Money with a dash of Funny: August 2016

Wednesday 31 August 2016

Tax Breaks the Bank

"There has been a big push recently by the international tax community to standardise tax codes, increase information sharing and close loop holes for companies operating in more than one country. Last year the OECD implemented their model tax convention, which all the OECD member countries and some non-member countries will aim at conforming to.

To market to market to buy a fat pig The big news out yesterday was the official tax bill that Apple will have to pay to Ireland (Europe), even though Ireland doesn't want the money. The investigation is less about Apple and what it owes and more about tax authorities setting precedence for how to tax multinationals. This topic is becoming increasingly important as the globe becomes smaller through technology, where do you tax a company that sells cloud storage to company X, has the server farm in country Y, has it's head office in country Z and then has the call centre support staff in country A?

There has been a big push recently by the international tax community to standardise tax codes, increase information sharing and close loop holes for companies operating in more than one country. Last year the OECD implemented their model tax convention, which all the OECD member countries and some non-member countries will aim at conforming to. A big part of the convention is sharing information between tax authorities on people and companies who have operations in more than one jurisdiction. Apple may have to face something similar, where other countries may come forward saying that Apple owes them tax based on this investigation.

Part of the issues being argued by the investigators is that Apple had special treatment on the amount of tax that they paid, treatment that other smaller companies (potential competitors) were not able to receive. I agree that something needs to be done if the tax code subscribed to Apple is one of a kind and not available to other companies. Competition is the corner stone that a functioning economy is built on. It is key that operators who are inefficient are overtaken by more efficient and innovative operations. The same principal needs to apply to countries and governments though. If one country can charge a lower tax rate because their public offices are not bloated and the tax money is spent efficiently or like the case in Ireland where they want to be as business friendly as possible to create jobs, then the country should be able to have a low tax rate. Part of the Apple statement yesterday, touches on the jobs topic; "It will have a profound and harmful effect on investment and job creation in Europe".

To summarise, Apple will need to pay over $14.5 billion, plus interest to the Irish government, even before appealing the decision. This is neither here nor there for Apple, they have cash sitting at around $231 billion at last count, for other companies it may have been a problem because they might have needed to go to the debt markets to raise the cash. The way I understand it, the cash will sit in an escrow earning interest (if there is any interest to be earned) until the matter is settled. Both Apple and Ireland will be appealing the decision. Then lastly, the market doesn't seem too concerned about the news, the stock was down 0.77%. A good article that I read on this topic is - Here's What You Need To Know About Apple's $14.5 Billion EU Tax Bill.

A quick look at the markets, another flat day for The Alsi down 0.2%, Gold stocks under more pressure, down 3% as a collective. For the US markets all three major indexes were down 0.3%, adding to the streak of basically no volatility in US equities. A positive close for The Dow and The S&P 500 today will mean 7 straight months of gains and 6 straight months of gains respectively. Remember the very rough start to the year where US markets were down 10% for the year? Markets are now up 6.5%, which shows the speed at which things can change, don't forget to throw a Brexit into the mix here too.

Company corner

Steinhoff released their Unaudited financial update for the year ending 30 June this morning. The numbers look strong with a 33% growth in Revenue (now stated in Euro's) and a 32% increase in operating profit. From a global diversification point of view, 68% of their revenues come from Europe and Australasia, with the remaining 32% coming from Africa. If their purchase of the US based Mattress Firm goes through they will add even further diversification to their revenue streams. The large purchase of PepKor looks to be doing well, with constant currency revenues up 19%. Given all the moving parts with their acquisitions, issuing of new shares and taking on more debt we will have to wait until the 7 September to see the exact impact on EPS.

Linkfest, lap it up

Here is a graph putting Apples new tax bill into context - Apple's Foreign Tax Payments Since 2003

You will find more statistics at Statista

The one product that I am excited about is the Apple watch 2. I'm hoping that they boost the watches functionality for exercising, first thing coming to mind is having its own GPS. We will know at the product launch on the 7 September, here is a leaked spec, longer battery life - The new Apple Watch might have a longer-lasting battery.

Buffett turned 86 yesterday, to mark the occasion Business Insider complied some interesting facts about him - 14 stunning facts about Warren Buffett and his wealth

An interesting map showing how people tend to collect in major areas. It would explain why property values in cities have been skyrocketing over the last few decades - European Population Density: The Black & Blue Areas Have Identical Populations. I imagine that in the not too distant future, the way we work is going to change where we have to be. We may not be required in an office 5 days a week opening up the opportunity for people to move out of cities.

Home again, home again, jiggety-jog. Our market is down 0.5% this morning, being led lower by resource stocks. Steinhoff is also down following their trading statement this morning, down 2% as I write. Market moving news out today is CPI numbers out of Europe, the figure has a large bearing on what Super Mario does going forward with monetary policy.

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

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Tuesday 30 August 2016

Apples in Ireland

"We will have to wait until the finding is released to hear what the amount will be. Then there will probably be another round of court cases fighting certain aspects of the finding, so I don't see cash changing hands anytime soon."

To market to market to buy a fat pig Another day, still slow volatility, mostly in the US. The ALSI finished up 0.11% yesterday after swimming between green and red for most of the day. In the US, The Dow was up 0.58%, The S&P 500 up 0.52% and the Nasdaq up 0.26%. Potential market moving news out last night was that Apple may face a hefty tax bill in Europe due to its corporate tax structure being viewed as unfair, Apple's Irish Tax Bill May Run Into Billions of Euros. We will have to wait until the finding is released to hear what the amount will be. Then there will probably be another round of court cases fighting certain aspects of the finding, so I don't see cash changing hands anytime soon.

Sticking with Apple, the grand unveiling of the new iPhone has been announced. It is the 7th of September, so you only have a week to wait till we see what the new design is and if the phone does or does not have a headphone jack. (Apple sent invitations for the iPhone 7 event on September 7). The reports are that the phone this year will be very similar to the iPhone 6S and that next year, the 10 year anniversary of the iPhone we will see big changes to the product.

In portfolio construction one of the key objectives is to try and balance within different sectors of the economy and within different businesses that are likely to perform well under all circumstances. This isn't always possible, as you well know, when holding a portfolio of assets some will perform better than others, on paper. The price action of the stocks attached to the companies vary in ways that you may, or may not expect. The market as a collective isn't always right and has been responsible as a collective for some darn awful mistakes, think recently the housing crash in the US that led to a global financial crisis, as banks, individuals and savings institutions were are equally oblivious to the risks and the perceived risks. I recall at the time thinking that it wasn't a big deal.

Strangely, through the worst crisis of our time, there were some stocks of a consumer nature that actually gained in value. Apple is the perfect example. If you had sold everything as a result of the financial crisis storm, you may have missed one of the greatest rallies (in single stocks) of all time. There were some sectors that were near terminal, there are some banks that have not recovered (both from a share price and share dilution point of view) and may well never recover. There are going to be some sectors that you should try and not time and you should avoid. Or at least we think so, building and construction is one. For the most part, banking is not a favourite. Mining is also hard to call the cycles, energy is equally difficult. Who would have called the recent oil price moves with any accuracy?

From personal experience, when discussing a selection of stocks in a portfolio, retail clients will cast their eyes to the stocks that have done the worst. You may well have a portfolio of ten or twelve stocks, all of them may be up bar for one, the one will be the topic of conversation. There may well be in amongst the others a stock that is woefully overvalued at that point, again human nature dictates and expects equities to rise, so we shan't and won't visit that topic. We hate losing. Which is a good thing. The very nature of owning stocks is a risk in itself for many private individuals, it is a giant hurdle that they have been able to overcome and now they must deal with losses and gains simultaneously on specific holdings, trying to decipher it all is like trying to crack the Enigma code. We are of course all afraid of the unknown. The unknown is exactly what we embrace when owning stocks.

In the markets we all have the same objectives (we all want to make money), we just have different time frames and entry (and exit) points. Take the case of a young saver starting out, their portfolio will evolve over decades and they can equally chop and change whilst their share portfolio morphs into a more substantial retirement savings pot. For them it matters little whether the share prices go up or down, in fact, if they can continually add whilst the prices are lower, that is a very, very beneficial outcome. For the older retiree, that may be owning equities for the first time, the prospect of owning more shares in a down trending market is like being forced to watch countless re-runs of electioneering clips. Painful. Even if life dishes you up different circumstances at different ages, your savings pots are there for a rainy day, whether you need it for medical emergencies as a younger or older person.

So here is a trick that I suggest we try more of. Drop the profits and losses columns on the spreadsheets. Have values only. Have cash flows attached to those values. See if it all stacks up. Some companies are very likely to confound you when talking about said cashflows, I recall a time that banks dished out large lolly, technology companies paid nothing. That is changing, as companies mature (and others are forced to stump up higher reserves). What companies do with their cash changes. Berkshire never pays dividends, that doesn't mean it isn't a "good one", on the contrary. You may be forced to sell a single stock every couple of years to meet retirement goals, and deal with the capital gains, rather gains than losses! Less intense analysing and more long term eyes on the prize!

Linkfest, lap it up

Paul was chatting to Bruce last night on 702 about money, investing and lessons learnt so far in life - 'Collect experiences, NOT possessions!' - Paul Theron. IF you have 17min it is worth a listen.

This an interesting link between buildings and markets - Do Newly Built Skyscrapers Signal The Top of the Stock Market?. It is interesting that the most expensive house in the world cost $1 billion to build, it is Mukesh Ambani's house in Mumbai of 27 stories. Compare that to the price tag of the worlds tallest building coming in at $1.5 billion, does that mean building costs in India are really high?

Here is a great example of how to say the same thing but change the perception that people have. Authors and researchers have a large amount of power over how their research is interpreted by others, where no doubt people biases come to play - How to Lie With Fed Statistics. Here is an example, "There was a study a number of years ago that split a number of people into two separate groups. One was asked if they thought it was possible to save 20% of their income. About 50% of them said yes. The other group was asked if they could live on 80% of their income (thus saving the remaining 20%). In this group, nearly 80% said yes."

When it comes to music Japan seems to have been left behind - Why Japan has more old-fashioned music stores than anywhere else in the world

Home again, home again, jiggety-jog. Our market opened in the green this morning but is heading for the red. On the currency front we are still around that $/R 14.40 level which it will probably stay around until there is more news out of the political arena locally or US economic data.

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

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Monday 29 August 2016

A Chunky dish served at Famous Brands

"A stock that is doing well at the moment & trading under cautionary is Famous Brands, reaching a new all time high of R155 a share, great to see. The stock highlights the need to be patient when investing, the stock price stayed rooted to the R100 level for a chunk of 2013, all of 2014 and the start of 2015."

To market to market to buy a fat pig Friday marked the day when Janet Yellen spoke at Jackson Hole, CNBC even had a count down timer on their screen throughout the day. The speech was very over hyped, I think this headline sums things up - Janet Yellen's speech was wishy-washy. Now what?. All that hype and still not clear when the next interest rate hike will be. The Dollar strengthened as traders are still expecting a rate hike to happen this year, markets are indicating a 33% chance of a rate hike in September from 21% before the speech and then a 59% chance of a December hike from 52%.

All in all, the rate hike will happen when it happens, when the US economy is in a strong position. Rewind to this time last year, it was almost a foregone conclusion that September 2015 was going to be the month of the first rate hike in almost 10 years and that 2016 would see at least 4 more further rate hikes. In the end we only saw a rate hike in December 2015 and zero rate hikes so far this year. Don't focus on the FED for investment timing decisions, when the FED move they will do it based on what is best for the US economy, a strong US economy is then good for the long term performance of companies operating in that country.

Onto the market movements for Friday, our local market closed slightly in the green. US markets closed slightly lower (the NASDAQ was up 0.1%), with the S&P500 extending its streak of not moving more than 1% on any particular trading day. This week is jobs week again, this is where we will get a good idea of how the US labour market is performing and get a clearer picture of interest rate policy. Can you remember what the last jobs number was? It was an addition of 255 000 jobs for the month of July, ahead of expectations, the June number was also revised higher to 290 000 (People always forget that numbers are revised regularly).

Investment Lesson: A stock that is doing well at the moment & trading under cautionary is Famous Brands, reaching a new all time high of R155 a share, great to see. The stock highlights the need to be patient when investing, the stock price stayed rooted to the R100 level for a chunk of 2013, all of 2014 and the start of 2015. If I had asked you if you would take a 50% return (not to mention the very healthy dividend that that pay) over 3 years you would have jumped at the opportunity. We saw people getting frustrated with the stock and the company 'doing nothing' towards the end of 2014, where selling seemed like the required action for the stock. Returns in the market are normally chunky, where you don't know when that short period of outperformance will occur. This is the reason to not try time the market because emotions get in the way and you end up missing these periods of stock price increases. Buy the quality and then relax.

Linkfest, lap it up

The term low oil prices is very relative, in 1998 it was at the $10 a barrel level. Here is an interesting look at the workings of the oil market, note the average production cost for each country - Which Countries Are Damaged Most by Low Oil Prices?.

Here is a list of some of the recent stock market crashes. Note how quick most of these crashes last, minutes in some cases and unless you were highly leveraged and paying very close attention you would not even know they happened - A short history of stock market crashes. Many research studies have shown that not looking at your portfolio regularly leads to better returns and less stress!

Have a look at how much time, trial and error goes into designing a new tech product - Inside Building 87, Microsoft's hidden mad science laboratory.

Global inflation levels have cooled off over the last few years, with the likes of Japan and Europe fighting to stave off deflation. Here is a look at the different price changes in different industries, the price changes show where there are demand and supply imbalances, like education - Why Gauging Inflation Is So Hard

Home again, home again, jiggety-jog. Our market is down today, the Rand is weaker too, what I should say is that the Dollar is stronger due to the speech from Yellen on Friday. A higher chance of an interest rate hike means more people want their money in US when that happens, hence stronger currency. US futures are also pointing to a lower open but most people there are not out of bed yet, so this may change between now and when their market opens.

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

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Friday 26 August 2016

Woolies Weathers the Winter

"Funnily enough a late winter in both Australia and South Africa took much of the headlines. CEO Ian Moir even said on the radio that they had employed meteorologists to try and predict the seasons. Thats what fast clothing retail has become. Gone are the days when one leather jacket would last you 15 winters."

To market to market to buy a fat pig Yesterday marked the 34th straight day that the S&P 500 moved less than 1% in a trading day. From having a very volatile end to last year and start of this year, we have now had rather smooth sailing since July. Today we might see a bit more movement, there is a GDP number out of the US and Janet Yellen is speaking 30 minutes into the trading session. I don't expect her to say anything that the market doesn't already know and the GDP read will probably be in the ball park of what economists have forecast, so maybe we can make the 1% streak 35 days. The S&P 500 was down 0.14%, The Dow was down 0.18% and the NASDAQ was down 0.11%.

Our market was also in the red yesterday, down 0.14%. Sibanye was down 3.2% yesterday after their 6 month numbers were released. The results were good but the market was expecting a bit more, maybe unfairly so. The stock is up a whopping 340% over the last 12 months. The management team have done well to manage their local assets and then move into platinum when people were running for the exits, time will tell though if that was a master move or not.

Behavioural economics is the only segment of economics that really excites me. To me, Economics is not a perfect science, nor is it math, it is the interpretation of statistics and what it means. If government x acts like y, the outcome isn't always the same as the last time, you have people who can u-turn at the drop of a hat. Governments can spend and reign in spend at the drop of a hat. Individuals react to situations today that have long lasting and reaching effects for tomorrow. For example, the financial crisis forced children to stay at home for longer (their parents may complain, secretly they are happy about it) and delayed plans to buy houses. Houses became harder to buy. Millennials saved more than they spent. Financial institutions were forced to become less risk averse and hopefully never to return to reckless lending.

This is "fun and easy and I am good at it" suddenly didn't exist any more. At a micro level, you can get children in the same family that spend or save, same background, same lessons. Human behaviour dictates that whilst we are given foundations in order to act in a certain way, our hard coded DNA is all wired differently. The Chicago Board Options Exchange tries to measure and replicate "fear and greed", both very different and bad emotions to have when investing in the stock market. When trading, perhaps not so much, this may well be a very good set of characteristics. As I often say, we haven't tried it (trading), so I wouldn't know. Trading I suspect, you either have the knack, or like many golfers who are at the edge of really cracking it (excellent at what they do, just can't make any money), mentally you need it all there.

What makes George Soros tick and what makes Carl Icahn tick are probably very similar and different at the same time. Icahn hustles, Soros may be out and in before you catch wind of it, and he may be telling you very different things. David Tepper, Kyle Bass and John Paulson all essentially made money on different sides of the cycle on essentially the same thing. Bass and Paulson bet against the mortgage market, Tepper bet that banks and financials would recover in the aftermath. Same event, the financial crisis which involved reckless lending and borrowing (it takes two to tango), different trading methodology and same outcomes. Whilst these were "trades", they were also longer dated bets on specific events. In so much that some people won huge, many financial institutions had to hand out pink slips on many a trading desk. The untold stories.

Greed had much to do with the financial crisis. And right now, somewhere and somehow, the next crisis is brewing. Jamie Dimon replied to his teenage daughter who asked what is a financial crisis, that it was something that happened every 6 to 8 years. Economic cycles come and go, the last downturn may have been overdue and far deeper than most expected, what is important is that you do not act with fear as an investor. There is nothing you can do about the economy, there is very little you can do about stock prices of the businesses you own. There is everything you can do about whether or not you should own that specific business, that part is very clear, yet this gets lost in the cloudiness and blur between company and stock price.

Speaking to retail investors is very rewarding, genuinely helping people save for their dreams and meeting goals can be fun for all concerned. Having to act as a shock absorber during the tough times is equally rewarding, provided the thesis remains true and that the desired outcome (in the subsequent earnings bounce back) holds true. It is much harder to tell someone that they should not follow their fear instinct and should "flight". In the case of holding quality equities, your flght instinct is often more valuable in these cases. Fight, as it is right. Quality outlives the troughs of equity markets. Don't let your fright spook you into doing something you will regret. Fight, not fright.

Company corner

Yesterday we received another set of solid full year results from our favoured retail stock, Woolworths. Lets delve into the numbers straight away and then we can discuss the different segments.

Group sales increased by 16.4% to R72bn. Basic headline earnings increased 44% but if you include the extra shares from the rights issue headline earnings per share increased 8.9% to R4.56. Trading at R87 a share the stock affords a respectable multiple of 19 and a dividend yield of 3.6% before tax (313c per share to be paid this year).

Sometimes a picture says a thousand words, this infographic from the presentation says more.

Often referred to as a grocer, Woolworths only makes one quarter of their profits from selling food. That segment grew 11.9% due to a 5.7% growth in volume and a 6.7% growth in price. The Woolies client is still happy to pay up for quality. Profits in this segment grew 15.6%.

As you can see, the clothing division is divided into 3 segments. Clothing and General Merchandise, David Jones and Country Road. Funnily enough a late winter in both Australia and South Africa took much of the headlines. CEO Ian Moir even said on the radio that they had employed meteorologists to try and predict the seasons. Thats what fast clothing retail has become. Gone are the days when one leather jacket would last you 15 winters. These days you have to stick to the trends. A cold winters breeze on your skin sends you straight to the Woolies to buy the latest jackets. Despite this, Clothing sales grew 9.6%, David Jones grew 8.4% and Country Road grew 5.5%.

When they bought David Jones the business needed a fresh turn around and that is exactly what we are seeing. Woolies management have a great knack for creating a world class retail experience which draws customers in. They have sold one of the old legacy properties for R3.8bn and will be using R2.1bn to build a brand spanking new, 7 story department and food store in Sydney. I am sure it is going to be fantastic. Because of its proximity to Asia, Australia is fast becoming a big luxury goods destination. I am very confident in that economy's ability to diversify and thrive even with lower commodity prices.

And that is why we own the company. We back the fabulous management to continue to bring in clients and maintain quality products. Retail in general will remain competitive, tough and cyclical. These guys have the ability and quality to ride these waves and continue to produce stellar results. I think at a historic PE of 19 and forward closer to 16.5 the stock is presenting a great buying opportunity. Plus you are getting paid over 3% yield as a bonus.

Linkfest, lap it up

Facebook is looking to get a return on their 19 billion investment. The key here is not be too invasive or for advertisers to dampen the user experience because once you lose a user you are unlikely to get them back - Facebook Moves to Monetize WhatsApp With Business Messaging.

Tim Cook has been at the helm of Apple for 5 years now. Amazing how quickly time goes by - How Apple Shares Have Performed in 5 Years Under Tim Cook. I was surprised to see Microsoft doing better than Apple over this time period, Apple was well ahead last year this time. All stocks go through times of favour and times of being unliked.

You will find more statistics at Statista

Uber only works with scale and they are spending huge amounts of cash to get that scale - Uber lost a whopping $1.27 billion in the first half of 2016. It is amazing that a company that makes a loss of over $2 billion a year and probably won't be in the green still for a couple of years, has a value of over $60 billion.

Home again, home again, jiggety-jog. Our market is flat today, bouncing between green and red this morning. The Rand is stable sitting around that $/R 14.10 - $/R14.20 range, I don't see it getting too much stronger (unless Yellen says no more rate hikes for another year this evening) until there is some political certainty going forward. Good luck to the Protea's & Boks this weekend.

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

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Thursday 25 August 2016

Bid for this Corp

"Their main operating area is Australasia, which contributes around 22% of the revenues but 35% of their profits. Next on the list is their UK business which is the bulk of revenues at 43% but 'only' 27% of the profits. It was interesting that they said one of their growth constraints in the UK was a lack of labour. Does that mean less and less people are willing to drive trucks and work in factories? Well done Brexit"

To market to market to buy a fat pig Yesterday was characterised by the selling of SA Inc. Banks were down 5%, retailers down 3% and financials done 2%. The All Share was up just over 1% though, which sounds weird the first time most people hear that. "We have some political head winds, the Rand has weakened but share prices in Johannesburg are up?". This is thanks to the large offshore profits from companies listed on the JSE, 20% of the index is Naspers (bulk of value sitting in Tencent) and SAB Miller (share price pegged in pounds).

I think yesterdays moves shows why owning stocks is a great asset class. They are relatively cheap to buy (certainly cheaper than a property), you are able to get your money out after 3 working days (3 months with a property if you are lucky) and you are able to get global diversification with relatively little fuss. Regular additions is what is important to maximise the returns on equities.

Company corner

Yesterday we had the maiden results from Bidcorp since their listing on the JSE. What makes looking at these results a bit tricky is that there are no comparative figures to work with, management have provided pro forma numbers based on the assumption that the current entity existed in its current format a year ago.

Here is a quick look at all the regions that Bidcorp operates in, as you can see they are a global company with North America the only major region missing.

Moving onto how those regions contribute to Revenue and profits:

Their main operating area is Australasia, which contributes around 22% of the revenues but 35% of their profits. Next on the list is their UK business which is the bulk of revenues at 43% but 'only' 27% of the profits. It was interesting that they said one of their growth constraints in the UK was a lack of labour. Does that mean less and less people are willing to drive trucks and work in factories? Well done Brexit. On to the Emerging Markets division, China is one of the countries they operate in where they are still growing a foothold. The division is still relatively small but has huge upside potential given the big shift in China towards more consumption.

Going forward the group is looking to focus on the higher margin, more specialised parts of their business, basically they want to get out of the very vanilla logistics business. Given that trading margins for the group is 3.7%, the low margin business must be really low margin. In these sort of highly competitive spaces, being able to keep costs under control is important, Bidvest / Bidcorp have shown in the past that they are skilled cost cutters.

Onto the numbers, their HEPS for the full year 2016 was R10.80 which puts them onto a P/E of 25. This is not cheap but not excessive especially if you consider that HEPS growth was 32% over the last year on a pro forma basis. Another reason that the stock trades at a premium is due to its defensive nature, until we can replace meals with a pill food supply it is going to be important. Also lets not forget about their global footprint, which adds good diversification to your personal portfolio.

Linkfest, lap it up

Bright found this article yesterday, it is about staying calm when things get bumpy in the stock market - Want to grow your money? Find yourself an air hostess. . .

Have a look at the recovery in the US economy since it bottomed out in March 2009 - The Big Four Economic Indicators. I looked at the numbers and saw relative strength as the overall theme, the author of the piece sees poor performance from the US economy. This is the basis of a market, different views and different time frames.

There are a number of reasons given for why savings rates are down, albeit improving since the great recession. The fact remains that not having savings leaves you exposed in unforeseen situations - Chart: Most Millennials Have Less Than $1,000 in Savings. I was surprised to see that females had poorer savings than their male counter part, research has shown that females are better with money than men. The survey was only conducted on 2 585 people and doesn't say if the demographics was proportional to that of the national numbers, so the data may be very skew.

Home again, home again, jiggety-jog. Our market is slightly in the red this morning and our Rand is looking stronger moving from $/R 14.20s closer to the $/R14.00 level. We had full year numbers from Woolies this morning that looked strong, the stock is up 3.3% and then an average looking trading statement from Discovery, there are many moving parts in there so we will have to wait until the 6th of September to see exactly what is going on.

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

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Wednesday 24 August 2016

Zakhele Futhi

"The new MTN Zakhele Futhi (new scheme) has an implied value of R9.9 billion and will soon be open to the public. Qualifying people will be able to invest in these shares. Please get involved, ask questions (ask me Bright Khumalo) and most importantly INVEST your hard earned savings and let it work for you"

To market to market to buy a fat pig Yesterday we saw both our local market and the US markets up slightly. On the local front there were strong moves from Anglo and BHP Billiton, both up over 4%. In years gone by, if those two stocks were up by such a margin, the overall index would not be far behind. Currently BHP Billiton has a 5% weighting in the index and Anglo American has a 2.7% weighting, for context the biggest weighting in the index is Naspers, sitting on 12.8%.

Company corner

MTN Group came out with an interesting announcement that a lot of people have been waiting for with bated breath. To those who do not know what I am talking about, I am referring to the announcement of the new BBBEE scheme now going to be referred to as 'MTN Zakhele Futhi'.

Zakhele = Build it yourself

Futhi = Again

Quick recap on the 'MTN Zakhele (old scheme) deal. This is the scheme that was put together in 2010 and is listed on the JSE's BEE board under telecoms. It holds up to 4% of MTN Group. This scheme is coming to maturity at the end of November and management is in the process of unwinding this scheme. In the process of unwinding current investors have three options:

i) Cash

ii) A mixture of Cash and Ordinary MTN shares

iii) A re-investment option which will allow you to roll over your "MTN Zakhele" (old scheme) into the 'MTN Zakhele Futhi' (new scheme)

In 2010 the shares were offered at R20 per share and according to the SENS announcement management is estimating a fair value of R75.52 after all costs relating to unwinding the structure and paying off all the debt related to it. This is a return of almost 4 fold, yes 4 fold!!! One of my favourite BBBEE specialists uses the phrase "it's better than a kick to the face." I think here he's referring to the fact that the MTN Group has not done all that well compared to the BEE scheme in the same time frame, non the less great returns for black shareholders.

MTN Zakhele Futhi

The new MTN Zakhele Futhi (new scheme) has an implied value of R9.9 billion and will soon be open to the public. Qualifying people will be able to invest in these shares. Please get involved, ask questions (ask me Bright Khumalo) and most importantly INVEST your hard earned savings and let it work for you. If you own the MTN Zakhele (old scheme) and you are not sure which option to pick, or you don't know what it all means, again please bombard me with your questions!

The old and the new scheme together will contribute to an effective indirect "see-through" black ownership of over 30% of MTN's South African operations. Now we wait for the prospectus which will outline amongst other things what price the MTN Zakhele Futhi (new scheme) will be offered at. All we know right now is that MTN is going to sponsor this deal giving the potential BEE shareholders a 20% discount on purchase, very generous management!

The SAB & AB InBev merger is one step closer to being completed, albeit a bit harder going forward. A UK court yesterday ruled that the Altria and BEVCO shareholders(they own a combined 41% of SAB Miller) will be treated as a separate shareholder class when it comes time to voting on the merger. Removing Altria and BEVCO from the vote means it will be a bit harder for the merger to go through. Basically of the remaining 59% shareholders, 75% need to vote in favour of the merger for it to happen. Given that the SAB Miller share price is still around the 44 Pound mark, it tells you that the market thinks this will go through. D-Day or vote day will be the 28 September.

Linkfest, lap it up

Given how central the internet is to my daily life, it is hard to comprehend how having access to the internet means you are part of the minority - The Not So World Wide Web

You will find more statistics at Statista

Sticking with the internet topic. Having access to the internet is important for development in South Africa and even bigger in helping to level the playing field - FNB launches own-branded smartphones. Depending on how good this phone is, it could be huge for FNB both on new banking clients and on data consumption on the network.

Having only the survivors in the financial world appear in long term statistics can make certain asset classes appear more appealing than they otherwise would. Hedge funds and small cap funds come to mind. There is a lot of money to be made in these spaces but there is a bigger risk of blowing up - Survivorship Bias. The blog talks about an interesting WW2 incident where the airforce wanted to know which parts of their planes to reinforce based on the damage on planes returning from the front lines.

Tesla is setting a new benchmark of what electrical vehicles need to aim at. The new battery packs improve the acceleration of the car (2.5 seconds to 60 mph) and increase the range of the car to be over the phycological 300 mile mark - Tesla has maxed out what its current batteries can do

It is amazing some of the areas that science is working on. Sending information outside of the restrictions of space and time is mind blowing - China's new quantum satellite will try to teleport data outside the bounds of space and time

As more people pile into index trackers there will be new distortions in asset prices. Remember how the market reacted last year when there was mass fear and widespread selling of ETF's? Some share prices got klobbered in a very short space of time just because they had a higher weighting in an index - One chart that is sure to give Wall Street nightmares.

Home again, home again, jiggety-jog. This morning the market moves are split by the news last night that Pravin Gordhan has been summoned by the hawks, again. Dual listed stocks are up sharply this morning thanks to the weaker Rand and anything that looks like a bank is down sharply this morning (First Rand currently down 4.3% and Standard Bank down 5%). On the currency front the Rand is at the $/R14.00 level again, we were last here at the beginning of August. I suspect that this is an over reaction spurred due to memories of what happened to the currency and stocks when NeneGate broke at the end of last year. Head down and remember, a large portion of the JSE has offshore profits, so you do have diversification which ever way these political winds blow.

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

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Tuesday 23 August 2016

Invest in Innovation

"When investing you can either look for the exceptional innovator or the exceptional doer. Or both. Innovators can be disruptors of the same technology that exists, and only makes it better. Think about the design team at Apple, Steve Jobs and Jony Ive deliver on both form and function. Nobody would pay that much for a phone if it wasn't a thing of beauty."

To market to market to buy a fat pig Our market went sideways yesterday, flip flopping between green and red the whole day, finally finishing up 0.1% (See graph below). We speak of the market as if there are no moving parts in the index itself. Given that Naspers, the biggest component of the index was up 2.5% yesterday it means that there where many other stocks who were in the red, off setting the large gain from Naspers. So many moving parts make up the market and it is not as simple as just saying one or two events was the reason for the market being green or red. Sticking with Naspers, it closed at an all time high last night, now at R 2 335 a share. It is amazing, you could have bought them as late as May 2014 and still doubled your money. The key with investing is avoiding the companies that blow up and go to zero, which means that you only need to find a couple of stocks like Naspers in a life time to significantly outperform the rest of the market.

Source:Share Data

The undisputed greatest investor is Warren Buffett, who built a business over decades, paid a dividend initially and thought to himself, can I do better myself with this money? He suggested that he was a better allocator of capital, and that was what his shareholders wanted. I suspect that Buffett, like his good friend Charlie Munger, will not be around in a decade or so, and he will leave behind him an unparalleled legacy. In investment terms, he is the Bolt, Ali, Bradman all rolled into one. Exceptional concentration and the ability to think on his feet, as well as articulate his mission and game plan in one. He has this uncanny ability to see behind the current noise that prevails, 24/7. He has the same rituals.

And that is what is great about investors and their ability to find something amongst all of the known. Luck, as Gary Player (and his 1000 sit ups) once made known, comes easier the more you practice. It took 50 years of reading the annual report of International Business Machines before Buffett bought any for Berkshire. That didn't prevent him from stopping to have a look. Evaluating and benchmarking yourself daily to the index, or to your peers, or to the global markets in Dollars is all lost if you keep trading and incurring costs.

One of my favourite stories about Buffett is when someone asked him to look at a chart and let him know what was going on, he didn't know which way to hold it. Upside down or not, trading around past information and predicting what is going to happen next is like looking at a scorecard from the past weekend and suggesting this will happen now. No. No two moments in time, let alone in equity markets, are the same. Be they 1929, 1987, 2001, 2008, or whatever. You can quite simple make any data point look like another.

When investing you can either look for the exceptional innovator or the exceptional doer. Or both. Innovators can be disruptors of the same technology that exists, and only makes it better. Think about the design team at Apple, Steve Jobs and Jony Ive deliver on both form and function. Nobody would pay that much for a phone if it wasn't a thing of beauty. Nobody would pay that much for a Tesla if it wasn't that functional and equally beautifully designed. There are the doers and executors, Aspen, Saad and Attridge spring to mind. They have taken businesses that essentially nobody really wanted (or they were not core) and made them great. Sweating the costs and doing the basics right. There are some similarities with the Steinhoff businesses, taking something tired, paying a price that doesn't seem right, and sweating the asset really hard.

Then there are others, like Adrian Gore from Discovery who is someone who challenges the status quo, someone who takes the same old product and uses the changes in technology to shake it up a little. New ways of innovating in health insurance leads to being rewarded as such makes Discovery a more profitable business. Free movies, smoothies, discounted travel and so on, continues to see members push their targets and goals beyond the "ordinary". And we find ourselves competing with each other, saving the business from unwanted costs. I asked the question in the office the other day, how come the French spend less as a percentage of GDP on healthcare and get it more "right" than the Americans? Or perhaps that is just my perception.

You can then get businesses that just do the same thing over and over, better than their peers and capture (and keep) market share. Bidcorp, the food services business, although as a standalone relatively new, have the evergreen Brian Joffe at the helm. Delivering on quality day in and day out can be challenging to say the least and requires exceptionally high standards. It may not seem like a growth business, more and more people are not only eating out, equally they require the "cooked at home" out of home meals. When Paul was recently in New York, a young millennial described how her "home cooked food" was delivered to her apartment for her for a fee. No more cooking, no more need for a big surface in a kitchen. It is time that dictates such things.

Equally, the internet and the delivery speeds have changed a lot. I often say that if I could give a Nobel prize to a "thing", it would be the internet. The internet does more to demystify ourselves from ourselves. If you want to know something, there is either an app for that, YouTube, Wikipedia, blog entries, the works. Google Maps are even filming the Falkland Islands on the back of sheep. Soon, there will be no area of known land that is not visible on the internet. The internet will prove to be the great leveller for humanity. I was amazed to learn that Kenyan silver (once gold) olympic medalist Julius Yego taught himself to throw the javelin by watching YouTube. Who does that? He does, in this day and age. I love that story.

So, with everything in life, portfolio construction is a refined process and we like to think that there is no cookie cutter approach. Trimming the winners for the sake of trimming the winners doesn't feel right, after all Bill Gates was once accused of having too many eggs in the proverbial investment basket, it was all Microsoft and that has turned out OK. I am also mindful that this doesn't always work, Dick Fuld from Lehman Brothers once lost everything and watched as Rome burnt in front of his eyes. Too much leverage.

In the end, you have to trust your own instincts as an investor. Does this feel right, does it look right, will the investment thesis be many years ahead, is the price that I am paying today "just fine" relative to all that I know? How patient am I going to be? It may sound counterintuitive and it almost never works for most investors. If your investment thesis checks all boxes, you should hope that the price falls. Like that, you can get the same thing for less. Yet it never works that way, when the share price of a great business goes down, intuitively we see fear and want to sell, we have after all lost money. Even if only on paper. The other thing that is on your side is time. A year is actually a very, very long time. I have spoken to many people who feel after a mere few months that things are not working out. I get it, equity investing is not for everyone.

To conclude this piece in the continued and extended bits and bobs over the last few days, it is irresponsible for any investor to pretend that they know better than the collective. To presume that the price is going to come down or going to go up as a result of your thesis and the collective is wrong seems misplaced. At least to me. Time, patience, scrutiny, attention to detail, reevaluate and repeat. Keep on keeping on.

Linkfest, lap it up

Having an understanding of history does not give you the ability to predict the future but it allows you to avoid mistakes made by people in similar situations to you - The United States of Market History Amnesia

Stock prices reflect a mixture of current financial numbers and what the future expectations are for those numbers, mostly future expectations. Understanding that stock prices are nothing more than expectations is the first step in understanding why prices move - Three Essential Points Every Investor Should Understand

Having a financial base makes it easier for financial generations to grow that base, I suspect that the global graph will look similar to the US graph below - Trends in Family Wealth, 1989 to 2013. So save like crazy now, build a share portfolio that you can live off dividends when you retire and then when you pass on there is a base snowballing for future generations.

Home again, home again, jiggety-jog. Our market is down just over 0.1% today and the Rand has strengthened slightly to the Dollar, now sitting at $/R 13.40. Sasol is down 2% this morning after coming out with their updated report on their capex spend in the US, it looks like the project is going to cost $2 billion dollars more than originally budgeted.

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

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Monday 22 August 2016

Buy and Buy

"The last thing about equities and why we own them is simple, the long term wealth creation as a result of compounding earnings and dividends leads to higher prices in time. And Dollar cost averaging is important too, always be adding to the portfolio, as and when you can, for as long as you are employed. Companies access the capital markets in order to grow their businesses."

To market to market to buy a fat pig Friday was a relatively quiet day, both on the local front and the US. For the AlSI in JHB, it was down 0.41%, switching to the US, the NASDAQ was down 0.03% (or 0%), S&P down 0.14% & the DOW was down 0.24%. I saw an interesting factoid over the weekend, the US markets have not had a 1% or greater move since early July. Which is very unusual for our very hyper active modern market.

In the week ahead we have the annual Jackson Hole central bankers conference. Which even though it probably doesn't have too many market moving moments, will be broadcast and spoken about by all major news outlets. The highlight of the event for markets will be when Janet Yellon speaks on Thursday, with the big question on peoples minds, 'When will she raise interest rates?' Will it be before or after the elections? Interest rates will effect markets in general over a short to medium time frame. Part of the reason for the Dollar weakness (Rand strength) this year is due to US interest rates rising slower than people expected. Last year this time it was a fore gone conclusion that the FED would raise rates in December last year (which they did) and then raise rates another 4 or 5 times in 2016. At the moment we are on track for one rate rise, maybe. The result being that all the money that flowed into the US to take advantage of the higher interest rates is now flowing out in search of yield somewhere else, emerging markets are one of those destinations.

When the FED does decide to raise rates there will be certain sectors that are under pressure and other sectors that do well, increased interest rates are great for bank's margins and tech companies sitting on billions in cash. Companies that are currently bought for their yield might come under pressure (price wise) though, as people switch to safer assets. Equity markets are not isolated when looking at the asset universe, part of the reason for the above average valuations currently is due to very little or no yield in other asset classes. See the graphs below, companies are paying out record amounts of their profits and their yields are better than those of safe assets.

Source: Dividends Eat Up Bigger Slice of Company Profits

Sasha's Stash

Why do we invest in equities? According to a Deloitte report titled Brokerage Accounts in the United States, the number of households with savings and brokerage accounts dropped significantly from after the dotcom bubble through to the recovery post the financial crisis: "In 2013, 27% of households with brokerage accounts reported using the advice of a broker for saving and investment decisions, down from 35% in 2001." That means that the stock market is only really important or of any meaning for 1 in 4 households in the US. Which is pretty sad. The number back home is possibly much, much lower as a percentage point of view, I recall a post from a fund manager who went to Italy and found people had little, or no interest in the stock market.

Why is that the case? Why are there, in some countries like the US and more recently China, where there were by the middle of last year (according to the data I was reading) around 150 million brokerage accounts, many of those first time rookies. In fact, according to this article, not an April fools you know what - China Enters Stock Frenzy as Rookie Traders Open Record Accounts. See that? 2.8 million brokerage accounts opened in a single week, you will recall the pictures of vendors on the side of the road who were trading shares online (not too dissimilar from the 'Bucket shops' lining the US streets 100 years ago), Chinese equity markets are a crazy place. Yet, even in the infancy of the Chinese equities markets (it is just over a generation old), there is heavy participation. Lower as a percentage than the US, yet the entrepreneurial spirit means much higher than the norm in Europe. In that part of the world, most people are invested through their pension funds.

I guess you also wouldn't then be surprised to learn that the top 10 percent of income earners are the most concentrated percentage in terms of brokerage account ownership. 50 percent of top 10 percent earners have brokerage accounts in the US, in the bottom 25 percent of income earners, it is only 2.8 percent. The wealthy stay wealthy as they have the skills to earn the money and the foresight to save. My daughter asked me the other day a question about sunscreen, why do we apply it, she said? I said, in the same way that we save and recycle, you only see the impact much later in life, that is why we apply sunscreen. Same thing, right?

The last thing about equities and why we own them is simple, the long term wealth creation as a result of compounding earnings and dividends leads to higher prices in time. And Dollar cost averaging is important too, always be adding to the portfolio, as and when you can, for as long as you are employed. Companies access the capital markets in order to grow their businesses. There would be little or no reason to list if you didn't need public shareholders. What always amazes me however is the daily turnover, which while I am grateful for the liquidity, it doesn't seem right that a stock like Apple can trade on average 32 million shares a day. That is 160 million shares a week. Or 2 billion shares a quarter. And then the whole market cap inside of a calendar year. Does that seem sensible? Not to me.

I suspect that in a world of continued choices, equities will always be assuming more risk than cash or bonds, yet if you pick wisely and invest through the cycles, you will be "just fine". I don't own the index and possibly never will want to. For retail investors that have little or no chance of ever picking stocks, that is the best option. I am always amazed that someone thinks that a residential townhouse and having to place a tenant in one is of lower risk than owning Tiger Brands, a huge food producer with millions of South African customers of yesteryear and now. Tiger has been one of the best investments to have just owned and not needed much other than extreme patience. Even better, if you forgot and didn't know you owned them, that was the real clincher.

In conclusion, pay attention, not so much that you worry about the share price all the time. I once recall a gobsmacked Becky Quick of CNBC interviewing Warren Buffett, she asked him how often he looked at the Berkshire Hathaway share price. He replied, maybe two to three times a week. Her jaw dropped, the answer wasn't what she was looking for, yet it made perfect sense. There is little or no reason for him to look at all, other than once a week, the investment thesis will eventually come to him!

Linkfest, lap it up

Two of the dominant social media companies are Facebook and Tencent. The one dominates the Chinese market the other dominates everywhere else, here is a look at how they stack up against each other - How China's Biggest Tech Company Compares to Facebook

You will find more statistics at Statista

As more airlines take to the sky and as aeroplanes get more efficient, the price to fly across the globe drops. This is particularly true for popular routes where there is higher competition - Delta is building suites for business class, and it could make in-flight luxury cheaper on all airlines

Two interesting stories out Friday on the CEO front.

The first is from one of Christo Wiese's smaller holdings, Invicta - Change And Restructure To The Board

"Shareholders are hereby advised that, following a heart attack earlier this year, Byron Nichles has decided to relocate to Cape Town with his family in order to pursue a new and more balanced lifestyle."

Byron is in his mid 40's, so by modern standards still has another full career ahead of him.

Then one of our US holdings, Solar City (soon to be Tesla) announced that their CEO and CTO have requested that their salaries be slashed to $1 a year (do you think it is an annual payment or a monthly payment of 8c?) - SolarCity slashing costs, including CEO pay.

Home again, home again, jiggety-jog. Our markets are slightly in the green this morning. On the commodity front Brent Crude is above the $50 a barrel again but is down 1.5% this morning, probably on the news over the weekend that the Oil rig count climbs for 8th straight week. The data shows that fracking operations in the US are profitable with oil in the mid $40s, which will help keep oil around the $40 - $50 a barrel range for the foreseeable future.

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

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