Money with a dash of Funny: April 2017

Friday 28 April 2017

Amazing Amazon

"I really feel that Amazon now have the size and scale for world domination. The Prime membership is genius. You have 80 million users who have logged in their credit card details. All it takes is one click to make a purchase. You can attract more subscribers with incredible content such as movies, series, gaming and live sports. They are in all the right pockets of growth. Once you are a member, the services available are amazing."

To market to market to buy a fat pig Wow, what a day to have off yesterday! The trump tax plan, earnings flowing thick and fast on the US front and then Mediclinic coming out with some good news pushing their London share price up 16%! First things first, our market had a strong finish to Wednesday finishing the day up 0.8% with the likes of Mondi and Richemont reaching their 12 month highs.

Onto the news pushing Mediclinic up 16% in London yesterday. When oil prices dropped from over $100 a barrel to $30 a barrel, government coffers in the UAE where under pressure. To help a bit with a budget shortfall, Abu Dhabi implemented a hospital co-payment of 20% on the 1 July 2016 if citizens went to private healthcare providers. The impact of the co-payment was estimated by Mediclinic management to be around AED 150m (around R540m) on revenues for the 2016/17 financial year, the final numbers for that period will be published on the 24 May. The co-payment seems to be dropped now, here is the official SENS from the company.

"Mediclinic International plc, the international private healthcare group, notes statements made on 26 April 2017 by His Highness Sheikh Mohamed bin Zayed Al Nahyan, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the UAE Armed Forces. His Highness has ordered the waiving of the 20% co-payment for holders of a Thiqa medical insurance card, when receiving treatment at the private healthcare facilities in Abu Dhabi, with immediate effect. The statements have been reported on the official news agency of the UAE (Wakalat Anba'a al Emarat). The Group awaits to receive precise details of the changes from the Health Authority Abu Dhabi ("HAAD")."

So still some uncertainty around exactly what will happen but if this does come to pass, it is good news for demand of healthcare services.

Then there is Trumps new tax plan, which looks to cut corporate tax rates from 35% to 15% along with changes to personal income tax and inheritance taxes. The plan is still light on details, particularly around what will happen with offshore earnings. Even if offshore earnings are taxed, as is the current system, the gap between tax friendly jurisdictions and the US will narrow considerably, meaning that the problem of paying a huge tax bill to bring money back to the US is not really there anymore. Lowering taxes means that the budget deficit looks to be getting bigger, the argument though is that lower taxes leads to more economic investment which leads to more economic growth and then higher tax collections. Economists are very divided on that logic, either way business leaders are very happy to be paying less tax. Even though the current tax plan is very light on details, the few political analysts I have read don't see it getting through congress. A light version, something that doesn't mess with the long term debt situation of the US could be passed by just Republicans, assuming that they are all on the same page and vote together. Getting bigger tax restructuring done will require a handful of Democrats to vote in favour of the change. In short ,expect deal making levels to go up in Washington as a bill is hammered out, time will tell how much if any change will come.

Company corner

Amazing Amazon just continues to thrive. They reported first quarter 2017 results last night which the market took kindly to. The stock is up 4% after the close, touching on $954 a share! Before we go through the many highlights, let's look at the numbers.

Revenues came in at $35.7bn which is up 22.6% yoy beating consensus of $35.3bn. Operating income breached $1bn while operating cash flow grew 53% to $17.6bn. Earnings per share smashed expectations, $1.48 vs consensus of $1.08. As you can see, price to earnings is off the charts. But Amazon is still in it's infancy. Quite incredible for a company with a market cap of $440bn.

The company reports in 3 segments. North America, International and AWS (Amazon Web Services). See the image below for the break down.

Note the huge growth in sales in it's most mature market, North America. The International segment is still fresh and new. They have invested heavily in India, here is what CEO Jeff Bezos said about the region.

"Our India team is moving fast and delivering for customers and sellers. The team has increased Prime selection by 75% since launching the program nine months ago, increased fulfillment capacity for sellers by 26% already this year, announced 18 Indian Original TV series, and just last week introduced a Fire TV Stick optimized for Indian customers with integrated voice search in English and Hindi."

When I was there a few months ago I noticed a big Amazon presence. To avoid the traffic in that place, buying online is a no brainer!

AWS is also thriving and is their biggest profit driver. Web services is a competitive industry with the likes of Microsoft and Google also getting in on the act. But Amazon have a fantastic reputation and will continue to leverage off this cash cow to grow other parts of their business.

When Amazon reports results they list a bunch of highlights for the quarter. Considering that this is for a period of 3 months, the highlights reel is always impressively long. A few that stood out for me in this report are the following:

Amazon signed a deal with the NFL as it's exclusive partner to deliver live streaming of Thursday Night Football to Amazon Prime subscribers. The race to stream live sports is on and with Amazon's resources and an estimated 80 million Prime subscribers, I think they may win it.

Launching Prime in Mexico with over 20 million products available.

Amazon Fresh (groceries) is now available in Japan, the UK and 21 Cities in the US.

Original content breaking viewership records in Japan and Germany.

I really feel that Amazon now have the size and scale for world domination. The Prime membership is genius. You have 80 million users who have logged in their credit card details. All it takes is one click to make a purchase. You can attract more subscribers with incredible content such as movies, series, gaming and live sports. They are in all the right pockets of growth. Once you are a member, the services available are amazing.

Now all they have to do is spread their wings and grow globally. India makes sense with it's untapped 1.2 billion people (of course China has Alibaba and Tencent providing similar services). At least content does not require massive logistic and infrastructure spend which allows them to easily operate in many new regions (like South Africa). But I am sure that they will target online retail wherever they go in time. The concept of buying online is relatively new but the shift is real.

There are many competitors out there with regards to online retail, content, web services and hardware. Many of them are Vestact recommended stocks. In my opinion there is enough room and enough growth off a very low base for all these businesses to thrive. With Jeff Bezos at the helm, Amazon will dominate for many years to come. Investors should hop on for the ride.

Linkfest, lap it up

Here is a look at the revenues of the largest companies in the world, to give you relative size, remember that South Africa has GDP of around $300 billion - The World's Largest 50 Companies by Revenue

I was surprised to see the production cost differences between Apple and Samsung - Samsung's Galaxy S8 Is Expensive to Build

You will find more statistics at Statista

The downtime that commuters have is turning out to be lucrative for e-tail, the busier the better! - Busy commute equals increased buying. I'm not sure how someone even operates a cellphone when they are sharing a square meter with four other people.

"On average, across all the trains, the purchase rates went up 45 percent when we went from two people per square meter to five people per square meter."

Home again, home again, jiggety-jog. Numbers also out from Cerner and Alphabet looked good, the stocks are currently both up 4% in after hour trading. Starbucks on the other hand missed what analysts were hoping for, the stock is down 4.5% in after hour trading. We will cover all these numbers in the coming days, for now enjoy the long weekend ahead!

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

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Wednesday 26 April 2017

Behave and Save

"By saving say 10% of your income you create a very handy buffer so the next time you have an emergency, instead of tapping into your savings (or worse into debt) you can just divert that buffer to the emergency expense. Another benefit is that you get used to living on less, so if the unthinkable happens where you no longer have a job, your savings last you that much longer. A more rosy alternative is that living on less gives you the freedom to change from the job that you are not too keen on?"

To market to market to buy a fat pig After a red start to the day the All Share finished the day in the green, up a little over 0.5%. Banks recovered from being down over 1.5% to finishing in the green for the day. Most of the gains though came through our dual listed stocks. Aspen has had a resurgence since around lunch time on Monday. Bright pointed out that it might be a coincidence but he was on CNBC Power Lunch on Monday talking up Aspen and the management team, you decide if Bright is a market mover!

Leading the charge for a green close was Naspers up almost 2% and within a whisker of it's all time high, currently sitting at R 2 537 a share. The 5 year return on the stock is an amazing 453%! I remember when it crossed the R1 000 mark in late 2013, there was a stir because a share on the JSE was trading above R1 000 but more because Naspers had been trading at R500 a year before. Rapid share price appreciate scares most of us and for good reasons. Bubbles are a real thing, the dot com is still recent history. Sasha sent images to us from the Tulip museum in Amsterdam, it is unbelievable how high a price of a plant got. Near the peak of the bubble a Tulip bulb was worth around 200 times its weight in gold! Around 21 years worth of wages for a carpenter! In the case of Naspers, our brains struggle to comprehend the size of the Chinese population and the exponential growth of the internet.

New York, New York Another record high for the Nasdaq along with the conquering of the 6 000 mark for the first time in its history, closing the day out at 6 025. The S&P 500 was up 0.6%, The Dow more than that with a gain of 1.2% thanks to big players having good results. CAT was up around 8% after crushing expectations, they only had 3% growth in revenue but thanks to restructuring and increasing efficiency, their profit number was almost double what it was last year. CAT is a nice indicator of what is happening in the primary sector around the world. No surprise then that Oil & Gas in North America showed good results. Also doing well was the construction industry in Asia/ Pacific. The growth for CAT came more in the sale of aftermarket parts instead of the sales of big machines, generally pointing to companies still being cautious.

After reading this blog piece (How Much Money Do You Need to Retire?) and having a number discussions with clients and people "in the know", my conclusion is that being financially free doesn't require a complex strategy. The first and most important rule is spend less than you earn, sounds simple right? The second rule is avoid blowing up financially by taking too much risk. Do those two things and then as time goes by, you can't help but be financially free. We have little control over what we earn, we can control what we spend and what we own though, so lets focus on that.

The greatest threat to rule number 1 is Lifestyle Inflation, where your monthly expenses tend to grow inline with your raise each year. Spending less than you earn has the obvious benefit of allowing you to save, there are some less obvious benefits though. By saving say 10% of your income you create a very handy buffer so the next time you have an emergency, instead of tapping into your savings (or worse into debt) you can just divert that buffer to the emergency expense. Another benefit is that you get used to living on less, so if the unthinkable happens where you no longer have a job, your savings last you that much longer. A more rosy alternative is that living on less gives you the freedom to change from the job that you are not too keen on?

How do you avoid blowing up financially? It all comes down to controlling your risk. The reason why we have insurance on our cars and houses is so that we don't blow up financially when low probability things happen to us. One of the many reasons why the middle class has been able to emerge is thanks to insurance spreading risks among society. So those risks are taken care of. More relevant to our conversation is the risks around asset allocation, which generally goes wrong with people taking on leverage or going "all-in" on one investment.

As Buffett said:

"If you don't have leverage, you don't get into trouble. That's the only way a smart person can go broke. I've always said if you're smart you don't need it and if you're dumb you shouldn't be using it"

Basically he is saying is, "be patient, you don't need returns of 50% a year to be wealthy." Compounding returns is an amazing tool that gets more powerful over time, so stay in the game (don't blow up) and let time and compounding do the rest for you.

Being financially free or wealthy looks different to everyone and if it was easy to get there, everyone would do it. Getting there is probably easier than most people think though, particularly if your starting point is in the ranks of the global middle class.

Linkfest, lap it up

Netflix reached an all time high last night thanks to the news that they are getting a presence in China - Netflix is going to China. The share was up around 6% but this is still very early days and they are using a third party provider to stream the content. Progress none the less.

The French election was the market moving story for Monday and will be again on Monday 8 May. If you don't know what each candidate stands for, here is a nice breakdown - France: Macron vs. Le Pen to Decide Fate of EU.

This is a fairly emotive issue at the moment and will probably come to the fore again when Trump announces a tax overhaul. It is the issue of inequality and rich v poor - Its Awesome Being Poor Today!.

Home again, home again, jiggety-jog. The Rand was weaker out of the gates this morning, getting to the $/R 13.15 levels but stabilised at that level. The All Share is green lead by the dual listed stocks. Later today we get oil inventory numbers out of the US, not too important for investors but more important for consumers. Will we see tax news from Trump? If we do see some news expect a reaction from the market.

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

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Tuesday 25 April 2017

Plastic is Fantastic

"An interesting number that came though was the positive impact for Visa from the Indian government clamping down on cash. Visa saw a 100% increase in transactions compared to last year and a 50% increase on access points over a 5 month period. Other governments may not be as harsh as the Indian government when it comes to clamping down on cash but I think it will come."

To market to market to buy a fat pig The market friendly results in the French election meant green for global markets, the CAC 40 was up over 4% with some of the French banking stocks being up around 8%! The All Share for the first time in a couple of days opened in the green and managed to stay in the green the whole day closing off 1.4% higher. At the top of the leaderboard were some of our core holdings, Steinhoff up over 5%, Discovery up over 3.5% and Woolies up 3%. Gold miners were at the bottom of the pile again, the index down 5.4%. With things going "according to plan" in the French election, the gold price was lower as ~~investors~~ traders no longer needed the safe haven asset.

Unfortunately reaching 12 month lows was Aspen, all the negative news around their pricing has hurt the share price. Given that Aspen sold ARV's at a loss at one point, I don't think gauging the customer is in their culture. Hopefully the investigations in the relevant countries are completed quickly so that the company can focus on what they do best, which is taking forgotten drugs, removing inefficiencies and then getting them to the consumer. As I said to a client yesterday, watch this recent video of Stephen Saad (Stephen Saad results interview) and then when you are done watching you will want to buy more shares at these low levels!

New York, New York Record highs again for the Nasdaq which is reaching a phycological landmark of its own, 6 000 points. It was up 1.2% to 5 983 points. The Dow was up 1% and the S&P 500 was also up 1%. Tomorrow we should see the revised Trump tax plan, where Tech companies could be some of the biggest gainers. Tech companies are cash making machines and given that their services are available over the inter webs, tax structuring has meant that they are all sitting on huge amounts of money offshore. I'm sure that the first thing that CFO's will look for in the Trump tax plan is if there is a tax holiday to bring billions of dollars back to the US without having to incur a huge tax bill. Here is an article from last year showing how much each company would have to pay in tax if they wanted to bring their cash back to the US, given the age of this article you can assume that most of these companies have even bigger cash piles now - These 30 Fortune 500 companies have the most cash in off-shore tax havens.

As you can see there is potentially a huge windfall for the IRS, which can buy many F-35 jets/ build many miles of wall. As things stand, the IRS will see little or none of those taxes, companies would rather not pay the US tax and try invest that cash in other countries. There is a delicate balancing act that needs to be done now. Giving these companies a tax holiday will mean that money comes back to the US, which leads to billions more being spent in the country, great for economic growth and employment. Giving a tax holiday sets a precedent though, which means companies will continue to accumulate cash offshore and then wait for the once a decade tax holiday. The final question to ask is how much of a tax break do you want to give? Giving a 100% tax break would probably mean that most of the offshore cash comes back to the US, giving a partial tax break would mean the IRS still collects some tax but that not all the offshore money comes back to the US. We will have to wait and see what is included in the new tax plan, if anything at all.

Company corner

Last week we had market beating numbers from Visa, this was for their (Fiscal Second Quarter 2017 Key Highlights). Here are the numbers quickly, Revenue of $4.48 billion growing at 23% (expectation was $4.3 billion), Adjusted Net income of $2.1 billion which translates into EPS of 86c growing at 27% (expectation was for 79c). The market has come to expect outperformance from Visa, the stock is only slightly up (less than 1% as I look at it) after these results. Even though popping share prices are exciting, not much movement in the price after a good set of numbers means that all of a sudden you can by the same stock at a cheaper valuation.

Trump and some of his top people have been talking recently about the Dollar being too strong. The initial impact of a weaker Dollar would be to increase the profitability of US based multinationals. For Visa, a strong Dollar took 2.5 percentage points off of their revenue growth and took 4 percentage points off of the EPS number.

An interesting number that came though was the positive impact for Visa from the Indian government clamping down on cash. Visa saw a 100% increase in transactions compared to last year and a 50% increase on access points over a 5 month period. Other governments may not be as harsh as the Indian government when it comes to clamping down on cash but I think it will come. Populations are ageing, governments need extra tax revenues, a large cash component in commerce has correlations to low tax compliance, the result is a big push lead by government to stamp out cash. Tax avoidance is just one negative aspect of cash, there is enough research to show that many illegal activities (like the drug trade) which have a negative impact on society is conducted using cash. Removing cash will not mean illegal activities cease to exist, it does mean it makes it harder to conduct, so some positive impact on society?

The important number for Visa though is what does usage look like? Transaction volumes are up 42% (thanks in part to the purchase of Visa Europe) to 26.3 billion transactions for the quarter. On the value side, all the transactions came in at $1.7 trillion, up 37% for the quarter compared to last year. Buying Visa now means you believe that the usage of cards and the Visa network will only increase for many years into the future. The argument against Visa is that there are rival payment methods popping up like PayPal, for most online shops you can now pay using PayPal instead of your credit card. Yes you can fund your PayPal account with a bank transfer but most people still use their credit card to top up their PayPal account. Paypal and Visa already have a very good working relationship. That goes for the multitude of other payment systems out there, Apple Pay, Android Pay, Venmo, Zapper and many more options.

The stock currently trades on a forward P/E of around 23 times, not cheap but not expensive for a company growing double digits. Management expect revenue for the full year to be up between 16% and 18% with no change on the company's margins, so similar operating earnings growth. When it comes to EPS growth there are a whole host of moving parts to take into consideration, the biggest would be the number of shares in issue. The board has given the green light on buying an additional $5 billion of Visa stock, taking the total share buy back war chest to $7.2 billion. Over the last 3 months the company bought back a little over 19 million shares for a value of $1.7 billion. Happy holders and buyers of this company.

Linkfest, lap it up

This would have been unthinkable a decade ago - Britain goes a day without coal-fired power for first time since the 1880s. The article doesn't say so but I assume that this was part of Earth week celebrations.

With spring on the cards in the Northern Hemisphere, ice is melting and Russian oil companies are getting ready to increase their production again - Russia's Oil Cuts Won't Be So Easy If OPEC Deal Is Extended

As Buffett says, you don't need a high IQ to be a successful investor. Emotions and overthinking a situation can lead to poor investment returns, humans struggle to see past the now - Isaac Newton was a genius, but even he lost millions in the stock market

Home again, home again, jiggety-jog. Another green day for our market, Naspers is having great day, up over 2% getting within a whisker of its all time high. The Rand is having a weaker day though, back below (above?) the $/R 13.00 level. Banks and Retailers are both down over 1%, for some reason SA Inc is out of favour at the moment, can't see any new news out though.

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

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Monday 24 April 2017

Au Revoir Le Pen?

"The final numbers were Macron with 23.75%, Le Pen with 21.53% and Fillon with 19.91%. What do the polls say about the next round's outcome? The polls are showing Macron should get around 60% of the vote if the choice is just him or Le Pen, doesn't even look close then. On the news the Euro strengthened nearly 2% against the Dollar. Macron, as one market commentator put it "is a pro-market centrist who melts the hearts of urban progressives". Le Pen is anti-EU, anti "Wall Street economics", pro working class, anti free trade and anti immigration."

To market to market to buy a fat pig The polls got this one right, we have a Le Pen and Macron run off vote on Sunday the 7th May. The poll numbers we put up last week had Macron, Le Pen and Fillon getting, 23.5%, 22.5% and 19.5% of the vote respectively. The final numbers were Macron with 23.75%, Le Pen with 21.53% and Fillon with 19.91%. What do the polls say about the next round's outcome? The polls are showing Macron should get around 60% of the vote if the choice is just him or Le Pen, doesn't even look close then. On the news the Euro strengthened nearly 2% against the Dollar. Macron, as one market commentator put it "is a pro-market centrist who melts the hearts of urban progressives". Le Pen is anti-EU, anti "Wall Street economics", pro working class, anti free trade and anti immigration.

As the developed worlds middle class feels more and more left behind, you can understand why Le Pen's support has grown. In the 2012 French election she received 17.9% of the vote, finishing third. Sitting in our cushy office in Sandton, anti-EU, anti free trade and anti-immigration seems like a terrible idea for the working class. Maybe over the short run, building an invisible wall around France will help the working class. However, all the way back in 1776 Adam Smith with his book The Wealth of Nations, clearly showed that isolating yourself from the rest of the world makes the nation poorer over the long run. It probably makes the rich richer too because they own the the means of production and with little international competition; well the poor suffer and the rich keep cashing dividend cheques. France and the UK currently have similar GDP per capita numbers, time will tell which route worked out better for their respective populations.

New York, New York It was a red day for US and local markets, S&P 500 down 0.15%, Dow down 0.3%, the Nasdaq down 0.11% and the All Share was down 0.58%. The big market moving news will be the long awaited tax revamp from the Trump administration, which is expected around the middle of this week (Trump says his 'massive' tax plan is coming next week). The first thing that the market will be looking at is if the tax cuts are as big as people were expecting. The next thing is if the market thinks Trump will be able to get the tax legislation through congress. Remember the revamp of Obamacare, that didn't get very far? Hopefully the GOP is more united on lower taxes. At the turn of the last century, tax rates in the US were much lower, so was the role that governments played in peoples lives (The History Of Taxes In The U.S.). Most of the tax increases happened during the 2 world wars, to help fund the cost of buying tanks and airplanes, the jury is still out on what tax rates should be and how much of a role the government should play in the economy.

Linkfest, lap it up

Thanks to the internet people are visiting malls less and less. Who wants to fight for parking, then fight crowds and then queue to pay, not to mention the time it takes to get to and from a mall - Brick-and-Mortar Stores Are Shuttering at a Record Pace.

Here is a Ted Talk about a film maker walking through dead shopping malls - Inside America's dead shopping malls.

If Elon Musk wasn't busy enough with running SpaceX and Tesla he is adding another thing to the list of things he is spear heading to push the human race forward - Elon Musk Outlines His Mission to Link Human Brains With Computers in 4 Years.

Regulations getting in the way of doing business. This bar in India came up with a clever way of getting around a new law prohibiting bars from being too close to major roads - Why This Bar Built a Labyrinth Outside Its Front Door.

Augmented reality seems to be the next step for the tech industry. The results could be huge shifts in the way we consume information and entertainment in particular - Mark Zuckerberg Just Signed a Death Warrant for Smartphones

Home again, home again, jiggety-jog. Our market is in the green this morning but anything that has a hint of a shiny metal is down. The Gold mining index is down over 6% and Platinum miners are down around 2.5%. The good news this morning is on the Rand front, currently trading below $/R 13.00 level and in the mid 16s against the Pound.

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

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Friday 21 April 2017

Healthy Numbers

"On Tuesday the company released first quarter numbers for 2017. Sales increased by 1.6% to $18.8bn, $9.4bn of that was in the US, $3.9bn in Europe, $3.1bn in Asia and Africa and $1.4bn in the Western Hemisphere excluding the US. This is a pretty decent sales mix. I always get encouraged when US companies still have big growth opportunities internationally. For a company the size of JNJ and the brand strength that they possess, the world is their oyster."

To market to market to buy a fat pig Our market closed down just a smidgen yesterday, down 0.09%. PSG was up 3.5% after their results yesterday and Naspers was up over 1% thanks to Tencent trading at record highs in Hong Kong. Having a look at the chart for Tencent, the stock is up an impressive 24% year to date and up 44% over the last 12 months! Naspers over the same time periods, is up 23% year to date but only 15% over the last 12 months. Part of this divergence in fortunes comes down to a stronger Rand, which has gained around 8% against the Hong Kong Dollar. Rand strength doesn't explain all the divergence in fortunes though, it seems South Africans are still skeptical on the Tencent story. Chatting to Byron this morning, we were reminded about when people ("investors") took Koos Becker cashing in share options as a sign to exit Naspers. The news emerged in late 2015 when the share price was around the R1600 - R1700 level, meaning if you sold then you would have left around 45% on the table!

Gold had a rough day out, with the index down nearly 4%. Having a look at how these stocks have done year to date, I was pleasantly surprised to see that they are up. Sibanye is up 13% for this year but still down for the last 12 months, almost halving for the period. A strong Rand, weak platinum price and their pending purchase in the US being the culprits.

New York, New York The Nasdaq reached a record high yesterday, closing up 0.92%. The Dow and S&P 500 were up 0.85% and 0.76% respectively. The strength seems to be stemming from new tax cut talks in the US, Steven Mnuchin saying a tax reform plan was coming "very soon". Tesla was down 1% due to them needing to recall 53 000 cars, which is more than half of the cars they will produce this year (Tesla recalls 53,000 of its Model S, Model X cars). The faulty part is a gear in the parking brake, which seems to be an easy fix and doesn't pose any risk to life.

International news that will have an impact on the global markets going forward is the outcome of the french election. Tomorrow is the first round, where if no candidate gets more than 50% of the vote (very likely to happen) the top 2 candidates go into a second round of voting on the 7th May. From a markets point of view, France staying actively involved in the EU is a good thing. The attacks in France last night might sway some votes more to the Nationalists but time will tell. The polls are showing that Le Pen may get to the second voting round but that she won't get further than that, same as the polls said no Brexit and a Hillary win.

Company corner

Johnson and Johnson needs no introduction. From commercialising first aid kits in 1888 to the $320bn market cap business it is today, the story is extraordinary. Now compromising three core divisions, consumer, medical devices and pharma, the business had annual sales of $72bn last year.

On Tuesday the company released first quarter numbers for 2017. Sales increased by 1.6% to $18.8bn, $9.4bn of that was in the US, $3.9bn in Europe, $3.1bn in Asia and Africa and $1.4bn in the Western Hemisphere excluding the US. This is a pretty decent sales mix. I always get encouraged when US companies still have big growth opportunities internationally. For a company the size of JNJ and the brand strength that they possess, the world is their oyster.

Adjusted earnings per share were up 5.8% to $1.83. Expectations from the company are for $7.00-$7.15 for the full year. Trading at $121 a share, the company trades on 17 times forward earnings which is pretty much in line with market. There is no doubt this is a quality company and quality attracts a premium.

To get a better understanding of their sales mix, take a look at the below image from the results presentation.

Pharma is still the crowned jewel but medical devices had a really good quarter.The medical devices sector is full of innovation and JNJ have the war chest to handpick great bolt on acquisitions. Speaking of which the $30bn Actelion deal has reached agreement and the impact on earnings has already been included. Remember they went after this Swiss business for its leading, differentiated in-market medicines for pulmonary arterial hypertension which already has 65000 patients on board.

The sector certainly comes with regulatory risks. But I think that justifies an investment in JNJ. The business is so big and so well diversified you are protected from certain products facing regulatory scrutiny. The more I follow the healthcare sector the more I realise that although it is a sector you have to be invested in, it is better to go with big conservative businesses. JNJ is the biggest and the most diversified.

Johnson & Johnson remains a core holding in the Vestact portfolio and we are still very happy to be adding at these levels. Scope for global growth is huge and they certainly have the resources to do so successfully.

Linkfest, lap it up

The success of Netflix is shacking up the entertainment industry. The big question that still needs answering is how does sport fit into the future of product offerings? - A potential fight is brewing in TV land over an under-20-dollar TV bundle without sports.

Talking of Netflix, their moat protecting their value lies in their line up of Netflix produced shows - Why the Best Is Yet to Come for Netflix, Inc.. Compared to a few years ago when Netflix produced shows were more miss than hit, their current line up of Netflix originals are world class.

Home again, home again, jiggety-jog. The All Share opened higher this morning, with the Rand hovering around the same levels as yesterday. Visa had numbers out last night after the market close which were a beat, the stock is set to open 2% higher when US markets open at 15:30 our time. We will give you a better run down of those numbers next week.

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

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Thursday 20 April 2017

Bank with the Yanks

"Lean in here, just to hear an amazing number. Total average deposits clocked 1.3 trillion Dollars (in a low rate environment), up 7 percent relative to the first quarter of 2016. Total loans ticked up 4 percent to 958 billion Dollars, again, an eye popping number."

To market to market to buy a fat pig The All Share went from green to red yesterday shortly after lunch, closing down 0.24%. The movers and shakers were Kumba Iron Ore up around 5%, clawing back some of the huge drop the day before. On the other end though we had Pick n Pay down around 4.5% after publishing their full year numbers. The numbers themselves didn't look too bad, HEPS and Dividend were up 18% but the top line number is what was the problem. They increased turnover by 7% or only slightly more than inflation. The stock is priced as a turn around story, meaning there is a high expectation for solid growth. You can only improve operating costs so much before you need strong sales growth to be the driver of increased profits.

Good news for consumers, oil dropped by over 3.5% after data out of the US showed that oil inventories were decreasing much slower than forecast. The implication is that the OPEC deal to cap production has sprung a few leaks, continued support for the production cap may be limited, what a twist. Even as global demand for oil has risen the impact of production caps from OPEC have become less and less significant thanks to the Frackers. Here are two graphs about how things have changed for the frackers over the last few years. First, here is what production numbers have been over time. Note how even though rig numbers fell at one point the production output didn't.

A more significant graph is how the costs relating to fracking have plummeted. Remember that OPEC's original strategy was to push oil prices down thus causing the frackers to go out of business? Thanks to technology, less and less producers will be impacted if that strategy is implemented again. If anything OPEC member nations will sink first with lower oil prices.

Company corner

Wells Fargo reported numbers last week. At the same time, Berkshire, the biggest shareholder, sold down shares to below 10 percent. Reason being is in part that the shares in issue have reduced, as a result of buybacks from the company. Fewer Wells shares in issue means higher holding by Berkshire, as they are not a seller. Regulations then forced Berkshire to sell down its position. The numbers themselves were OK. The company of course has been in the news for all the wrong reasons, recent executive clawbacks of shares are a step in the right direction of normalising the behaviour of the staffers in question. Of course the stink associated with the scandal meant that the chief was axed and the board moved swiftly to restore credibility.

To the numbers for Q1 2017! Net income was flat at 5.5 billion Dollars on revenues of 22 billion, relatively light for what the market expected. Earnings per share registered a Dollar exactly, the market consensus was three cents lower than that. Lean in here, just to hear an amazing number. Total average deposits clocked 1.3 trillion Dollars (in a low rate environment), up 7 percent relative to the first quarter of 2016. Total loans ticked up 4 percent to 958 billion Dollars, again, an eye popping number.

Credit quality improved, provisioning expenses were lower by 44 percent. Good news! Consumer balance sheet repair continues. What is more interesting is that online and secure sessions (what we know as internet banking) continues to gain momentum at the expense of the branch visits. I am sure that when people eventually come around to being less interested in the physical interactions, and more at peace with the online transaction, that costs can be further curtailed. Branch interactions are actually up from Feb to March, down heavily year-on-year though.

The real question arises, why own this company? And is the stock fairly priced at these current levels? Firstly, the USA is where animal spirits are encouraged. The USA is a place where capitalism and risk taking is encouraged, and has been for the last 250 odd years. The champagne socialists will tell you otherwise, the real hardcore two-piece short sleeve Mao suit wearing socialists will believe otherwise. The truth is, more people have been lifted out of poverty by forward economic momentum of the capitalistic kind than at any other point in humanity. The US continues to have a growing population, forward momentum in terms of household formation, and a growing economy. Wells Fargo is a good proxy for housing in the US, it is a good proxy for the economy in the US. Until recently, they were a good proxy for the gold standard in risk free banking ownership (of the stock).

What about the price? The stock fell in response to the earnings. Recently the chair and the CEO bought shares in the business after the price fell, around 5 million Dollars worth. I suppose that is as good an endorsement as it gets. This is Stephen Sanger (chair) and new CEO, Timothy (Tim) Sloan. The stock trades on 13x historic earnings, with a pre-tax dividend yield of close to 2.9 percent and around 12.2x forward. It is hardly expensive, yet lower rates may well mean that interest earned may be lower than anticipated. i.e. the idea that the Fed won't raise rates as much as anticipated. We own the stock as a stable part of the portfolio, reliable, yet a proxy for the US economy. We continue to be patient, the share price should expand later into the year as the US economy improves, and interest rates rise.

Linkfest, lap it up

A current topic that has grown momentum over the last few years is the level of global inequality. One part of the discussion that many people forget is how quickly the global pie has grown over the last century - 2016: the "Year of the 1%" or the Year Poverty Fell to a New Low?

When cars crash, wealth is destroyed in society even if it wasn't your car in the accident. An increase in accidents means higher insurance cost for you, higher cost of the materials that go into cars and increased time in traffic - Study confirms we all use our phones while driving. With a phone addicted population self driving cars can't get here fast enough?

"It is estimated that a 2-second distraction increases the risk of a collision by 20 times."

I'm not sure if my wife would be keen to stay here, it looks like a huge opportunity for Disney though - Disney wants to launch a 'Star Wars' starship luxury resort, and it looks like a fan's dream.

Home again, home again, jiggety-jog. The Rand is having a strong morning, getting closer to that $/R 13.00 level and below the Pound/Rand 17.00 level. With the UK parliament green lighting an early election expect some Pound volatility for the next few months as political parties woo voters with promises about the future.

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Wednesday 19 April 2017

Spanked by an Iron Rod

"Stocks in Jozi were whiplashed, an iron ore price that has been ditched in a hurry (perhaps post the first Trump policy roadblock) and a firmer Rand that weighed on both the commodity stocks and the Rand hedges. By the time that the bell rang for the close, resource stocks were on the ropes, down over three percent at the end of the day. Industrials had shed over a percent and one-quarter."

To market to market to buy a fat pig Stocks in Jozi were whiplashed, an iron ore price that has been ditched in a hurry (perhaps post the first Trump policy roadblock) and a firmer Rand that weighed on both the commodity stocks and the Rand hedges. By the time that the bell rang for the close, resource stocks were on the ropes, down over three percent at the end of the day. Industrials had shed over a percent and one-quarter.

There was very little to be excited about, stocks across the board were lower by over a percent and a half. Only Hammerson, Growthpoint and Woolies were showing any exciting day returns to speak of, all three up over a percent to the good. In the losers column it was a widespread "red-spread", a whole lot of bleeding going on I am afraid. Kumba was down nearly 9 percent by the end, BHP, Anglo, Glencore and Steinhoff all fell over three and three-quarters of a percent.

Aspen was whacked over four percent. Another nasty story about the company "celebrating" price hikes for cancer therapies, in internal emails. Or so an investigation has shown. These drugs were bought from GSK, and Aspen have hiked the prices of some of these therapies post the transaction, and in some cases by a lot. The company responded with a release on SENS, which said the following (amongst others):

"The content of the reports concern matters that are sub-judice. Out of respect for the integrity of ongoing legal processes with European regulators, as well as the court in Italy, Aspen will not comment on these public allegations. Instead, Aspen looks forward to the opportunity to demonstrate the integrity and legality of its practices in the context of these legal processes."

That is fair enough. If the company thinks that they have acted ethically, then they will show this. European healthcare is tricky, the public healthcare systems are huge in the lives of ordinary citizens, equal rights and getting a fair shake is a "given". The last part of the release shows how much smaller this business is, relative to the rest of the business:

"The oncology portfolio in question generated revenue in the European Union in Aspen's financial year ended 30 June 2016 of EUR60 million (R963 million). The majority of the revenue was from the sale of tablets which have an average price of approximately EUR2 per tablet. The Aspen Group's total revenue for the year ending 30 June 2016 was R35.6 billion."

So .... as usual in these situations, we suggest that one awaits the outcome of the investigation. I don't know Stephen Saad well enough to say what he is feeling as a result of this, I am pretty sure that he is hurting and wants to get to the bottom of this. He does not strike me as a person who is after the buck, he genuinely wants to make a difference. He has. And will continue to do so. Hold and take the wait and see approach.

Stocks across the oceans, in New York, New York closed off their lows of the day, alas for the bulls, still in negative territory. By the close the Dow had shed over half a percent, most of the drag coming from Goldman Sachs (poorly received earnings - WSJ - Goldman Misses Big on Trading, Trails Rivals Badly and Goldman's Mighty Traders Strike Out), the stock was down around four and three-quarters of a percent. I always get the sense that Goldman is like Austin Powers. Loved by insiders, secretly outsiders are jealous.

JNJ results from the company which saw the share price sell off over three percent, we will write up on this one too. The broader market S&P 500 gave up three-tenths of a percent, whilst the nerds of NASDAQ fell by a little over one-tenth of a percent. IBM also reported after-hours, the stock has been completely kiboshed, down over five and one-third of a percent in the aftermarket. Check this out, revenues for Q1 and Q3 since 2002. Not good. Perhaps Buffett and Berkshire knows something we don't?

Looks like it is getting a little desperate. Having said that, there is a still a dividend underpin of around three and one-third of a percent and an earnings multiple of around 12, the stock looks ex-growth. A whole lot of cost cutting whilst they re-engineer themselves into the internet of things era, I have no doubt that they can do it. When you invest in a company with "legacy" issues, know that they can change and morph into something else, as a result of their resources and existing customers. For one ..... IBM have moved to Apple hardware and are a whole lot more productive.

Jeepers creepers, where'd ya get those peepers? Those are the opening lyrics made famous by Louis Armstrong. The song was actually written by Harry Warren, the first fellow who wrote for movies. Nominated for 11 academy awards, and winner of three, writer of over 800 songs ..... and yet, we associate the song with Louis Armstrong. It is just the way it goes. Like Michael Collins, the third astronaut in Apollo 11, the fellow who made it possible for Armstrong and Aldrin to step on the moon, and get back. Mind you, 24 people have "gone" to the moon, only 12 have ever walked on it.

My point is that there is a lot of stuff that goes on in the background, with exceptional people who are not in the limelight. I learnt that some small things change people, make them exceptional. A good example is the certificate from the Dale Carnegie School of Public Speaking that hangs in Warren Buffett's office. This is more important to him than his business and undergraduate college degrees. Before he did that course (which can still be "done" - Public Speaking Mastery, starting this Thursday), he was petrified of talking in public. I learnt this from watching the documentary "Becoming Warren Buffett", it is a must watch.

Back to Collins and Warren (from above), who knew who Sir Jony Ive was before he rose to prominence in an Apple post Steve Jobs? He is one of the people who has improved productivity dramatically for humanity. OK, and he is responsible for all that has been spawned from smart technology too. Currently he is the chief design officer at Apple Inc., one of the most iconic brands on the planet. And does he do it for the money? Nope. Maybe. Perhaps not. Often if the starting point is to be famous, or make money, you may never get there. In the end, Ive and Warren (Harry) were recognised for their brilliance. It makes you wonder how many people WANT to work at Facebook, Google/Alphabet, Amazon, Berkshire, Tesla and the like, as a result of other people who are trailblazers.

Linkfest, lap it up

China and associated economic news has gone a little silent in this politics driven world, Brexit, French Elections and of course Trump. It is refreshing to see some data suggest that whilst 7 (and thereabouts) percent growth may be the norm now, there are small signs that electricity demand and rail freight volumes are picking up in China - China: Housing-led recovery in Q1.

Confused about the French elections? The first round is this weekend, here goes a nice Bloomberg guide on who/what and how - The Latest on France's Presidential Election. My best guess is Fillon (anyone) trumps Le Pen in the second round and brings something fresh to politics there.

This is *very* interesting. Perhaps discuss this with two separate generations, the one above and below (if you still have access to those) and let us know what you think - The United States of Work

Home again, home again, jiggety-jog. I am off for a bit! Mikey and Byron will take care of you, I will return with fresh new ideas and fresh insights. I hope. Earnings season continues, regardless!

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Tuesday 18 April 2017

Game of Content

"We know the deal. Facebook and YouTube have adverts and attract many more eyeballs. Netflix is paid for content. Netflix is at the early stages of a global revolution in content generation and content serving. Some of the older and more traditional (one-way) content providers have been unable to breach certain ceilings in subscriber numbers."

To market to market to buy a fat pig Markets in Jozi, Thursday (a while back), closed marginally lower on the day. Financials and banks were the winners on the day, resources slipped around half a percent by the close. SA inc. got another lift, Shoprite and Woolies, as well as Tiger and FirstRand at the top of the leaderboards. Dollar weakness translated to Rand strength, meaning that Rand Hedges were going to be under pressure. Coupled with the weaker commodities complex, it was unsurprising that the likes of Glencore, South32, BHP Billiton and Richemont all lead the losers. Losers in share price, not as businesses, that is important sportslovers. Notwithstanding that, Sappi clocked a 12 month high.

The Rand has done more firming over the last few days, back to levels seen in early February. What is that about? I guess we will have to see what international flows are likely to look like in the coming months. 6 months is my best guess of the unintended consequences of a negative credit review. The finance minister has been talking long and hard about fiscal discipline and fiscal consolidation and wanting to stave off Moody's from a downgrade to non-investment grade. The mood has looked gloomy to say the least. We shall see what transpires.

Stocks in New York, New York, have had two sessions since we signed off. Last evening, notwithstanding the geopolitical tensions that exist out there, stocks ramped up sharply. The Dow, the S&P 500 and the nerds of NASDAQ all rallied around nine-tenths of a percent. It was a broad based rally, industrials and financials leading the charge. We are pretty close to being in the middle of earnings season, this week and next week (and the one thereafter) will be huge. We have started already, there were the banks last week, which on balance were better than most people anticipated.

Wells Fargo reported last week, we will revert with those earnings review tomorrow. The stock reacted negatively, a bottom line beat versus a top line miss, the stock still looks cheap. Over the last five sessions the stock is down nearly 4 percent. Equally, YTD it is down over four percent, it has not been easy for the financials. The news that Berkshire, for regulatory reasons, reduced their holding in the company, also has put some heat on the stock price. In other words, Berkshire cannot own more than ten percent of a bank stock, as per regulations. We will review and revert.

Company corner

Netflix recorded numbers post the market close last evening, they are always presented in an orderly fashion via a shareholder letter from co-founder and CEO Reed Hastings - Q117 Letter to shareholders. For the time being the main metrics to focus on for the company will be the number of subscribers that they can continue to add, coupled with the most important thing for the subscribers, namely, content. Revenue growth of nearly 35 percent year-on-year, on net additions (of subscribers) of around 5 million (3.53 in their international business). Total subscribers (paying members) nearly reached 100 million, with a roughly even split between the US and their "international" business. Subscriber numbers were actually short of company and the Street consensus.

Content matters more than anything else in this business. At the end of the day, all the original content being generated is going to attract new and keep existing costumers. And that will mean spending heavily in order to keep up with all the traditional providers and then of course, those folks that may be newer entrants into this heavy streaming space. It is a constantly evolving space between new and existing platforms. Cord cutters are many. If you only need access to movies and series, then this is for you. If you desperately need to watch sport and love that (I do), then you need to find another way. Expect more streaming sports in the coming years, where people can pay per program viewed, either live or with a short delay. Sport, you have to, have to, watch live.

The earnings transcript is always a great place to find information about the business (you'll have to sign up for the free service) - Netflix's (NFLX) CEO Reed Hastings on Q1 2017 Results - Earnings Call Transcript. What Netflix can do, is always to partner with eager local content producers who want their content to have a global audience. I have watched some international movies with subtitles, the content is magnificent, it is just out there without big enough audiences. Of course the factor that keeps these countries with poor internet infrastructure away from the main drag is exactly that, bad internet speeds. As those improve, no doubt the ability to grow across emerging markets exists.

What is interesting is that Reed Hastings says that they have YouTube envy. He suggests that the company is at the early stages of internet movies, whilst YouTube and Facebook have a much larger audience. Except the content you watch on both of those channels is normally shared by people of a like mind (Facebook), or is a search function (YouTube). Netflix is served to you, and whilst the review process has changed recently (from 5 stars to thumbs up and thumbs down), it does take a little longer for the company to get the "mix" right. They experienced this first hand in Brazil, a massive market with a growing middle class.

We know the deal. Facebook and YouTube have adverts and attract many more eyeballs. Netflix is paid for content. Netflix is at the early stages of a global revolution in content generation and content serving. Some of the older and more traditional (one-way) content providers have been unable to breach certain ceilings in subscriber numbers. If you buy Netflix now (at nearly 150 Dollars a share, a 63 odd billion Dollar market cap), you are certainly buying the future. Revenues should continue to grow at a healthy click, earnings are not likely to exceed 3 Dollars this year. Which means that the stock actually looks cheaper than at any point. If you own them, keep them and definitely pay attention to who is generating content and what the consumer wants out there. Their original stuff is amazing (both reality, series and documentaries), and finally people are finding a young and fresh platform.

Linkfest, lap it up

I am sure that you have always wondered why company spend on advertising is so high, you cannot just make a sweeping statement of "oh, people will always drink XYZ". The Visual Capitalist says this about customer loyalty - Here's 5 Ways to Build Customer Loyalty, According to Science. One piece of research stands out there for me, 79 percent of customers would take their business to a competitor within a week of experiencing poor customer service.

This is amazing! This retailer is showing the power of AI - How Germany's Otto uses artificial intelligence.

"The AI system has proved so reliable - it predicts with 90% accuracy what will be sold within 30 days-that Otto allows it automatically to purchase around 200,000 items a month"

"Overall, the surplus stock that Otto must hold has declined by a fifth. The new AI system has reduced product returns by more than 2m items a year."

Talking of future technology impacting our present day lives, 3D printing parts is and will be huge for the aeronautical industry - 3D-printed titanium parts could save Boeing up to $3 million per plane

Home again, home again, jiggety-jog. Stocks have started lower here across the board, Resources stocks as a collective down around two percent for starters. Long4Life (the Joffe SPAC) is heading lower and finding a level, perhaps somewhere around the cash level is appropriate.

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Wednesday 12 April 2017

Namaste Lululemon

"The share price graph is flat. Expectations were great. This happens, where there is a run up into what seems like an amazing business (which it is), the market expects more. Now may well be the right time to strike (a pose). It seems we may have gone from a time of "sleeping hero" and "pigeon" (downward dog?) to locust and cobra. Know your yoga positions people."

To market to market to buy a fat pig A good day in Jozi for stocks, the all share index added nearly three-quarters of a percent. Financials added nearly a percent and a half, industrials as a collective added four-fifths of a percent. Kumba fell over six percent, Anglo dropped a percent. Amplats and AngloGold Ashanti roared ahead and were at the top of the leaderboards, the banks reacted positively, there was chatter that Barclays Africa would not sell at these depressed prices.

Two years out, all the major banks trade on multiples in the high single digits, with some yields pushing 8 percent (Barclays Africa). I mean, if the forecasts are right, Barclays would be selling "ABSA" at a current multiple of 8.1 times on a dividend yield of 7.2 percent (pre-tax). That hardly sounds like they (Barclays) would be getting a good deal. In fact, it sounds like a horrible idea. To be fair to the market and the present levels that Barclays Africa trades at, the multiple has been this low since 2014, the highest is around 13.5x in 2015. The stock hasn't got above a ten multiple this year, or 2016 for that matter. Mid single digit earnings growth is expected from the company this year, for a very cheap 7.5 times forward multiple. And a yield of nearly seven and a half percent.

It (Barclays Africa) is, at these levels over the last few weeks, trading at the bottom end of the "low" area. The market is still not convinced. Too much noise around .... credit ratings downgrades, political noise, general economic weakness and all in all, uncertainty. The kind of uncertainty that leads to business investment paralysis, of the kind that effectively sees people in freewheel mode. Capital has many choices, to lie and wait, to look for others pastures to survey the lay of the land, or to "get active". I am afraid that a lot of people are thinking along the first two lines. Once capital leaves, it is unlikely to return any time soon.

I saw a tweet from Wayne McCurrie (Ashburton Investments) that suggested that corporate credit markets are currently frozen. He said that MTN and Barloworld had to cancel issuances. He also suggested that Transnet was looking for 300 million Rand, and only got 20 million Rand. I am sure that when "things" settle, it will look a little more favourable for issuances. At least I hope so, if investors are shy, then things may get tougher. And added to that is the fact that we should see an 80 cents per litre increase (more or less) in the petrol price at current levels. So, it is possibly fair to say that in this type of scenario, with the consumer and business environment looking "sad", perhaps the banks are currently on exactly the correct rating. Meaning that the market is discounting the stock price based on the unknown-unknowns, to borrow a Rumsfeldian phrase. It is what it is.

Just this morning the folks from BHP Billiton have come out with a review of (the) Elliott proposal. The company views the proposals as a little short sighted. And what is interesting is the part about local (Jozi listed) shareholders:

"South African shareholders, who comprise 17 per cent of the BHP Billiton Plc register, would face particular risk as they would not obtain capital gains tax roll-over relief and might need to pay tax under Elliott's proposal."

Under that scenario, I would be totally against this! The ending is a "thanks, but no thanks" answer to Elliot. I suspect that they are going to have to do a lot more work than this, to get what they are looking for. As I said to some of the fellows in the office, for all we know, they have unwound the structure anyhow. The stock is down a little in Aussie, having fallen initially on the news, bouncing a little as we write this. Spot on Bevan, tell 'em to fob off. Unless Elliot can come back with more gunpowder and take a meaningful stake in BHP Billiton, they are just small shareholders. Sure, I buy the fact that they are owners of the business, then again so are the other 96 percent, and the current trajectory may be better for them, as owners of the business.

Stocks in New York, New York, ended better than the session start, closing marginally away from the prior session for the Dow Jones Industrial Average. Down 0.03 percent by the close for blue chips. The broader market S&P 500 gave up 0.14 percent, whilst the nerds of NASDAQ lost nearly one-quarter of a percent on the session. Losers included some of the major tech stocks that have had good runs YTD, Facebook and Apple losing a little ground.

Much of the weakness in equity markets was attributed to the geopolitical picture and the heightened risks in recent days. Syria and North Korea are the hot spots. The recent strikes on an airbase in Syria in response to a chemical weapons attack on civilians, and the deploying of a US aircraft carrier to near North Korea being seen as a sign that "stuff" is getting real there. China have sent 150 thousand troops to their border with North Korea. Is that to show solitude or just an act? Either way, this is somewhat reminiscent of the Cold War, chess pieces being moved all over the show.

The Chinese do not want the North Koreans to get friendly with the Russians, nor do the Americans. The Chinese do not want the North Korean regime to be friendly with the US South Koreans, and I am sure the Russians do not want that either (they share a border with North Korea too). It is a case of 25 million people living under a tyrant, who could do so much better with their brothers and sisters to the South. The South, for historical reasons, has a capitalist economy and high standards of living, due to the relationship with the US post the Korean War.

The North is ..... nothing short of a disaster. It forms an important geographical buffer for both Russia and China, away from "the West". Let us just all admit that it is complicated. The nuclear bomb aspirations of the North Koreans (or a few people to be precise) makes the Japanese very nervous. And it makes the people living on the West Coast of the US very nervous too. Let us just say that is the one thing that worries Warren Buffett the most, he has made that known several times. Syria? That involves the Russians and Americans too. And many fleeing citizens that have to put up with a hostile reception in Europe and further afield. Again, this is very, very complicated.

As we have said, many times in the past, and I am sure many times in the future too, politics is a tricky old business. It changes, it can be stuck, very fluid and definitely impact on markets. The trailing PE multiple of the South Korean market is around 12.5 times, it is cheaper than many of their peers across the region, bar for China. As a result of geographical proximity to North Korea and potential conflict, investors are always putting a lid on valuations in that region. Russia may be the cheapest market in the world, in Dollar terms at this stage. Again, as in the banks and South African scenario above, sometimes cheap for a reason.

Company corner

I have been meaning to write about this for over a week, the Lululemon Athletica results. There has been, how do we put this mildly, a lot on the go. Lululemon manufacture and sell high quality yoga and running apparel. It is not cheap, at 118 Dollars for a pair of yoga tights, 198 Dollars for a jacket, 118 Dollars for a swimming costume and even a simple visor costs 32 Dollars, this is at the top end of the apparel range. You can even buy a reversible mat, towel and water bottle for a combined 100 Dollars. Or a duffel bag for nearly 150 Dollars.

So who shops at Lululemon Athletica? Someone who wants and needs fashionable and comfortable items for athletic and general wear. You certainly have choices. I did a couple of searches, Yogasmoga for instance is more expensive. Nike, the same range tights are around 115 Dollars. Adidas sells cheaper tights. Under Armour sell cheaper and more expensive tights, depending on the quality.

At the end of the day, for a consumer that likes a luxurious product, that is durable and crosses over into fashion, they will be the core consumer of the apparel. Someone who exercises once or multiple times a day that likes to be comfortable, and the added style and comfort has a serious price tag attached to it. It is a fairly crowded space, equally, it is a space with room to grow. The brand has a loyal bunch of followers, the main gripe recently has been a lack of colour in the range. OK, time to have a look at the numbers.

Check out the Lululemon athletica inc. Announces Fourth Quarter and Full Year Fiscal 2016 Results. Revenues up 12 percent for Q4, 14 percent for the full year. The company net revenues clocked 2.1 billion Dollars. Gross profits increased 20 percent, to 1.2 billion, diluted EPS for the full year was up to 2.21 Dollars a share, an increase from 1.89 for the year prior. Mid teens growth across the board sounds like a really good outcome. Except, as is often the case, the market was expecting more from these numbers, as well as the outlook. The company expects 2.6 billion Dollars in revenues this year and diluted EPS to be 2.36 Dollars at the top end, 2.26 (which is hardly any growth) at the bottom end.

The share price fell in a heap after these numbers, down from above 66 Dollars to just above 50 Dollars, roundabout where the stock is trading now. On a low 20's forward multiple, the stock hardly seems like a steal currently. What they do have, is a growth road ahead. Although the market is relatively small and niche, the scope for multiple brands attracting a growing middle class hungry for comfortable and quality apparel is clear to see. There are multiple runways ahead for the industry.

The stock has been priced right at this level. It has been stop-start for investors since 2011, the stock is up 16 percent in 6 years. Currently at 51 Dollars a share, the high in that time is 81 and the low is in the high 30's. We are more in the bottom half. From the annual report, see below the revenue growth, which is pretty astronomical:

The share price graph is flat. Expectations were great. This happens, where there is a run up into what seems like an amazing business (which it is), the market expects more. Now may well be the right time to strike (a pose). It seems we may have gone from a time of "sleeping hero" and "pigeon" (downward dog?) to locust and cobra. Know your yoga positions people. Any further weakness in the share price, somewhere in the region of 47-48 Dollars a share seems like good value, around 8 percent lower than now. Having said all of that, who knows where share prices go, I like the story over the next three to five years. It is now correctly priced.

Linkfest, lap it up

Here is why you should never buy/sell a stock based on what someone says on the TV or an article - Scammers Used SeekingAlpha for Bogus Stock Promotions, SEC Says. You have no idea what time frames or motives the person has for saying what they say.

We think Tesla is an amazing company and that Elon Musk is someone you don't want to bet against. Here is why people worry about the Tesla share price, note how much growing needs to happen just for the share price to stay at its current levels - The Numbers Behind the 'New Big Three'

You will find more statistics at Statista

AI is already changing our lives, even if you don't realise it. Here is how far the industry has come in a mere 5 years - Five years ago, AI was struggling to identify cats. Now it's trying to tackle 5000 species.

Home again, home again, jiggety-jog. Stocks have started better here, that is a good thing. Pretty much across the board. French elections in two weeks, those should be fun! Or not. The spreads on the French and German treasuries have blown out. i.e. The yields and the risks have risen in France. I suspect either way, Le Pen will come second and still claim victory at some level.

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