needing volumes that are not growing at the pace before, then that is not necessarily your "fault". All commodity producers could have done better to diversify their economies. We are not Brazil. Or Russia. Or Venezuela for that case -> Venezuela Devalues Currency As Economic Crisis Deepens.

The Bus driver (the president's job in a past life) has driven this economy off the cliff, you could argue that the oil price falling wasn't his fault, ironically as a result of the Americans pumping greater volumes led to that. Sorry chaps, the capitalists won again. A client of ours here at Vestact told me that their ex husband remembers a family member in the Weimar Republic in Germany burning bank notes to stay warm. Try fool the market with your idiotic economic policies, people eventually reject you. The low oil price may be a curse for modern day Venezuela, it may well be the catalyst for reform. Caracas is the most violent city in the world. For the people of course. Well done Hugo Chavez, your version of extreme socialism didn't work, neither will future versions work. Of course not everyone agrees, that is why many states still exists with the word "people" in their long name and a single leader at the top.

Away from politics, as they say, never discuss that and religion and I have committed writing harakiri by doing both. Sigh. Back to Mr. Market. There has a great deal of sentiment and equally strange views about the world (it is always ending for some people), the earnings season which just passed was OK, there are obvious problems. Not insurmountable though. We will be fine. Take advantage of the same companies at a weaker price.

Markets in New York, New York last evening closed down, the nerds of NASDAQ fell over a percent, the broader market around half a percent and the blue chip index, the Dow Industrials sank around one quarter of a percent. That is weird, it is not too often that you see that, normally the indices are closer to one another. IBM was the difference, that stock was up 5 percent higher on the day. The one year return has been minus 17 and a half percent, the five year return has been minus 19.65 percent. Wow. Stretch that out some more, and the 10 year return is 64 percent, a positive at least. Believe it or not, whilst IBM might seem to be flopping all over the show, the company has a better ten year return than the S&P 500. Which is only up 49 percent. So sometimes a longer perspective is needed.

In the background, Walmart, as per the FT article suffers worst sales performance in 35 years. Without the impact of the stronger Dollar, sales would have increased by nearly 3 percent, rather than contracting. I guess people are starting to ask questions about how it all works, what is the future of the retail environment. They have the distribution network to adapt is my sense, it will just take some careful engineering on their part. They should get it right, in the mean time, Amazon has gone from an outside competitor to a real threat.

Company corner

Health care is too important to stay the same. That is the payoff line for the company Cerner, founded in 1979 by three Arthur Andersen employees. The company is the largest standalone healthcare IT business in the world, essentially they operate where medical care and information technology collide. Two of those founders are still there, the CEO (and Chairman), Neal Patterson and Vice Chairman Clifford Illig.

Recently Neal Patterson has started treatment for Cancer, which has been described as both treatable and curable. As you would expect, the founder and CEO is quoted as saying: "It's not often I'm forced to slow down, but the silver lining will be having some extra 'think' time to reflect on all the extraordinary opportunities we have in health IT. After years of studying health care systems around the world, this unique opportunity already has my gears turning." I guess that is the nature of an entrepreneur, always thinking and always looking for new angles. He plans to stay active in the business, fewer meetings and less travel being the order of the day. So whilst Patterson is in therapy, he still remains operational.

He went through therapies with his wife, who herself had cancer towards the end of 2014, and knew that there is plenty of work for his business to do, he remembers lugging vast amounts of physical records when visiting specialists. The story is personal to him and the millions of other people who want specialists and health professionals all around the world to make sure that their records are readily available.

I want to copy and paste an important paragraph from the last published annual report, that underscores why we want to continue to own this business: "Size matters because health care is the largest sector in almost all worldwide economies. It has tremendous complexities, breadth and reach. Our size alone is of no value without vision, agility and real skills." Deteriorating individual health does not know creed, race, colour or economic background. Obviously the more resources you have, the greater the ability to deal with healthcare problems.

The results for the full year were by most metrics very good, the only issues were that bookings were weak. And this was on top of the fact that revenue backlogs increased to 14.2 billion Dollars from 10.6 billion Dollars the year prior, there certainly is a lot of demand for their products! Making healthcare electronic is a top priority. It is becoming an increasingly competitive space, loyalty for new business is often at pricing point. The company obviously has long standing relationships.

So why did the share price swoon by as much as 13-14 percent pre market? The stock ended down 4.8 percent down by the end of the session Wednesday, recovering a lot off the worst, ending the session at 52.79 Dollars. It was trading at a 52 week low, at the beginning of the session, 49.89 Dollars at one stage. The 52 week high is 75.72 Dollars. The share price is down 30 percent from the highs from last April. Why? I suspect that when your stock trades on a very high multiple, you have to deliver earnings in the high twenties, percentage wise. It is not that they haven't grown earnings aggressively, the market has cooled towards healthcare and technology, their peer grouping, Athena Health particularly as an example, is equally off as much.

Current year estimates suggest a 20 percent rise in HEPS to just shy of 2.40 Dollars, which is around a 23 multiple, the estimates for next year of 2.70 Dollars of earnings, means that the stock trades on a 20 multiple two years out. I think that for the growth prospects, this represents a really good opportunity to buy a quality business that sits squarely inside of two industries that have serious growth potential, healthcare and information technology. And they represent the glue in-between. Buy.

MTN released a really ugly looking trading statement yesterday after the market closed. Earnings are likely to be more than 20 percent lower for the full year to end 31 December 2015. HEPS in 2014 was 1536, it is likely that HEPS will be 307 cents lower than that. In other words, from 1229 cents per share or lower than that. Which means that at the TOP end of the range, the stock will trade (after the results on March the 3rd) on an earnings multiple of at least 12.5, possibly much higher if the earnings are likely to be much worse than that. And this excludes the pending Nigerian fine.

What does it look so bad? "The negative earnings performance has been impacted by a number of factors with the operational underperformance in Nigeria, resulting from the subscriber disconnections and the withholding of regulatory services, being a key contributor to this." How do you say, not good in Igbo and Hausa? Those of course are some of the regional languages spoken in Nigeria, bearing in mind that English is the official language.

We continue to evaluate the business, this may be a once off, wrestling with the regulator, or it may be part of an ongoing trend across the continent, governments under pressure to raise revenues looking at softer targets. The dividend will certainly matter here, there are undoubtably many institutions that hold the business for there cash flows. If the dividend is pruned back to the stem, you may see aggressive selling. Expect the stock to take some heat today.

Linkfest, lap it up

One of the advantages of Elon Musk being involved with two renewable energy companies is that they can leverage off each others experience. The Tesla gigafactory will use solar panels from Solar City and now SolarCity to Use Tesla Batteries for Project in Hawaii.

Markets still are trying to find the most effective way to broadcast over social media. Despite this they are doubling their allocation towards social media which is great for the likes of Facebook and Twitter - Marketers Keep Spending on Social Despite Lack of Results.

I think that this is a great way to empower people - An Indian company is launching a $4 smartphone. There is an added benefit that the manufacturing of the phone will also create jobs on the ground in India.

Home again, home again, jiggety-jog. Stocks are mostly lower, Shanghai not as much as Hong Kong. Japanese stocks are off around one and a half percent, US futures are marginally better, we should open a little lower again. The Rand is stronger, perhaps the president had eggs for breakfast that was easy over and just right?

Sent to you by Sasha and Michael on behalf of team Vestact.

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