Our Stats Look Poor

To market to market to buy a fat pig. Last month Stats SA published their Poverty on the rise in South Africa report. It makes for some grim reading and puts life for the average South African into perspective. The below image best sums up the report.

Here is a quick breakdown of what the different acronyms mean. Food Poverty Line (FLP) is currently set at R531; it is the amount they have pegged as the amount needed just to feed yourself for a month. Can you feed yourself on R17 a day? Lower-Bound Poverty Line (LBPL) is currently set at R758. It means that you have enough to feed yourself, but you don't have enough for other essentials, so you probably go without food so that you can afford the other non-food essentials. Upper-Bound Poverty Line (UBPL) is currently set at R1 138, the point where you should be able to feed yourself for a month and afford essentials.

The above image is saying there are 13.8 million South Africans that can't afford to feed themselves and 55% of our population don't earn enough to afford essentials and food. They have to choose one or the other. There have been significant improvements since 2006 when the first issue of the report was published. The problem now though is that we have gone backwards since the 2011 report was published. Corruption, state-capture and flip-flopping on finance ministers hits the poor much harder than the rich.

The only thing that will fix our problems is growth. Growth can't happen without economic confidence and certainty. To finish off on a more positive note, have a look at the substantial progress being made in getting people power and water.

New York, New York. US markets kicked off the day in the red, to recover and squeak into the green. That means we have had two straight days of record high closes for all three major indexes. Here is the scorecard, the Dow was up 0.18%, the S&P 500 was up 0.12%, the Nasdaq was up less than a point and the All-share was down 0.4%.

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Linkfest, lap it up

One thing, from Paul

Rheumatoid arthritis is a growing problem amongst older persons. As you know, pretty much everyone is living longer these days. It affects women more than men, and results in stiff, swollen wrists and hand joints.

For serious cases, Doctors prescribe TNF (tutor necrosis factor)-inhibiting, anti-inflammatory, biologic medications such as Humira, Enbrel or Remicade. Those drugs are made by US-based Abbvie, Amgen and Johnson & Johnson, respectively. Humira is the world's top selling pharmaceutical product. To put that in context, its annual sales exceed $18 billion. It really works, but it costs about $4,370 per person per month.

We own Amgen in US portfolios, which makes Enbrel and also wants to sell a Humira biosimilar called Amjevita. Remember that biosimilars are intended to be less costly versions of expensive biotechnology medicines. Because biotech drugs are made from living cells it is not possible to produce exact copies, which differentiates them from generic copies of simple pills that tend to be much cheaper.

Yesterday Abbvie and Amgen announced a legal settlement that ends their patent disputes, which resulted in both of their share prices going up. Amgen has agreed to delay the US launch of Amjevita until 2023. The product will be launched in Europe in October 2018. AbbVie will also receive royalties from Amgen - AbbVie, Amgen settlement sets Humira U.S. biosimilar launch for 2023

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Byron's Beats

Yesterday Uber celebrated 4 years in Africa. If you are a client of theirs, I am sure you would have received the same email I did. This showed some stats that they have recorded over the years. Here is the image below. What I found interesting was the request times. In SA the most popular request time was 6pm on a Friday. I would guess that is because a lot of people go out drinking at that time. I would love to see the drinking and driving stats since Uber arrived here. I am sure they have declined.

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Michael's Musings

Here is something lite for a Friday - Legalised Cannabis May Be a Windfall for McDonald's and Taco Bell. One of my favourite games to play in economics class was, "What are the potential unintended consequences of doing X ?".

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Bright's Banter

This morning I'm reading a short piece from Cliff Asness Co-Founder of AQR, an asset management firm and hedge fund with over $165 billion AUM in Connecticut - Little Things Mean A Lot

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Home again, home again, jiggety-jog. My heat map was all green this morning, I thought it might be broken. US GDP yesterday was a beat, coming in at 3.1% growth. UK GDP, just out, was a miss. They grew 1.5%. Good luck to the Bokke this weekend.

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Tax Gets Waxed

To market to market to buy a fat pig. The much-awaited US tax revamp finally arrived, well a vague breakdown at least. As investors in US companies, the drop in the corporate tax rate from 35% to 20% is significant. One of the Trump campaign promises was a corporate tax rate of 15%, so he has already made a compromise. House Speaker, Paul Ryan has said the final rate would probably be between 20% - 25%, time will tell where it finally settles. The below graph highlights why a US tax rate drop is significant and probably called for.

A quick google search for, "Average effective US Corporation tax rate" says, after deductions, US corporations pay around 18.6%. Even though that is much lower than the above 35%, when compared to global effective tax rates, only the UK and Japan have higher rates. What deductions are allowed is as important as the headline number. To get this bill through Congress, some of the current deductions may get dropped meaning the effective tax rate won't shift much.

As expected, there will be a one-time reprieve for companies to bring back offshore assets at a low tax rate. At last count, Apple alone had more than a quarter trillion dollars offshore! It is estimated that the one-time, low tax rate will be around the 10% mark. In 2015, when Obama was proposing a similar tax-break, it was estimated offshore cash amounted to at least $2 trillion. That number has no doubt swelled over the last two years. Good news particularly for US tech companies and good news for the US budget.

Time will tell how much of this proposed tax bill gets through Congress. Political 'experts' are forecasting it to be implemented during the first half of next year.

New York, New York. Markets were red hot yesterday! All three major indexes finished at record highs. Here is the scorecard, the Dow was up 0.25%, the S&P 500 was up 0.41%, the Nasdaq was up 1.15% and the All-share was up 0.26%.

Naspers announced this morning that, "Naspers Increases Stake in Delivery Hero", their stake now sits at 23.6%. The current share price of Delivery Hero is EUR 34.10, Naspers received a 13.5% discount to buy them at EUR 29.50. The current market cap of Delivery Hero is EUR 5.85 billion; Naspers stake translates to around EUR 1.38 billion or R22.1 billion. On Naspers R1.3 trillion market cap, their stake in Delivery Hero is a rounding error but for perspective, R22 billion is the equivalent of two Famous Brands.

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One thing, from Paul

Apple's share price has softened in recent days. Its all time high was $164.94 which it reached on September 1st. It closed last night on Wall Street at $154.23.

The price came off after its product launch event, despite lots of buzz generated at the event. For one thing, there have reportedly been problems with the cellular connectivity of the new Apple Watch Series 3. The company is working to resolve those.

More importantly, festive season sales might lag expectations slightly because the much anticipated iPhone X will only be available in November, and will probably sell out when it does come in. Early indications are that pre-order demand for the iPhone 8 and 8s is a little muted. In my view this is because more people (myself included) will go straight for the top of the range iPhoneX. That model starts at $999, so expect a big revenue and profit boost in 2018.

This view matches that of a US analyst who made the news yesterday - Apple shares bounce back afterRaymond James sees 'surprising' demand for iPhoneX.

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Byron's Beats

Clients have asked about selling Nike because it's recent performance has been poor. Here is my reply:

I would strongly advise against selling a share just because it has gone down. That is not a good long term strategy.

I will give you 3 examples of stocks we own which would have been a terrible call to sell just because the company hit a speed bump.

Cerner had a horrible year in 2016 as the market was unsure they could sign on big clients. They went from $66 a share in Oct 2015 to $48 in January this year. Many of our clients were down on the stock and thought it was not a "good" company. But behind the scenes Cerner was working hard and managed to sign a few large US government clients. So far this year Cerner is up 50%! It would have been a horrible mistake to sell.

From December 2013 to July 2015 Google traded around $550 a share. It did nothing for 18 months. Then they hired a new CFO who was more transparent about the business and it flew to $960 in 2 years. Again, the patience paid off.

Apple reached $95 a share in 2012. It then dived down to $60 a share in 2013. By March 2016 it was back at $93. It had gone backwards over 4 years! There were big concerns over competition from Samsung (just like Nike now with Adidas). But then sales continued to do well and the stock rerated to $154. It is up 33% so far this year.

Yes Nike is facing more competition. The whole industry is also shifting to online and more direct sales (Nike are adapting to this). From the examples above, when a company is quality like Nike is, these are the times to be buying aggressively, not selling. It may take a year or two but it is much better to be patient.

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Michael's Musings

Thanks to social media, researches have been able to collect mass data on our mood - The data that proves bad weather alters your mood. If you have any big life decisions to make, wait until it is a sunny day.

There is no doubt that Twitter needs to shake up their business model. I don't think doubling the character limit is the way to do it though - Twitter is doubling the number of characters allowed in tweets; Twitter users are not happy. Short is sweet.

With the S&P 500 at record highs, here is a breakdown of how the different sectors have faired this year - The stock market has been flipped completely upside down.

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Home again, home again, jiggety-jog. Asian markets are mixed this morning and the All-Share is in the red for the first hour of trading. The Rand has continued to weaken against the Dollar, it is almost at $/R 13.60. Not good news for consumers, inflation has just been tamed. The big data read for today is US GDP and US initial jobless claims.

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Mark Zuckerberg is a Legend

To market to market to buy a fat pig. Or if you celebrated heritage day with a braai, you may have bought some boerie, lamb chops or a big chunk of steak. The price of meat has been increasing at a very fast rate in SA. In last month's inflation data we saw a 15% increase in the meat price, a lot higher than the rest of the basket. Having said that, meat here is still relatively cheap compared to many developed markets.

On Friday stocks were down across the board. North Korean tensions again rearing its big fat ugly head with rim glasses and a terrible crew cut. Trumps recent comments seem to be fuelling the fire. As investors, these are the kind of tensions and speed bumps we need to absorb. If you stayed out of the market because of political tensions, you would never be invested. Markets do not like uncertainties. If everything was certain, investing would actually be a lot harder because there would be no opportunities.

US stocks also took a hit yesterday for the same reasons. Tech stocks were hit the hardest, as they often are when uncertainties arise. Facebook declined 4.5% because Mark Zuckerberg ditched plans to create a new class of shares which would allow him to keep control of the company whilst selling shares to fund his charities. Because the shares had done so well, he no longer needs to restructure the company's share scheme. He plans to sell 35-75 million shares over the next 18 months. At the current price, 75 million shares equates to $12.4bn. Good on the Zuck, a great example of business and capitalism making the world a better place.

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The oil price has hit 2 year highs. In the past, higher prices has pushed US frackers to bring operations back on line and ramp up production. In turn, this has forced OPEC members to break alliances and ramp up their own production. So far OPEC has managed to keep to their latest agreements. I am sure at current prices the temptation to ramp up production is tantalising. The good old prisoners dilemma. In my opinion OPEC will eventually be a thing of the past because of increased competition. I cannot stand collusions, OPEC is the second biggest collusion in history and I cannot wait for increased competition and alternate energies to end them.

You may ask then, what is the biggest collusion of all time? Remember this is all my opinion, this is not based on fact (Byron here, you are more than welcome to challenge me on this). The answer is taxi drivers. The fact that most taxi drivers around the world use a set price is crazy. They should be competing against each other for better prices and better service levels. Poor consumers have been ripped off for decades until Uber came around. That is why I love Uber so much, another great example of business making services better and more transparent. I am very disappointed that London has banned Uber from their city. See Bloomberg article titled Uber Losing Battle in London After Regulator Revokes License.

Sounds like a successful lobbying campaign to me. London is supposed to be a forward thinking city which encourages innovative disruptors. Another step backwards for a city plagued by the likes of Brexit. Uber do have the right to appeal. Lets keep an eye on it.

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Linkfest, lap it up

Two Things from Paul

In case you thought that China had stopped investing in infrastructure, they have not. Look at the details of their Belt and Road initiative. It is seven times larger that the Marshall Plan after World War 2. China's Belt and Road Initiative.

Is Mexico ethically challenged? At the recent Mexico City Marathon, the organisers deployed a timing chip and mat system for the first time, only to discover that 5800 athletes (20% of the field) cheated. What the Hell Happened at the Mexico City Marathon?

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Brights Banter

Remgro is swapping its Unilever's South Africa stake for Unilever's Spreads Business. We don't know for sure what prompted this move, but knowing the Remgro management, it was probably a deal that made lots of sense for shareholders otherwise why would they go ahead with it right? - Remgro Sells Minority Interest In Unilever SA

Mastering excel is a very important skill if you're planning on having a successful corporate career. John Dumoulin is only 17 years and he's already the champion of Excel, this opens so many doors in corporate as every big corporate has an eye on him. Not all heroes wear capes! Be like John and become the best Excel guy at your firm - Microsoft Excel Champion

The Zuck is planning on selling 35 million to 75 million shares of Facebook stock over a period of around 18 months from 22 September 2017 in order to fund his philanthropic endeavours. In the words of Bobby Axelrod from the TV series "billions" - Make the money and give it all away! - Mark Zuckerberg Selling Up To 75 Million Facebook Shares

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Home again, home again, jiggety-jog. We have opened up horribly in the red, playing catch up to two days of market uncertainty. Naspers is down 3% in sympathy with the tech stocks.

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The Vital Future of Insurance

To market to market to buy a fat pig. The SARB didn't do what most people were expecting; they left things the same. A Repo rate at 6.75%, means you are still paying the same for your house at month end. As we have spoken about before, certainty is key to economic growth and a stable economy in general. Certainty leads to stability and stability leads to certainty. The reason given for leaving rates unchanged was due to lack of certainty.

"Given the heightened uncertainties in the economy, the MPC felt it would be appropriate to maintain the current monetary policy stance at this stage and reassess the data and the balance of risks at the next meeting."

The good news is that the Rand strengthened on the announcement, I suspect due to happy bondholders. They next meet at the end of November, where things may be even more uncertain due to the ANC conference in December.

Our market dropped slightly on the MPC news but then recovered and finished flat. US Markets opened in the red and stayed there all day, so no records for the day. Here is the scorecard, the Dow was down 0.24%, the S&P 500 was down 0.3%, the Nasdaq was down 0.52% and the All-share registered a change of 0.00%.

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Company corner

Michael's Musings

On Monday there were Full Year numbers from Discovery, which didn't disappoint. The results are broadcast on TV, making it easy to watch and pause if need be. Adrian Gore's passion for the business sure is inspiring. Recent books that I have read all talk about the importance of the vision from a founder. Founders generally have more credibility and business-wide support, meaning they can push companies in directions that professional managers would struggle. Adrian Gore and Stephen Saad are the first two South African leaders that come to mind when I think of inspirational leaders. But we are blessed with many.

Here is a quick look at the group's performance as a whole.

The numbers in pink are their UK operations, which have been hit hard by Brexit. The group estimate's that Brexit has had at 25% impact on the profit for the Vitality Life business, ouch! Looking at the other UK business, Vitality Health, that huge jump in profit is due to the previous period having some once-off costs, so it was coming off a low base. Both UK divisions aren't doing as well as management had previously hoped but are moving in the right direction. Vitality UK is a superior product to traditional medical aid and life insurance. Their marketing is all over the place, you can't watch UK sport now without seeing Vitality branding somewhere.

The human behaviour data they have acquired, unsurprisingly is being put to good use in the UK. When people sign up for the Apple Watch incentive program, they saw a 42% increase in physical activity. From Discovery's perspective that is money well spent.

The Discovery Insure division has clear benefits from the incentives program. The division is still relatively new and falls in the group's 'emerging businesses' segment. Discovery Insure only started making money in the second half of the year and was loss-making for the full year. For 2018 though we should see a nice juicy profit. Their focus on driving quality, has resulted in new customers improving their driving by 27% in the first year on average. Even better, bad drivers are more likely to move to other insurers, meaning they are left with a higher proportion of their book in good drivers.

A bit of shameless Discovery promoting, I am an Insure customer. Since joining, I am more aware of my driving and for my efforts, I get over R1k back a month. The only problem now is that my wife's driving score is substantially higher than mine; I get reminded of that fact frequently.

From an investors perspective, the most exciting part of the business is their JV in China. The number of new customers increased by 428% last year to 3.7 million lives, a drop in the ocean for China. The operation is still loss-making but is expected to reach break-even during next year. Adrian emphasised that they are more focused on building a solid foundation than becoming profitable as soon as possible.

Over the last two-years the Discovery share price is flat, but since January they are up 25%. Part of the concern was that Discovery would need to do another rights issue to fund their international growth and the bank that they are launching in South Africa (expected for the second quarter of 2018). As the year has gone on it became increasingly clear that a rights issue was not needed.

The stock is not cheap at a P/E of 21, when earnings only grew 8% last year. Going forward though, they have a long pipeline of strong profit producing businesses. Their 'emerging businesses' will become more established and the Chinese division has the potential to become their most significant profit centre. We back Adrian Gore's vision for the company and their world-leading IP. A buy in our books.

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Byron's Beats

Because we are in the industry of equities, we often get inquiries about trading the market. Most of the enquiries come from inexperienced youngsters who have seen glamorous adverts about getting rich quickly from trading, especially forex trading. I like to compare trading to playing golf. Anyone can do it but it takes years and years of practice to actually make money from it. And even with all that practice, many people will still end up losing. It is very difficult. We may have shared this image below before but it deserves another mention. It is called the 90/90/90 Rule of Trading.

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Home again, home again, jiggety-jog. Asian markets are all in the red this morning, along with our market which opened down 0.3%. OPEC are meeting today, people in the know don't expect anything new to come of the meeting. With Brent trading at $56 a barrel and the Rand in the $/R 13.20's range, a petrol price hike is probably on the cards next month. Enjoy your heritage weekend; I will be putting a big piece of meat on a braai for my heritage day.

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Interesting Rates

To market to market to buy a fat pig. As expected the Fed left rates unchanged with the hint that there is a better than even chance of a hike in December. I clearly remember the first rate hike in December 2015; I was in the Frankfurt airport on my way to visit Ted, our broker in New York. Even in a European airport, the only thing the news services could talk about was the first rate increase since the Great Recession and how four more hikes were due for 2016. If there is a rate hike in December, it means that there have been only four hikes over two years, half the speed that people were expecting.

The Fed Dot Plot gives an idea of what officials think the rate trajectory will be. Given that stock prices today reflect the discounted value of future profits, long-term interest rates are an important metric. At the meeting in June, most officials were of the opinion that 3% was where long-term rates would settle, that number is dropping. See below most officials cut their long-term forecast by 25bps.

The plan for shrinking their $4.5 trillion balance sheet is to let $10 billion in bonds runoff each month, working the number up to $50 billion over the next 12-months. $10 billion may sound like a big number, but it is only 0.22% of their current balance sheet, it is going to take them years before things are back to normal. The hope is for things to normalise before the next financial crises hits. Imagine if a crisis hit now? Interest rates are only 1.25%, and the balance sheet is enormous, not leaving much to work with if the economy needs propping up.

US markets yesterday were very flat until the announcement, where they initially fell on the news but then ticked up to finish a little better than flat. That means US markets are on a three-day streak of record closes. Here is the scorecard, the Dow was up 0.19%, the S&P 500 was up 0.06%, the Nasdaq was down 0.08% and the All-share was down 0.26%.

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Byron's Beats

On Monday we had results for Discovery. We will still get those numbers to you shortly. There were a few changes announced to Vitality which should interest you if you are a member. This Moneyweb article titled Five Changes to Discovery Vitality will tell you all you need to know about the changes. What was very interesting to see from Discovery's data is that life expectancy for Vitality members is 81 years compared to 67 years for those who are insured but are not in the Vitality program. Now that is some good marketing!

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Michael's Musings

The private equity model is to usually buy a company using a ton of debt, improve its profits by making the business more efficient and then sell it, making huge profits because the initial investment was meagre. It doesn't always work out though, as seen by Edgars locally and now Toys R Us globally - The Toys R Us bankruptcy is clobbering 3 giant asset managers. In bankruptcy, the business generally continues to operate but current shareholders get wiped out, and bondholders take a haircut.

For a market to work, you need a buyer and a seller. Two people with different views on the same asset, here is a perfect example - Nvidia hits a record high as Wall Street begins to understand its dominance of AI and Nvidia: Now Irrationally Priced.

Tencent's 'other' division is still a small part of their business but in time it will be a significant contributor to both the top and bottom line - Tencent, Guangzhou Auto agree to collaborate on internet-connected cars

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Home again, home again, jiggety-jog. Asian markets are mostly flat this morning. The Dollar was stronger after the Fed's statements last night, meaning the Rand is currently at $/R 13.38. Our market hasn't opened yet due to a computer glitch, expect trading to start from 10:45. Then the big news of the day, "will you pay less for your home loan"? Probably. We will find out at around 15:20.

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Quantifying Quantitative Easing

To market to market to buy a fat pig. Today is Fed day. Later this evening the Fed will probably announce no interest rate increase, but more importantly, they will give details around how they will unwind their $4.5 trillion balance sheet. Rewind a couple of years, the short-term interest rate was already very low at 0.5% but long-term rates were much higher because people were scared. Ben Bernanke's Fed came up with the idea of Quantitative Easing (QE), to bring down longer-dated rates.

Economics 101; higher demand means higher price and conversely a higher supply means a lower price. The Fed stepped into the bond market to create extra demand, pushing up the price of bonds, which results in a lower interest rate attached to those bonds. At QE's peak, the Fed was buying $85 billion worth of new bonds a month, with one of their main focuses on the housing market, where they currently own $1.77 trillion worth of mortgage-backed securities. The Fed slowly reduced the value of bonds they bought a month until November 2014 when they stopped buying new bonds.

Given that bonds have set maturities, the question then becomes, what to do with the money from the mature bond? When QE was first thought up, their exit plan was to buy bonds for a short period, creating confidence and financial support, and then just let them runoff, which would reduce their balance sheet again. QE 1 then expanded into QE 2 into QE 3 and then QE 4, lasting longer and becoming bigger than anyone had originally imagined. There is a fear that the Fed, just stepping out of the bond market will result in a sudden shock to the financial system. As a result, instead of just letting bonds runoff, the Fed has been rolling over bonds that reach maturity.

Today Janet Yellen will give us an idea of how quickly they intend to shrink their balance sheet. Full steam ahead will be them not rolling over any of the bonds and baby steps will be them only letting a small percentage of the bonds runoff. I expect it to be somewhere in the middle. The Fed will always err on the side of caution; they won't do anything unless they are sure the US economy is strong enough to handle it. Basically, whatever the Fed announces today around their balance sheet, will be a non-event to most people, apart from economists and academics.

New York, New York Yes, you guessed it, another day another record. Here is the scorecard, the Dow was up 0.18%, the S&P 500 was up 0.11%, the Nasdaq was up 0.1% and the All-share was up down 0.07%. Unfortunately, the list of stocks at 12-month lows is growing and the list of stocks at 12-month highs is shrinking.

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One thing, from Paul

What on earth is Kim Jong Un thinking?

Experts disagree with Donald Trump (no surprise there). 'Rocketman' is not suicidal, they say. North Korea's nuclear missile program is best understood as an emulation the Chinese strategy of the 1960-70s. China was a rogue nuclear state and economic backwater, but became a military and economic giant and undid the US-Taiwan alliance. Kim Jong-Un hopes force concessions from the US, win reunification with South Korea and become a global power. This plan will likely fail though, since North Korea is economically decrepit. Here's Max Fisher on the topic, in the New York Times - North Korea's Nuclear Arms Sustain Drive for 'FinalVictory'

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Michael's Musings

Would you drink milk that was created in a lab? How about eating beef that was created in a lab? Animals have a negative environmental impact due to all the resources needed to sustain them - Infographic: The Future of Food.

Positive and negative responses from cities, over Amazon's new HQ is interesting. The fear is that Amazon will increase the population density, which increases property prices and increases wages. Surely more economic activity is always better than less though? - The $5 billion battle for Amazon's new HQ is getting even more heated

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Bright's Banter

On Monday the 18th of September I had the pleasure of meeting with Bidcorp's CFO David Cleasby at their head office in Sandton. Bidcorp as you may know is our largest holding in the food sector.

The business has presence in over 30 countries and are market leaders in countries like Australia and New Zealand. Bidcorps offshore businesses account for 90% of earnings and RSA is only 10% making them the perfect Rand hedge.

Bidcorp's typical customers are the owners of restaurants, who happen to be chefs most of the time. Bidcorp's growth will come from increasing their 'Routes To Market' (selling more things to the same customer), from entering a new market organically and through small bolt-on acquisitions, where Bidcorp can bring in their 'Know-How' and systems to the table. They focus is on increasing the basket of goods purchased by chefs; since the truck is already heading that way, any additional items purchased is pure margin. In the near future, there is big margin growth to come as a result.

The food industry is very fragmented and this translates to plenty of opportunities for Bidcorp. Their reps have their ears on the ground and they help spot gaps in the market. This kind of attention to detail allows Bidcorp to see exactly what the needs of the customers are and fulfill them. If the customer is happy with the service, they will ask for repeat business, and the income becomes annuity in nature. As long as the eating out trend persists and the middle class emerges, we expect Bidcorp to benefit handsomely and are happy to own this one for our clients for the long term.

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Home again, home again, jiggety-jog. Our market opened slightly in the red this morning, being pulled down by Sasol who are down 3.5% on the news that they have had to take a $900 million hit on their BBBEE scheme. STAR who listed this morning, are off to a strong start, opening at the top end of their expected range.

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Until The Next High

To market to market to buy a fat pig. Last week was the 57th birthday of OPEC, who were created at a conference in Baghdad in 1960. Here is a brief history of the organisation.

It is interesting to note that in its first 13 years, oil prices (WTI) were mostly flat at $3 a barrel. Then at the end of 1973, OPEC implemented an oil embargo against the nations they felt assisted Israel during the Yom Kippur War, prices almost quadrupled overnight.

Found at 1973 oil crisis

I have never been a fan of the cartel nature of the organisation, who would rather be labelled as a market and price stabiliser. I didn't know though, at forming there was another dominant force in the oil market, called the Seven Sisters controlling 85% of the oil reserves at the time. At the end of last year, OPEC said they controlled 81% of the globes oil reserves, the tables have turned. Even though fracking has taken off, OPEC still produces around 40% of annual production, see below how that number has changed over time. What will OPEC look like in the next few decades given how central oil is to certain countries and how quickly developed nations are going green?

Found at OPEC's $900 Billion Mistake

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Yesterday there were fresh records for the Dow and S&P 500. How many more days of records do we need until people start to feel that records are boring and just part of what the market does? Locally, we crossed 56 000 points and are heading for 57 000 for the first time. Here is the scorecard, the Dow was up 0.28%, the S&P 500 was up 0.15%, the Nasdaq was up 0.1% and the All-share was up 0.73%. Interestingly, the list of JSE shares currently at 12-month lows is longer than the list of 12-month highs. Stocks on the wrong list include Life Healthcare, Netcare and Taste Holdings. Speaking of Taste, they are busy building a Starbucks next to our offices, when it opens I suspect people will be queueing into the street. At an all-time high is Richemont, up 34% since January.

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One thing, from Paul

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Byron's Beats

As investors in the apparel sector I sometimes ask myself how much more innovation can be done in this sector. Well Nike have just answered my question. The latest NBA shirts have a chip inside the label which you can scan with your phone. Once you scan the chip you have access to stats, cheap tickets, discounted Nike shoes, Spotify playlists of certain players and more interactive features. Take a look at more details as well as a cool youtube clip in the article below titled How The NBA, Nike Partnership Leads To Smart, Connected Uniforms.

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Michael's Musings

Ben Carlson talks about why he loves writing but more relevant to us is the reasons he loves the market - Why I Love Writing About theMarkets. One of the things he points out is how big global equity markets are; "On an average day, over 80 million shares trade hands in equity markets around the globe totalling more than $350 billion."

Millennials have been the talking point generation as of late, Gen Z are about to enter their 20's meaning their significance to companies is growing - Meet Generation Z, the 'millennials on steroids' who could lead the charge for change in the US.

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Home again, home again, jiggety-jog. Asian markets are mixed this morning, Japanese stocks are up over 1% as they play catch up after being closed yesterday. The most important Asian stock, Tencent is up another 0.5% this morning so expect a green Naspers on our open.

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Hard for Saad

To market to market to buy a fat pig. Closing out last week both the Dow and the S&P 500 were both in record territory, with the latter crossing the 2 500 mark for the first time. I wonder if the cheese eating supreme leader watches global markets and their reactions to his missiles? Do you think markets shrugging off North Korea's latest missile launch is a blow to his ego?

Here is the scorecard from Friday, the Dow was up 0.29%, the S&P 500 was up 0.18%, the Nasdaq was up 0.3% and the All-share was down 0.37%. Graphics card manufacturer Nvidia was up 6.3%, which means the stock has increased 186% over the last 12-months. The combination of mainstream gaming, AI technology, cryptocurrency mining and huge data centres has meant their GPU's have been in high demand and is forecast to be much higher in the years ahead.

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Company corner

Byron's Beats

On Thursday we had full year earnings from Aspen, one of our biggest local holdings. This one certainly deserves a closer look.

I went to the results presentation and I must say, Stephen Saad looked a lot more relaxed than he did at previous results releases. He started off by saying that in 2013 they decided to change from being regional player to a global player. It was a big decision and has resulted in a massive slog for the team over the last four years. They announced their first major deal with Merck in June 2013. The share price popped on the news from R185 a share to R235. It then went all the way to R438 a share in January 2015. Sadly, they then crawled down to a recent low of R250 in February 2016. The share price is now at R310 a share after surging 8% after these results. It has been a very busy four years. Saad said yesterday that these results finally reflect the business that they have been trying to build.

Here are the numbers

Revenues for the year increased by 16% in Rands. In constant currencies (which reflect the operating environment of each business) revenues increased by 22%. So the strong Rand was a drag on the numbers. Most notably, constant currency revenues increased 31% in the second half. This is why Saad said that everything was starting to come together. Normalised earnings per share increased by 16% to 1463c per share.

While we are on the numbers, lets focus on their debt levels. These have increased significantly over the years due to to all their acquisitions. The Rand may have had a negative impact on earnings but 69% of their debt is in Euros. That makes the debt look smaller in the reported results in Rands. So interest payments actually declined. Cashflows increased 101% to R6.5bn. That's great news, since the overall debt level is R37bn but Aspen is in a comfortable position, and remains very cash generative. That is also why they can raise debt in Europe at very attractive rates, around of 2.1%

An overview of the business

These results were a lot more transparent about where their sales come from and which products make the most money. They used to be a generics business, but now only 10% of sales come from generic drugs. They also used to be a South African business, but are not anymore. Take a look at the two images below, which show where there sales were made and from which products.

Anaesthetics and Thrombosis are two pharmaceutical categories where Aspen have focused their global expansion. Remember Aspen are essentially a manufacturing and logistics business. They do not put money into original drug research and development, or try to create the drugs from scratch. They buy non-core, neglected assets from major drug companies and turn them around. Once a business is bought and Aspen takes over production, they have to show the regulators that they will maintain the same standards. This takes time. So does revamping production sites, establishing sales forces and improving logistics. This is why results have been slow for these two new divisions.

Aspen are confident that they have now received approval and created the capacities to sell these products more efficiently, around the globe. Expect a lot more sales growth from these two divisions. In fact, they announced a deal yesterday to buy the rest of the AstraZeneca's anaesthetics portfolio for up to $770 million. Never standing still.

The Other Commercial Pharma Division is what they call the heartbeat of the company. Mainly because 54% of sales come from emerging markets. That is unique to global pharma companies.

The last pharma segment on the table above is High Potency & Cytotoxics which is mostly complex female health products. They have an exciting new licensing agreement with Teva in the USA which should give them good exposure to that region. They see this area as having good growth potential.

Finally, we look at the Infant Nutritional Division which makes milk formula. This business has really struggled recently because the Chinese authorities have clamped down on unregistered imports of milk formula into China. As of December 2017, no unregistered formula's may be sold there. This will mean a big over supply of formula leading up to December. That market should then normalise at the middle of next year. Aspen have created a new, registered brand which they will push throughout China. This division has great fundamentals as the globe's population grows.

Valuation

The stock now trades at R310 a share. Or 21 times earnings. You are paying up here for an incredible management team that extracted R1.2bn in synergies during the year. They are very good at what they do. Saad said to expect more deals, always expect more deals. The cash generative model and access to cheap debt allows for this model to continue to thrive. As long as the team are willing to put in the hard yards. The founders are still there and as energetic as ever. We continue to buy and hold this stock as a core holding in our recommended portfolios.

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Linkfest, lap it up

One thing, from Paul

On Blunders this week: Apple iPhone-X vs. Dog, robots in Joburg, Virgin Money tricks Man United fans and Chinese fishing in the Galapagos - Blunders - Episode 73

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Michael's Musings

I think stores like this are the future of retail. You have a small experience based store where customers get to hang out and try on clothes. Then they order what they want online. Thanks to same-day delivery, your clothes might get to your house before you even do - Nordstrom's clothes-free store makes more sense than you think.

Having taxes based on revenue, sounds like a bad idea to me. At the moment many tech companies are loss making because they haven't reached scale yet, their user base isn't big enough to cover the costs of running the service. Think of a company like Uber who make a lose of hundreds of millions every month, now imagine how much bigger that loss would be if they had to pay tax based on their massive revenue - France sees more EU states joining push over tax on online giants

Talking of tech companies, Alphabet might inject $1 billion into Lyft - Alphabet Considers Lyft Investment of About $1 Billion. These companies need regular cash top ups because of their huge cash burn in their pursuit to grow their regular customer base.

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Home again, home again, jiggety-jog. Asian markets are well in the green this morning, with Tencent up around 2%, so expect a green JSE at 9:00. The week ahead holds both an MPC meeting and a Fed meeting, the former is expected to drop interest rates again, good news for the South African consumer. Then on Wednesday, Steinhoff's STAR lists with an expected market cap of R70 billion.

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CryptoInvestments?

To market to market to buy a fat pig. Waking up this morning a couple of the news apps on my phone had the breaking news that North Korea had fired another missile over Japan. The missile flew over the north island of Hokkaido. If you are a Netflix subscriber and not sure what to watch next, I highly recommend Wild Japan, one of the episodes is purely focused on the beauty of the Hokkaido island. Asian markets dipped briefly on the news of the launch but shook it off and moved back into the green.

When we look back at 2017, one of the things it will be remembered for is the rise of the cryptocurrency. Before I go further, I think the following disclaimer is in order. In 2014 when Bitcoin first made financial headlines, we looked at it with the conclusion of avoid because there were just too many unknowns. PLUS we are equity investors so it does not fall within our domain. Yesterday Bitcoin was tumbling after Chinese regulators say an exchange ban is certain, since 1 September the price is down 25% but still up a whopping 300% for the year. I personally think that Bitcoin is in bubble territory, purely based on the number of adverts I see for trading the coin.

We see first hand how human nature reacts to price movements both up and down. Human nature is to sell the stocks/assets that are down and to buy more of the stocks that are up. Translating that to Bitcoin, because its price has been on a one-way trajectory to the top right of your screen, people can't get enough of it, which then fuels the next round of price appreciation. Now that the price has suddenly dropped, the initial reaction will be a camp of people buying because the coin is suddenly much cheaper and they feel like they missed out on the first buying opportunity. So they make sure they won't miss out again. If those buyers outnumber and outlast the sellers in China, then I think the price will get back above $4 000 again. However, if the Chinese selling persists and then more people start selling because they bought at the peak, then I think human nature takes over, where more and more people sell just because the price is down.

The biggest reason I have never bought a Bitcoin is that I can't see where the value of the coin sits. There is a big difference between creating value for society and capturing some of that value for yourself. Cryptocurrencies and blockchain technology will have an increasing role to play in society; I can't see the likes of Bitcoin capturing the value that they create though. As I have said before, Bitcoin is either hugely undervalued or extremely overvalued, are you willing to take a bet on which one?

New York, New York didn't make it four days in a row of record closes. Here is the scorecard, the Dow was up 0.24%, the S&P 500 was down 0.09%, the Nasdaq was down 0.48% and the All-share was down 0.59%. The one stock bucking the trend was Aspen after their full year results yesterday, the stock finished up 8.5% and is up another 1.2% this morning. It has been a rough ride as a shareholder over the last 2-years but it looks like the company has now got through the growing pains of becoming a truly international company. More about Aspen on Monday.

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Linkfest, lap it up

One thing, from Paul

I've previously said that I would love Uber to list on the markets in New York, so that I can buy them for myself, and so that Vestact can buy them for our clients.

As you probably know, their founder and controlling shareholder Travis Kalanick just stepped back from the CEO role, handing that over to Dara Khosrowshahi. He seems excellent.

Yesterday's news was that Japanese tech fund Softbank wants to buy about 20% of Uber through a combination of share purchases from the company and a tender offer extended to employees and existing investors. But Softbank wants a discount of 30% or more from Uber's last valuation of about $70 billion - SoftBank and Uber's deal talks have advanced under Uber's new CEO

Anyway, why would we want to own shares in a company which loses so much money? Uber lost $645 million in Q2 2017, despite $1.75 billion in adjusted revenue. Well, for starters those losses are declining. They lost $708 million in Q1 2017, and $991 million in Q4 2016.

Most importantly, they are still growing madly.

This is a company that is transforming mobility. They are changing the world. Car ownership is no longer essential, and even if you do own a car, you'll find yourself taking an Uber in all sorts of situations. Take a look at how much you personally spend on Uber. If your life (and your family's life) is anything like mine, you spend a lot of money with this company. One day they will be hugely profitable.

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Michael's Musings

If you want to see what happens when there are no governments, have a look at this city in Hong Kong. It fell through the cracks when the British took control because China had a claim on that small piece of land - This Fascinating City Within Hong Kong Was Lawless For Decades. With less regulation, more gets done but at the same time consumers are at more risk.

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Bright's Banter

We have been receiving a lot of emails from clients on cryptocurrencies and I think it's only fair that we get a basic understanding of these currencies and their differences from each other - Comparing Bitcoin, Ethereum, and Other Cryptos

There's an old market adage that says being too far ahead of your time is indistinguishable from being wrong.

As Howard Marks pointed out in his second most recent memo, Cryptocurrencies are where Airplanes were in 1910. Yes we acknowledge the fact that the airline industry changed the world but that industry only turned profitable in the late 1990's and is yet to be a good investment!

The same with Tech companies in the late 1990s, only now are we starting to see extremely profitable tech firms (and we own some of course). No doubt that Cryptocurrencies or the block chain decentralised network technology could potentially have a big role in society in the future, however, we must not confuse them with actual investable assets. In closing, I wouldn't touch these with a ten foot barge pole.

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Home again, home again, jiggety-jog. Our market is down on the open today. Surprisingly, gold is down today even though North Korea was behaving badly. Yesterday's US CPI read was higher than expected, at 1.9% YoY change, part of the bigger increase in prices is being blamed on surcharge pricing when the two hurricanes hit the US. Being very close to the Feds 2% inflation target, the market is pricing in a 50-50 chance of a rate hike in December. Data to look out for today is US retail sales, which is expected to be up ever so slightly.

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Dashed Data

To market to market to buy a fat pig. Data out from our beloved country yesterday was under whelming. The retail sales number released by Stats SA showed a year on year increase of 1.8% (economists were forecasting a 2.8% increase) and a month on month decline of 0.6%. See below which areas of retail are doing well and which are not.

It is interesting to see that household furniture and appliances had a strong year but the hardware sector had a poor one. Does that mean, due to contained budgets, households are using furniture and appliances to improve their homes instead of going the more expensive route of construction based home improvement? 'All other retailers', which is flying, is mostly compiled of more specialist retailers such are jewellers, sports shops, second-hand stores and repair services. Yesterday's data is just one read of what is a volatile data set but is it pointing toward what is to come? Would the consumer rather go to specialised outlets instead of going to more general stores?

New York, New York saw very modest gains yesterday, for the S&P 500 to record its third record close in a row. Here is the scorecard, the Dow was up 0.18%, the S&P 500 was up 0.08%, the Nasdaq was up 0.09% and the All-share was down 0.38%. Aspen released numbers this morning that had more bright spots than negative; the share price has opened higher. Byron is at their presentation as I write, he will give us a detailed breakdown in the coming days.

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Company corner

Byron's Beats

Yesterday we received a 5-month sales update from Richemont which looked impressive. Constant currency sales increased by 10% across the board. For a company of that size, operating in what has been a pretty tough environment, that is a good showing.

The below table looks at the numbers throughout the regions.

Europe was slow on the back of a strong Euro. In those numbers however, the UK increased by double digits due to a weaker pound. Asia Pacific was very solid although this does come off a low base because of inventory buy-backs in the comparative period last year. Jewellery Maisons and Specialist Watches continue to be the shining light of the business.

Luxury goods sales have gone through a tough few years, and this looks like a good sign of a recovery. We will have a closer look when the full numbers come out in November.

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Linkfest, lap it up

One thing, from Paul

Business confidence in SA remains woefully low. Our biggest issue at present is politics. Stories of high level corruption, theft and bungling in government departments and at state owned enterprises fill the news every day.

There is a connection between business confidence levels and stock market valuations. Both are a measure of expected return on investments. The higher the anticipated profits the higher share prices go (relative to current earnings). Conversely, if trading conditions are expected to deteriorate, why pay up?

This of course, only applies to companies with large South African operations. For example, Richemont's sales numbers yesterday weren't impacted in the slightest by the current South African environment.

I do not expect much improvement in confidence levels before 2019, to be honest. Once the next national election has taken place, we will know where we stand and what kind of leadership we can expect in the years ahead. Until then, we will have to keep our heads down and our sense of humour high!

This RMB/BER survey taps the views of more than 1 600 senior executives in the building, manufacturing, retail, wholesale and motor trade sectors - 70% of SA execs unhappy with business conditions

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Michael's Musings

Elon Musk is a very busy man! In the midst of ramping up his factories to produce 10 000 Model 3's a week, he is now focusing on building trucks too. Yesterday he tweeted an unveiling date of next month for a Tesla truck - Tesla's 'long-haul' electric truck aims for 200 to 300 miles on a charge. As the article points out, having batteries big enough to power trucks, will be very expensive.

The Bill and Malinda Gates Foundation has chosen three statistics to show how the world has developed since the 90's, where things have been getting better for the poorest of the poor. This is thanks in part due to global funding to combat poverty and its resulting consequences - These numbers tell us real progress is at stake in the fight against global poverty and disease, say Bill and Melinda Gates

The topic of CEO and executive pay, is hot at the moment. It forms part of the wider debate around global inequality. Here are some more views on the topic - When CEOs StartWarning CEO Pay Is Too High, You Got A Real Problem

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Bright's Banter

The Mnuch showed up at the CNBC Institutional investor conference, Delivering Alpha, yesterday all guns blazing, saying that tax reform which was bounced off a couple months ago will be back and this time with a sweetener (closing the hedge fund loophole) - Hedge Funds Will Lose Tax Benefits

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Home again, home again, jiggety-jog. Asian markets are mostly lower this morning due to Chinese growth numbers coming in slower than expected. Still massive growth, just less massive than people were expecting. Later today is data on our current account, which should have an influence on the Rand. Then on an international front, the BOE is expected to leave UK interest rates the same and there are inflation numbers from the US. Just in time for the Feds interest rate meeting next week.

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