No Mercy for The Hoff

To market to market to buy a fat pig. Yesterday was one of those days that you will always remember. I remember when African Bank went to zero, it probably spent more time that day in volatility auctions than trading freely. Other days that come to mind would be the day after Brexit and then the day after QE was announced (that was a good day).

It was carnage for Dr Christo Wiese in particular, where over and above the Steinhoff train wreck, all his other companies also sold off heavily too. Shoprite was down 5.9%, Brait was down 5.2%, Invicta was down 3.1%, Tradehold was down 3.2% and Pallinghurst was down 2%.

I suspect that over the coming days we will get SENS announcements from some or all those companies saying that Wiese has sold some of his shares. What the above graph doesn't capture is that Wiese owned some of his shares using debt, or the use of leverage to boast his returns with an appreciating share price. The problem with leverage is that it bites hard when a share drops, more so because as soon as the share drops the bank lending you money tells you to sell your shares to pay their debt.

In September 2016, Steinhoff issued a whole bunch of shares to help them pay for the US purchase of Mattress Firm. Wiese bought 314 million more shares at a price of EUR 5.055 per share, for a total value of EUR 1.587 billion. Wiese may be one of the richest men in the world but to come up with EUR 1.6 billion im cash is not easy. To raise the money for the new shares he had to borrow it. To do that he had to use existing shares as collateral.

"have pledged to Citigroup, Goldman Sachs, HSBC and Nomura International Plc (together the "Financing Banks"), 628 million ordinary shares. . . Rand Merchant Bank, a division of FirstRand Bank Limited, provided additional facilities to companies controlled by Dr Christo Wiese."

He bought his shares at EUR 5.055, last night the stock closed at EUR 1.14; his collateral went from being worth EUR 3.14 billion to now only being worth EUR 715 million. I don't know how much he borrowed from the investment banks but if it is more than those shares are worth, he might be a forced seller. Selling now means that he is locking in his losses. Ouch!

To add insult to injury, less than a month ago Wiese bought 2 000 000 more shares at R61.46. He bought them through a single stock future, meaning more leverage. I have seen a number of people saying after the fact, that it was clear Steinhoff was going to implode. Wiese, a seasoned business man and Steinhoff insider wouldn't have bought R 123 000 000 worth of stock (using debt), if he thought the company was on the brink of implosion. Having a dispute with a business partner is not uncommon. Going to court over tax structuring is not ideal but again not uncommon for a multinational company. When operating in just one country, tax codes are pretty black and white. When you start operating across the globe, things get very grey and loop holes appear.

It currently looks like the reason for Jooste's resignation relates to Steinhoff overstating the strength of their balance sheet, allowing them to get better financing rates.

Market Scorecard. US markets fluctuated between green and red the whole day. The Dow was down 0.16%, the S&P 500 was down 0.01%, the Nasdaq was up 0.21% and the All-share was down 1.64%.

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Linkfest, lap it up

Byron's Beats

What did Steinhoff do wrong? Or more specifically (at this stage) Markus Jooste. It is still up in the air at the moment because nothing official has come out but there are many theories doing the rounds.

From what I can gather, one of the main dodgy tactics was to create off balance sheet entities to house non preforming assets or to purchase intangible assets from Steinhoff. This is a simple explanation, it is far more complicated than just that.

Another allegation suggested that the reporting on Conforama was incorrect. Throughout the period they owned that asset, they actually had a JV partner who was sharing all the profits yet they indicated to the market that they owned that asset outright.

We will have to wait for the external investigation to find out exactly what happened.

When you make investment decisions there is an element of trust you place in the management team. Christo Wiese, one of South Africa's smartest businessmen had put the majority of his wealth into this company. As Chairman you would expect (and trust) he knew exactly what was going on behind the scenes. Clearly this was not the case

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Michael's Musings

It is amazing how quickly things have changed in the retail space. As a consumer, being able to order online and have it delivered to my desk is a huge win - There are 170,000 fewer retail jobs in 2017 - and 75,000 more Amazon robots.

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Bright's Banter

Volkswagen executive Oliver Schmidt has been sentenced to seven years in prison after admitting guilt under a plea agreement in August. He's the eighth executive to be charged in the VW emissions scandal.

It get's worse, the German authorities are also launching their own fresh investigations on other VW vehicles potentially breaking environmental laws - VW Executives Gets Seven Years For US Emissions Fraud

Wal-mart or Wal-mart Stores has finally changed its name to Walmart. The company's name change is inspired by its move to push online shopping so it can compete with the likes of Amazon. Walmart's push online is so aggressive not even a hyphen can stand in its way - Wal-mart Changes Its Name To Walmart In Push Online

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Home again, home again, jiggety-jog. Steinhoff is down again this morning, along with other Wiese companies. On the local data front we have mining production and gold production reads. Then internationally the EU publishes their GDP for the 3Q, growth of 2.5% is expected.

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Hamba Kahle Markus

To market to market to buy a fat pig. Yesterday we received abetter than expected GDP read for the 3Q. The seasonally adjusted, annualised 3Q number showed growth of 2%. I prefer the simpler and less processed number of a simple year on year growth, which came in 0.8% higher than last year this time.

The biggest contributors to the growth came from sectors that are big employers of unskilled labour, much needed in South Africa. Unfortunately 0.8% growth is well below the number that we need to help our debt levels and employment situation. We are in desperate need of an uptick in business confidence to help our economy get back to its potential of growing at 5% a year. The South African Chamber of Commerce & Industry is publishing the number at 11:30 today, which will give us a better idea where confidence is lacking.

Market Scorecard US markets have been in the red for three days in a row. I can't remember the last time that happened? The Dow was down 0.45%, the S&P 500 was down 0.37%, the Nasdaq was down 0.19% and the All-share was down 1.06%.

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Company corner

Michael's Musings

Whoa! Last night Steinhoff announced that Markus Jooste has stepped down as CEO (Steinhoff announces investigation into accounting irregularities and resignation of CEO), with Dr Christo Wiese taking up the role of Executive Chairman on an interim basis.

The bigger problem though is the new accounting irregularities that have come to light and the possibility that they may need to restate prior years' financial statements. The result is that the audited financials have now been delayed indefinitely.

Jooste joined Steinhoff in 1988 and became the group's CEO in 2000. He is a Steinhoff lifer, and only 56 years old. So for him to be asked to step down, the new irregularities found are not around the subjective interpretation of tax laws, it will be something far more significant.

The saving grace for the company is that they have Wiese to take the reigns and the old Pepkor CEO, Pieter Erasmus will be assisting.

As the Buffett saying goes:

"In the world of business, bad news often surfaces serially: you see a cockroach in your kitchen; as the days go by, you meet his relatives"

One of the reasons we owned Steinhoff was because of the management's ability in sweating their assets. That has now changed, management has turned out to be a liability. The stink of the current scandal will probably hang around the company for years to come. You need to ask yourself, what will the company look like when this finally blows over? Will their huge store base still be relevant in an age of online shopping? We have been wrong in owning Steinhoff, expect more details on the matter later today.

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Linkfest, lap it up

One thing, from Paul

Vestact leads clients towards direct equity portfolios. We don't hold bonds, cash, property or other asset classes in your account, either here in South Africa or in the US.

Equities are partial ownership claims against the assets and future profits of living, breathing companies run by human beings who take decisions that sometimes work out well and sometime work out badly.

Owning shares is better than having cash in the bank or owning government bonds, as over time we earn higher returns, because we assume equity risk. In economics, the equity risk premium is defined as the "excess return that an individual stock or the overall stock market provides over a risk-free rate". This excess compensates investors for taking on the relatively higher risk of the equity market.

This works both ways. When companies thrive, their share prices go up. In 2017 we have enjoyed great gains in Naspers, Discovery and Richemont. However, we have had also had a number of disappointments, companies which have had setbacks related to poor acquisitions, soft demand for their products or investor fatigue. The stocks have gone backwards this year: Steinhoff, Mediclinic, Brait and Famous Brands. We have to take the rough with the smooth. Over time, we should come out on top.

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Home again, home again, jiggety-jog. Anything Wiese related is being clobbered this morning, Brait is down 4%, Shoprite is down 4%, Star is down 15%, KAP is down 15%, PSG is down 2% and Steinhoff was down over 50% on the open. International data out today, we have non-farm payroll numbers from the US and then the US crude oil reserves.

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Shuffling the Cards

To market to market to buy a fat pig. When asked for advice on which stocks to buy by non-clients, my first piece of advice is to not follow blindly what you watch and read in the media. The first problem with following the media is that you have no idea around the time frame of the commentator. There have been times when I have been on TV with a short-term trader. Unless you know that my views are from someone with a time frame of longer than five years and the person sitting across the table from me only has a time frame of around a month, you are going to get very conflicting advice.

The second problem, and particularly with written media, is that the journalist is not always familiar with the company they are writing about. A perfect example of that can be seen in an article written this morning about Steinhoff Africa Retail, aka Star's results. The headline reads 'Dark days for Steinhoff Africa after 10% drop', the only problem is that the journalist has confused Steinhoff International Holdings with Steinhoff Africa. For your man on the street, this is an understandable mistake, it is not a mistake you want a person 'in the know' making though.

The key is to make your own mind up about any particular stock and investment strategy. There are many successful strategies out there and many companies that are worth investing in, just don't flip-flop based on what the media says.

Market Scorecard. After a closer reading of the 500 page Senate tax legislation, it looks like someone forgot to lower the alternative minimum tax rate. This means companies with a high R&D spend, like Tech firms, won't be getting much of a tax break based on the current proposal. This Bloomberg article gives a good breakdown of its implications, Senate's 'Unpleasant Surprise'Hurts Tax Breaks for Tech, Others. The Dow was up 0.24%, the S&P 500 was down 0.11%, the Nasdaq was down 1.05% and the All-share was up 0.27%.

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Company corner

Michael's Musings

It was another bad day for Steinhoff. After their SENS announcement yesterday saying that tomorrows release won't be audited numbers, the share price proceeded to fall 10%. With the pending court case decision around Steinhoff's tax situation, it would seem that the auditors are reluctant to sign off on numbers that may need to be changed in the next couple of weeks.

Management says that there is no 'fire' behind the current 'smoke' surrounding the stock. With yesterdays announcement, some investors have decided to bail out, not waiting to see if there is in fact fire.

In tomorrow's unaudited numbers, one of the key things we will be looking at is how their Mattress Firm turnaround is going. During the last set of numbers, Mattress Firm was in the middle of their turnaround, having a negative impact on their profits.

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Linkfest, lap it up

One thing, from Paul

According to Bloomberg, total global equity market capitalisation is closing in on $100 trillion. Here is how that looks in a graph:

The interesting thing to note is how significant the moves have been in the last decade. We've gone from the early boom on the back of the commodities "supercycle" in October 2007 ($62 trillion), to the very dark days of the global financial crisis in February 2009 ($27 trillion) and then the rally to the present highs. Of course, I remember all of those days well. The euphoria and the dismay. I've had a front row seat!

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Byron's Beats

Starbucks has earmarked China as a massive growth driver for the business. You can see from the image below how big they are already versus other franchised competitors.

Former CEO and now chairman Howard Schultz has brought it upon himself to open up flagship stores around the world. This Bloomberg article talks about the world's biggest Starbucks which is set to open in Shanghai. The store is a whopping 30 000 square feet (half the size of a soccer pitch).

Starbucks is not just about the coffee, it is about the experience. I am very excited about this concept store initiative.

World's Biggest Starbucks to Open in Shanghai.

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Bright's Banter

The series "House of Cards" season finale will continue without Kevin Spacey.

The final season of House of Cards will only have eight episodes as opposed to the usual 13 episodes in a normal season. A fellow by the name of Robin Wright will take Kevin Spacey's role, playing the husband of Claire Underwood.

The shooting was suspended in October after a number of sexual assault allegations surfaced against Spacey. Roughly 15 men have accused Spacey of wrongdoing, of whom five were teenagers when the incidents allegedly occurred.

I can't wait to see how they assassinate this character TF outta the show! The world is a better place without sex offenders!

'House of Cards' Sixth and Final Season Shooting to Resume in Early 2018, Without Kevin Spacey

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Home again, home again, jiggety-jog. At 11:30 this morning Stats SA releases our 3Q GDP read, the forecast is for growth of 0.8%. The Rand is looking strong this morning breaking below the phycological $/R13.50 level.

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Takealot of Cash

To market to market to buy a fat pig. American politics is driving markets at the moment. Another Trump advisor, Michael Flynn, has been linked to Russia. He pleaded guilty to lying to the FBI, while they investigate Russia's involvement in the 2016 US elections. Markets tanked on the news.

More significant though is that the Senate passed their version of the tax bill. They managed to get the bill through without needing to increase corporate tax from the initially proposed 20%. Considering that tax legislation is arguably the most far-reaching and important legislation a government will pass, you would think it is something you would take your time deciding on. Well, at least enough time to read the bill before passing it. Here is a picture posted by a Democrat Senator showing that some of the changes to the bill were made so late, that they didn't even have enough time to type them all up. Worse is the fact that not all the words are legible.

As a South African owning US stocks, the only thing that really matters to me is what the corporate tax rate is. 20% is much better than 35%. Long term though a strong US is good for everyone, as such it would be nice for lawmakers to take at least a weekend to read through all their amendments and think what the long-term implications could be. From here, the Senate and the House need to agree on a final version of the bill before Trump then signs it into law. Both the Senate and the House's bills are similar, meaning things are still on track for a final version to be through by the end of the year.

Market Scorecard. Even though markets tanked n the Flynn news, they mostly recovered by the end of the session. The Dow was down 0.17%, the S&P 500 was down 0.20%, the Nasdaq was down 0.38% and the All-share was down 0.54%. Friday on the local market, Naspers had another red day, down over 4%. Tencent in Hong Kong is up 2% today, Naspers should be well in the green to get the week going.

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Company corner

Byron's Beats

Last week we received interim 6 month results from Naspers. Being by far the biggest company on the JSE, this event now attracts a lot of attention. As expected, the results looked stellar on the back of another incredible period for Tencent. Let us take a look at the numbers which remember, are now reported in dollars.

Revenues increased by 33% to $9bn. This resulted in a big leap in core headline earnings per share, up 65% to $3.50. In Rands that equates to R48 a share. Let's assume they grow earnings by a very conservative 10% in the second half. That would mean they would make around R100 a share. Currently trading at R3531 a share, the stock trades at 35 times earnings. I remember a time when Naspers traded at 150 times earnings. Despite the phenomenal rise in the share price, the stock has actually become cheaper related to earnings. People often forget that.

Here is a nice visual of their revenue mix. SNS (social network services) includes Tencent and Mail.ru

We often cover Tencent separately, in light of that I want to focus on the rest of the business.

Ecommerce grew revenues by 15%. This division includes Etail, Travel, Payments, Classifieds and Food Delivery. All areas with great potential, especially in the untapped developing markets. Classifieds (OLX) have just become profitable. Etail which includes Takealot and Flipkart will suck funds for a while to come. That makes sense, building distribution centres and sorting out logistics is capital intensive. We can see how long it has taken Amazon to build scale. But once you have that scale, you are almost untouchable. Flipkart has a 70% market share of online retail in India.

The Ecommerce division used up around $318m whilst the Video Entertainment division made around $234m. They are still using the old profitable video business to fund the new exciting ecommerce division.

Video entertainment had a decent period. Trading profits grew by 4%. The Rand has stabilised to the dollar but many of their operations throughout the continent suffered on the back of weak currencies. Showmax is doing nicely in South Africa and also has a solid presence in Poland. Maybe they got there before Netflix?

All in all these numbers look solid. We are comfortable that the rest of business is on the right track, continuing to grow and become more influential within the massive shadow of Tencent.

The current allegations against Multichoice are upsetting. Their silence on the matter has also been disappointing although they did announce on Friday that they have implemented an internal investigation. As a Naspers shareholder, I wouldn't be too concerned, the rest of the business is far too big and separated to be heavily influenced. As a concerned South African however I will follow this story closely. If the allegations are true, I hope we see some heads roll and the consequences dealt with accordingly.

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Michael's Musings

On Friday morning, AdvTech released the following SENS, Voluntary disclosure of fraud. One of the head office financial managers had been stealing from the group since 2015. In total the cash stolen was around R 5 million, which they should be able to recover through insurance and from the individual. As part of the SENS announcement, they stated revenue figures had been inflated and expenses were understated, resulting in a R35 million once off adjustment.

I'm not sure how the financial manager was stealing, but in my mind if you are stealing you would decrease revenue and increase expenses, creating a gap for you to take money? This incident shows the risks that come from owning and running a business, it is the reason why equity holders demand a higher return on their investment. The once off adjustment is rather small in AdvTech's life, around 1% of their revenue.

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Linkfest, lap it up

One thing, from Paul

This week on Blunders: Multichoice is paying big bucks for bum content; Winter Olympics coming up on the North Korean border; Takelot crashes on Black Friday: and fancy app Expensify uses humans behind the scenes - Blunders - Episode 81

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Bright's Banter

Pharmacy-retail giant CVS Health agreed to a $69 billion acquisition of health insurer Aetna in one of the biggest M&A deals of the year.

CVS is trying to get ahead of Amazon's expected move into the pharmaceuticals business , which has several pharmacy-retail companies tucking their tails between their legs.

Aetna is one of America's oldest health-insurance groups and CVS is one of America's largest pharmacy-retail companys making this one a very big deal indeed - CVS To Buy Aetna Reshaping Health Care Industry

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Vestact in the Media

Forbes has written a nice detailed piece on Discovery and their new bank, Michael gets a few comments mentioned - Bank On This Man.

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Home again, home again, jiggety-jog. Following Asian markets, our market is off to a green start too. Nothing major on the news front today. Steinhoff announced this morning that their audited numbers would not be released this week as expected but sometime in January. They will however release unaudited numbers on Wednesday. Not what you want to hear as a shareholder.

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Bezo$

To market to market to buy a fat pig. On Friday night, while eating supper my phone had a notification pop up saying that Jeff Bezos's NAV had just crossed $100 billion, the first time since 1999 when Bill Gates crossed that mark. Bill Gates is currently second on the Bloomberg Billionaires Index, he would be worth well north of $100 billion if he hadn't given so much away already. Then the most famous investor of the last three generations, Warren Buffett is sitting in third. His NAV would also be higher than $100 billion if he hadn't given away so much.

Looking through the list, Jack Ma and Pony Ma (no relation) are in the global top-20 thanks to the 2017 performance of Alibaba and Tencent respectively. I was somewhat surprised to see Steve Ballmer, the ex-CEO of Microsoft sitting at number 23, with a NAV of $34 billion. Then someone I haven't noticed on the list before is Jorge Paulo Lemann, the founder of 3G Capital; the company behind AB InBev and Kraft Heinz. Lemann is number 27 with a NAV of $31 billion.

Having a look at the list I wondered where John D Rockefeller, the first dollar billionaire, would feature. Here is the first ever Forbes list from way back in 1918, where you can see their respective NAVs in 2017 Dollars. To get an idea of his wealth, have a look at the gap between Rockefeller and Frick, it is huge! On a side note, if you visit NYC, go visit Frick's house next to the park on E 70th Street. They have turned it into a museum and is well worth the money.

Just based on the inflation-adjusted number, he would land around number 40 on today's list. Seems a bit low considering that at his death, his NAV was around 1.5% of US GDP. His companies also controlled 90% of the oil and refining industry in the US. Most articles I read peg his wealth at around $300 billion, if he was around today. You probably know that Standard Oil was forced to break up into 34 companies, Visual Capitalist had a nice graph of where those companies ended up.

At his death, his NAV was around $1.4 billion. What I didn't know until today though was that he took tithing seriously and he looked to give away 10% of his earnings. His charitable giving totalled over $500 million while he was still alive; more than a third of his final NAV. Here is what encyclopedia.com had to say.

"Rockefeller, from his first employment as a clerk, sought to give away one-tenth of his earnings to charity. His donations grew with his fortune, and he also gave time and energy to philanthropic (charity-related) causes. At first he depended on the Baptist Church for advice. The Church wanted its own university, and in 1892, the University of Chicago opened. The university was Rockefeller's first major philanthropic creation, and he gave it over $80 million during his lifetime. Rockefeller chose New York City for his Rockefeller Institute of Medical Research (now Rockefeller University), chartered in 1901. In 1902 he established the General Education Board.



The total of Rockefeller's lifetime philanthropies has been estimated at about $550 million. Eventually the amounts involved became so huge (his fortune reached $900 million by 1913) that he developed a staff of specialists to help him."

Rockefeller made his money due to his tireless pursuit of efficiency and cost cutting, which in part resulted in the price of kerosene going from 58 cents to eight cents a gallon. A very good outcome for the consumer. Then through their giving, people like Rockefeller, Gates, Buffett, Bezos and Zuckerberg are a huge win for society. They create companies that make our lives better and then they use the wealth they have created to make society better.

Market Scorecard. Markets were very muted yesterday, when the day came to a close markets were mixed. The Dow was up 0.10%, the S&P 500 was down 0.04%, the Nasdaq was down 0.15% and the All-share was down 0.28%. Sitting at 12-month highs are Clicks and Dischem, interesting that the two major players in the pharmacy retail sectors are both soaring. In an environment where retail growth is muted, you would think for one company to do well it would be because they are stealing market share from the other. Another stock at 12-month highs was Standard Bank, which benefited from Moody's not downgrading us.

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Linkfest, lap it up

One thing, from Paul

Amazon is a top holding in our Vestact US client portfolios. It has done incredibly well, hitting a new all time, intra-day high yesterday above $1,200 per share.

At that price level, founder and CEO Jeff Bezos is worth more than $100 billion, and is the richest person in the world, by quite a margin. Well done to him!

The reason for the surge appears to be that Amazon surpassed its expectations for sales on the Black Friday/Cyber Monday shopping weekend.

I was interested to see that the top selling items by value over the past weekend were the following: (1) Amazon Echo Dot, (2) Fire TV Stick with Alexa Voice Remote, (3) TP-Link Smart Plug, (4) Instant Pot DUO80 Pressure Cooker and (5) 23andMe DNA Test.

The top three are Amazon's own products. What's that last one? The 23andMe testers allows users to capture a saliva sample which gets sent in to a lab. After a few weeks the company issues a report showing the users' own ancestry, and their propensity to contract certain genetically indicated diseases.

More about those top sellers here.

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Byron's Beats

Yesterday Mediclinic announced their designate CEO. Remember current CEO Danie Meintjies plans to step down next year after 8 years at the helm. Dr Ronnie van der Merwe will be the man in charge no later than August 2018 . He is an insider and currently the Chief Clinical Officer. I must say, his CV is impressive. See this from the announcement.

"Dr Van der Merwe obtained qualifications in Advanced Management (Harvard Business School, USA), a Fellowship in Anaesthesia (College of Anaesthesiologists, South Africa) where he was the recipient of the Jack Abelsohn Medal and a Bachelor of Medicine and Bachelor of Surgery (University of Stellenbosch, South Africa)."

He has been at Mediclinic since 1999 and has been Chief Clinical Officer since 2007. The business looks like it will be in good hands. Although those hands will certainly be very full.

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Bright's Banter

Money laundering seems to be a big problem for Airbnb. The company has to navigate real-life versions of Walter White and Jesse Pinkman from Breaking Bad, as well as guys like Marty Byrde from Netflix's award winning series Ozark. If you have watched any of these series, you'll know that these guys are pretty bad ass.

People, just like the ones named above, are using Russian crime forums to scout, price, and share Airbnb listings made specifically for the purpose of cleaning cash from stolen/cloned credit cards. These scammers claim that this has been ongoing "since like foreverrrr". These scammers have managed to go around the authentication process in order to reach their goal.

These people are so good at scamming that they even work out the competitive rental for the area, manufacture fake reviews, online interactions etc. just to make it all look legit. Talk about going the extra mile! I'm sure you're gonna enjoy this read.

Inside Airbnb's Russian Money Laundering Problem

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Vestact in the Media

Bright chats to Power FM about Sasol's BEE shares. If you own their BEE shares or are thinking of buying them, make sure you give it a listen - Bright from Vestact.

Business Day gives us a mention in the following article Tiger Brands eyes Africa expansion.

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Home again, home again, jiggety-jog. Our market is off to a red start, probably in part due to the strong Rand. The only data out today of some note is the US consumer confidence number.

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Moody Outlook

To market to market to buy a fat pig. There you have it folks, a downgrade from S&P and a 'we will probably downgrade you after the budget speech in February' from Moody's. Here is one of the reasons S&P gave for the downgrade, "reflects our opinion of further deterioration of South Africa's economic outlook and its public finances,". One of our readers sent me a document last Friday confirming that to be removed from the Citi Emerging Markets index, both Moody's and S&P have to downgrade us. So for now we are 'safe'.

Here is the graph that summarises our problems. The red line needs to get back to the black line, which can either be done by increasing GDP growth or by lowering government spending. Compounding our problems is the under collections by SARS, in part due to leadership issues. The one saving grace is that around 90% of our debt is Rand denominated and not Dollar based. Thanks to our strong financial market, there is enough capital in the system to support the debt needed. Strict adherence to the constitution was another reason given for keeping our debt above junk, knowing that at some level the government is not a law unto themselves is positive.

Moody's has given us 90-says to try to get the red line back to where it needs to be; well at least pointing in the right direction. The two key factors in changing things will be who wins the ANC leadership in the next few weeks. More importantly though, will the hard choices be made when government tables the next budget. Changing a country's trajectory is likened to trying to turn a super-tanker around, it is possible but takes time. Having three months is basically no time at all. Cutting expenditure is very difficult, I wonder if the VAT increase to 15% is back on the cards again?

Economic growth will solve all our problems; it will bring our unemployment rate down, increase our tax collections and increase the denominator in the 'Debt/GDP' ratio. Economic growth is driven by confidence, and as the economy grows so does confidence. It is a self-reinforcing cycle.

Market Scorecard. It was a half day for US markets, enough time though to get back to all-time highs. The Dow was up 0.14%, the S&P 500 was up 0.21%, the Nasdaq was up 0.32% and the All-share was up 0.04% Woolies was the standout stock for Friday, up over 4%. I'm not sure the reason for the rally, maybe because their webpage was one of the only sites that didn't crash during Black Friday mania?

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Linkfest, lap it up

One thing, from Paul

This week: $500 million to take out the trash; odd drug names; Koos Bekker leaves R20 billion on the table; and an advent calendar promotion that's gone wrong - Blunders - Episode 80.

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Byron's Beats

I know I have been going on about Nvidia but the news coming out relating to the business is just too exciting to ignore.

GE has a very large healthcare division which manufactures all sorts of devices, more specifically scanners. Anything that processes images will improve it's quality with a Nvidia GPU.

This Business Wire article explains how GE and Nvidia have formed a partnership which will push AI into healthcare. Especially relating to image processing - GE and NVIDIA Join Forces to Accelerate Artificial Intelligence Adoption in Healthcare

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Bright's Banter

Michael Milken is an American investor, former fund manager, and philanthropist . He helped develop what we know today as high-yield bonds. He's the guy that saved Howard Marks' career after he got fired as the equities head of research when he worked at Citi Bank.

By the looks of things, Milken's influence and legacy has inspired many hedge fund managers and financiers in the Los Angeles area.

Junk bond king Michael Milken looms large in L.A. finance industry

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Home again, home again, jiggety-jog. Asian markets are all red this morning; expect a red opening for our All-share. Tiger Brands released their Full-year numbers this morning which looked good on the surface, their margins are growing again. Not much to speak of today for economic data releases. Looking at the week ahead, Naspers releases their six month numbers on Wednesday.

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D-Day

To market to market to buy a fat pig. It is D-day, 'Downgrade Day', or is it? Last night Fitch left our debt at one notch below investment grade on a stable outlook, making mention of our low growth and the likelyhood that we will need to borrow more going forward.

The way I understand it, we only need one of the ratings agencies to downgrade us today for our debt to be officially in junk status. Even with a one-notch downgrade today, our debt will still be considered of higher quality than Brazil's. Their 10-year yield is sitting at 10%, and ours is at 9.6%, which means we shouldn't see too much impact from here. Whatever the outcome this evening, expect the Rand and our yields to shift.

If you have email, your inbox over the last week has been spammed by all the retailers you have ever heard of and some that you haven't. It is amazing to see how quickly Black Friday has taken off here. Two years ago there was the odd special. Last year there were massive deals from many retailers, and South African's didn't know how to handle themselves. Remember the videos of people stampeding into Shoprite and Game? This year it looks like every retailer has jumped on the bandwagon, I even see that you can buy cricket tickets at 50% off.

At around 6:00 this morning, I was already seeing queues of people forming, and trying to buy something online is just impossible. Having said that, I tried Naspers owned takealot.com this morning and it was working smoothly, unfortunately nothing on my wish list was on special. Bright subsequently tried to do a little shopping and was greeted with the below, error. Speaking to an IT friend he says many of the smaller and more store-based retailers have just underestimated how much traffic can come through the internet on days like this. I'm sure armed with user number data from this year, shopping online next year will be much easier.

Market Scorecard. Yesterday was Thanksgiving in the US, so their market was closed and will only be a half day of trading today. The only index to report then is the All-share, which was down 0.75%. Naspers had another 4% drawdown yesterday, erasing all the gains made over the last trading week. Tencent is down another 1% this morning, so expect a red Naspers on market open.

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Linkfest, lap it up

One thing, from Paul

I'm not really a fan of podcasts. Such a slow way to take in information, via the ears! Mind you, it can work if you are stuck in a car for a few hours?

Thank goodness there is also a transcript of this great conversation between former US Secretary of the Treasury Robert Rubin and legendary asset manager and Yale University Endowment Chief Investment Officer David Swensen.

It has many great parts, but I especially enjoyed his comments about quantitative investing. Clients of Vestact might have heard (usually from some loud mouth around the braai) that owning direct equities and engaging in stock picking is outdated, old fashioned and that you should rather invest in some computer driven, algorithmic, trend following, artificial intelligence, quantitative fund. Yes! With a proprietary black-box system and eye-watering fees. Even when the net returns to investors are bad, you can still feel clever!

Swensen counters with this telling comment:

"I have never been a big fan of quantitative approaches to investment. And the fundamental reason is that I can't understand what's in the black box. And if I don't know what's in the black box, and there's underperformance, I don't know if the black box is broken or if it's out of favor. And if it's broken, you want to stop. And if it's out of favor, you want to increase your exposure.



And so I'm an old-fashioned guy that wants to sit across the table from somebody who's done the analysis and understand why they own the position. And then if it goes against them, I can have another conversation and try and figure out whether the thesis was wrong and we should exit, or whether the thesis is intact and we should increase the position."

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Check out the whole thing here (including the video podcast version): A Conversation with David Swensen

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Byron's Beats

Amazon has officially landed in Australia. This comes a day before Black Friday with expectations of 30% cheaper products on offer. It's started! How Amazon will change Australian shopping forever - and consumers will be the BIG winners.

But what does this mean for a company like David Jones who is investing heavily in new physical stores in Australia?

Woolworths is all about the amazing retail experience. I still believe there is a place for that. I am a big fan of online retail but the feeling of walking into your favourite store (mine is Outdoor Warehouse) full of potential cannot be matched online.

If you are good at your niche, you will be ok. Having said that, Country Road, Witchery, David Jones and the rest of Woolworths brands can still be sold on the Amazon platform. I am sure Woolies will take advantage of this new avenue.

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Michael's Musings

Even though global population is up 143% since 1960, most commodity prices have dropped. What makes that stat even more impressive is that over the same period per capita income is up 163%. Not only are there more people consuming resources but each person is consuming more resources. The massive demand increase has been met with a monster increase in supply thanks to innovation and efficiencies - The Enduring Wisdom of Julian Simon.

"Out of the 15 indexes measured by the World Bank, 10 fell below their 1960 levels. The indexes that experienced absolute decline included the entire non-energy commodity group (-20 percent), agricultural index (-26 percent), beverages (-32 percent), food (-22 percent), oils and minerals (-32 percent), grains or cereals (-32 percent), raw materials (-32 percent), "other" raw materials (-56 percent), metals and minerals (-4 percent) and base metals (-3 percent)."

I love the irony here, using the more eco friendly battery powered ship to transport dirty coal - China's first all-electric zero-emissions cargo ship is going to be used to transport coal. I am aware that the electricity for the ship will be produced by a coal fired power station but that won't always be the case.

Discovery have now launched a new product targeting funding for your children's education. More interesting in this following article though is the cost of education, they estimate at current prices it will cost parents around R2.2 million from crèche to a degree - Private education fees top R2 million per child.

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Bright's Banter

The year of the Rooster 2017 should be cancelled and renamed the year of the Crypto. If you think Bitcoin has had a brilliant year, then this is gonna blow your mind! The price of Ether just hit a new all-time high, trading at $410.

This cryptocurrency used on the Ethereum Blockchain (don't ask) is now up 5000% year-to-date from $8. Yes that's 5000% in just under a year...its not a mistake!

The market capitalisation (number of tokens x price of the token) is now $39 billion, a small number compared to the market cap of Bitcoin which sits at a measly $137 billion. The aggregate value of all the cryptocurrencies in circulation is $250 billion according to data compiled by CoinMarketCap.

Ethereum Price Sets A New All Time High

The logical questions to ask is "why are these cryptocurrencies flying like this? What is behind this rally? Can they go higher? Are they a good investment at the current price? "

When you find some inspired, well thought out answers please email it to support@vestact.com.

I think there's a big element of "The Greater Fools Theory" at play here. I buy this thing because there's a greater fool out there who is willing to buy them from me at a higher price than what I purchased them for. Seems legit?

I will end with one of Howard Marks investment adages — "Trees don't grow to the sky, not everything goes to zero"

Happy Black Friday, only buy items you need. Keep in mind there's Cyber Monday on the 27th of November.

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Home again, home again, jiggety-jog. Our market is off to a green start, since writing the 'market scorecard' section, Tencent is flat and the Rand has weakened resulting in Naspers opening green instead of red. There is no international data to speak of today. Enjoy your last weekend for November and good luck to the Bokke against Italy tomorrow.

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Sent to you by Team Vestact.

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Thanksgiving, Black Friday, MPC and The Ashes

To market to market to buy a fat pig. Thursday has finally arrived; for some it means we find out what the MPC decides to do, for others Black Friday deals open at midnight and for me, the Ashes cricket summer has kicked off. As a South African, choosing between England and Australia is like having to choose between eating brussel sprouts and cabbage. For entertainment value, not much beats live sport. How many more years until e-sport gets the same global following as cricket, rugby, football, and basketball?

Our inflation number published by Stats SA was inline with expectations, a reading of 4.8%. Having a look at the basket, meat prices are up 15.5%, both wine and water are up 7.2%, fuel is up 10.8% and packaged holidays are up 12%. Surely in the age of discount airlines and the internet, people will find travel cheaper, not more expensive? Talking about prices going down, telecommunication equipment was down 14.6%, home appliances were down 3%, fruit was down 3.5%, and thanks to good rainfall bread and cereals were down by 3%.

Even though inflation came down, don't expect a rate cut this afternoon. Remember at the last MPC meeting, we were one vote away from a rate rise. This is also the last meeting of the year before we hear what happens to our debt and before we hear who the new leader of the ANC will be. I think they will leave rates as they are and then assess where South Africa is in the new year after those two big pieces of information have come out.

Market Scorecard. Wow, what an all over the place day yesterday was. We have gone from very little volatility to 2% stock price moves being the flavour of the day. Yesterday, Naspers was down 4.6%, back to its level from Friday and Richemont was down 1.5%. On the upside though there was Tiger Brands and Kumba up 3%, Steinhoff, Sasol and Aspen were up 2%. The Dow was down 0.27%, the S&P 500 was down 0.08%, the Nasdaq was up 0.07% and the All-share was down 0.75%. With Naspers having such a big weighting, if it is down 4%, the rest of the market has some very heavy lifting to do to get the All-share into the green.

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Linkfest, lap it up

One thing, from Paul

We are all anxiously awaiting the forthcoming National Elective Conference of the African National Conference. Whether or not you like their policies, the fact is that they have won over 60% of the vote in recent national elections. So whoever they pick as their next leader will have a good chance of being our head-of state (President) after the general election in early 2019.

The constitution of our post-Apartheid state vests great power in our President. He or she really only answers to the majority party in Parliament. The President appoints all cabinet ministers, heads of state agencies, legal system leaders and heads of state enterprises, mostly without any process of approval or review. So it really matters what happens at this event at Nasrec in mid-December..

According to overnight reporting, the conference is going ahead, and delegates are almost all nominated. There are still some concerns that the whole thing may be delayed by legal challenges, but that seems to be receding - ANC Leadership Race: December conference likely togo ahead despite branch meeting worries

As investors and part of the pro-business lobby, we would be happier if Cyril Ramaphosa were to win, and less excited if Nkosazana Dlamini-Zuma were to come out on top. According to the SAIRR, Ramaphosa has his nose in front. However, they caution that this is based on leaks about how delegates will vote and may be "fake news". Also, note that in terms of the ANC's rules, delegates can change their minds and vote independently on the floor at the event. Keep tuned! (Ramaphosa Is Leading SouthAfrica's ANC Race for Presidency)

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Byron's Beats

Jensen Huang may not be a household name like Elon Musk or Jeff Bezos but he is fast making a big impression on Wall Street. Jensen is the CEO of Graphics Chip maker Nvidia. This article goes through 4 quotes from Jensen that investors should know about Nvidia. This one about the automotive segment caught my eye, especially on the back of Uber's recent order of 24 000 self driving vehicles from Volvo.

"Automotive segment should hit the ground running in a few years. We're building this future of autonomous driving. We expect robotaxis, using our technology, to hit the road in just a couple of years." Huang

Here is the full article. 4 Things NVIDIA's CEO Wants Investors to Know.

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Michael's Musings

If you are looking at raising funds to study or just feel you are poor at decision making, why not consider an IPO of yourself. Sell shares in yourself, raising money for yourself and giving complete strangers the power to make all the important decisions in your life - The man who sold shares of himself. Some of the decisions made for Mike was who to date, if he could propose and that he should become vegetarian.

Weird to think that it has been just over 10-years since the market high before the 2008 crash. Here is how an investment back then would look today - A Decade Later: What $1K Invested in These Stocks is Worth Today.

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Bright's Banter

First things first, we are thankful to have you as a client here at Vestact. If you are not a client, we are thankful that you read our daily message and we hope that we will win your hard earned Rands one day. Happy Thanksgiving to you and your family!

Now back to the Turkey. America slaughtered an eye popping 244 million birds this year, a flabbergasting number I know! According to the US Department of Agriculture, the turkey industry has helped families plate 3.4 billion kilos of meat so far this year. How much meat can you eat though? Not enough it seems.

The cost of a live turkey is at it's lowest since 2013 thanks to a large number of birds in cold storage, this is almost twice last years numbers. This means a 7.3 kilo bird costs around $22.38 on average across the US.

What are you thankful for this year?

The Price Of Turkey This Thanksgiving Is Lower Than Usual Because We Slaughtered 244 Million This Year

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Vestact in the Media

Byron chats to Fifi and Karabo on Closing Bell about healthcare stocks - SA's healthcare stocks are bleeding, here's why.

We get a mention in this Business Day article talking about Naspers - JSE within 100 points of record high as Naspers touches R4,000 per share

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Home again, home again, jiggety-jog. The man with a moustache much better than mine, Lesetja Kganyago will let us know the interest rate decision around 15:00 this afternoon. Cerner was up 5% last night on rumours that they are partnering with Amazon. We will let you know when the partnership is officially announced and the exact details.

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Sent to you by Team Vestact.

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