Money with a dash of Funny: October 2017

Tuesday 31 October 2017

The Best Visa To Have

To market to market to buy a fat pig. All focus yesterday in the US was on politics. The scale of Russian involvement in the US election is coming to light; I have heard political commentators start using the words 'impeachment' and 'Watergate' again. The comparison, of course, is to Nixon who resigned after his meddling in elections came to light.

More important to markets though is the talk of Trump's tax plan being phased in slowly instead of a big tax cut off the bat. For companies, a big tax cut up front would be preferred. There is still much 'politicking' to be done between all stakeholders. For now though, we will wait and watch to see how the cards fall.

Market Scorecard. After bouncing between green and red yesterday, our market pushed higher in afternoon trade to finish in the green and at a record high. The Dow closed down 0.36%, the S&P 500 closed down 0.32%, the Nasdaq closed down 0.03% and the All-share closed up 0.28% Naspers is fast approaching the R3 500 mark, currently sitting at R3 451; its year to date return is 71%! For comparison, Tencent is up 85% since the beginning of January.

Company corner

Michael's Musings

Last week Visa reported their 4Q and full year numbers, beating market expectations on the top and bottom line. Reading through their earnings call, it is amazing to see the insights that they get globally, thanks to seeing spending changes. They have noticed a spending drop off in areas hit by recent natural disasters. More developed regions spending returned to normal in a shorter period when compared to less developed areas. Another thing they pick up is the impact of currency changes on spending and travelling. Speaking of travelling, they saw a 10% rise in the number of cross-border transactions; high margin business for them and good news for our investment in Priceline.

Arguably the most important number, indicating future business potential is the number of cards in issue. The number is huge! With around 3.2 billion cards, that is almost enough cards for one in every two people on the globe to have one. I had a look in my wallet, there are 3 Visa cards in there, which I guess is the average for most people?

Onto the numbers. Revenue for the full year came in at $18.4 billion, an increase of 22%. Net income clocked $6.7 billion also an increase of 22%. The growth was driven by the purchase of Visa Europe last year, which is performing better than expected, both in terms of revenues and in terms of lower costs. As more people become comfortable with not using physical cash, the number of swipes go up. For Visa, they processed 43 billion transactions in only three months.

Management is ploughing money into share buybacks; using cheap debt to buy back shares. Depending on the direction of the share price, this can be a great idea. If you are an Anglo American shareholder, you would rather forget all the buybacks done at R450 a share, back in 2008. As a Visa shareholder, the strategy is working well. Over the last financial year, Visa spent $6.9 billion on share buybacks, at an average purchase price of $90.31, translating into a 22% return for shareholders. For the current year, management plans to spend $9 billion on buybacks and dividends, around 3.5% of Visa's current market cap.

One of the questions we get asked regularly is if Visa will be around in the future due to cryptocurrencies. As it stands at the moment, using Visa is cheaper, quicker, safer, easier and uses less electricity than purchasing with the likes of Bitcoin. Going forward, I think we will operate in an environment where cryptocurrencies play a role but the network Visa has built will still be the dominant player for payments. Happy to continue holding this company for decades to come.

Linkfest, lap it up

One thing, from Paul

President John Magufuli of Tanzania has been giving private companies operating there a hard time.

Elected at the end of 2015, Magufuli made a stir by announcing sweeping anti-corruption measures, cutting expenditure on his inauguration, curtailing the number of ministers in his cabinet and banning first-class air travel by government officials.

Since then, enthusiasm for his rule has waned, because he has curbed media freedoms, jailed HIV-activists and attacked foreign companies operating in Tanzania. For example, he ran some numbers and announced that based on the historical value of gold concentrate exports by UK-listed Acacia Mining dating back to 2001, that company owed back taxes of tens of billions of US dollars (including interest and penalties).

Acacia unveils blueprint for cash inteeth of Tanzania crisis

The ruling elite in Tanzania probably think that this is all marvellous, and that foreign companies are being given a good lesson, but of course the long-term impact will be that Tanzania will be a no-go area for future foreign investment. In the long run, it's an own goal.

Bright's Banter

Today I am listening to Prof. Scott Galloway, I've said before that he's a professor at New York University Stern School of Business, author of The Four: The Hidden DNA of Amazon, Apple, Facebook, and Google (all companies we own).

I have written about Prof. Scotty before but I didn't do it justice. He's an investor, marketing consultant, author amongst other things. He's founded many companies including Red Envelope and Prophet. His most recent company is L2 Digital a business that tracks and ranks the top brands in the world according to their Digital Performance. Visit his website for more info on that.

Below is his interview with Barry Ritholtz on Bloomberg's Masters In Business Podcast Series. He discusses all the companies in "the four" and basically articulates why we here at Vestact prefer to invest your hard-earned cash in these businesses.

- Scott Galloway Discusses Four World Conquering Companies (Apple iTunes Version)
- For those who do not have an iPhone:Scott Galloway Discusses Four World Conquering Companies (Other Version)

Home again, home again, jiggety-jog. Despite the US markets being red yesterday, our All-share is green this morning; breaking into the 59 000's for the first time. Later today, we get an unemployment read from South Africa, where data is expected to show unemployment running at a sad and dismal 27.7%. Then while you are biting down on a sandwich for lunch, the EU releases their CPI figure; it is expected to be 1.5%, still well below the ECB target of 2%.

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Monday 30 October 2017

Tech Soars

To market to market to buy a fat pig. The 3Q GDP read from the US came in better than expected, with a read of 3% growth; we would love to get growth of even half that! This makes it the second quarter in a row where the US economy has grown by more than 3%. The strong growth will no doubt be a consideration for Janet Yellen and her team when the Fed meets this week. The market is still pricing in a third rate hike for 2017, either at this weeks meeting or their December meeting.

Market Scorecard. Wow! Tech was on fire on Friday; the share prices that is, not the electrical burning smell you get when you try play a game that your PC can't handle. The Dow was up 0.14%, the S&P 500 was up 0.81%, the Nasdaq was up 2.2% and the All-Share was up 0.24%. The weak Rand has been a huge tail wind for our dual listed stocks with Naspers, Richemont, Gelncore and AB-inbev all at 12-month highs; the first three stocks at all-time highs. The Nasdaq's surge is due to Amazon and Alphabet(Google) beating expectations with their results, they were up 13.2% and up 4.2% respectively.

Amazon's impact is being felt across the US. In contrast to the tech stocks, JC Penney cut its guidance for when it reports on the 10 November, pushing the share to an all-time low and taking its YTD decline to 62%. Another sector bracing for the impact of an Amazonian tidal wave is the 'retail pharma' companies. CVS (think Dischem of the US) has made a bid for Aetna, a US heath insurer, in an effort to try cut costs so that they can be competitive when Amazon arrives en mass to their industry (CVS bid for Aetna: A $66 billion bet on cutting drug costs).

Linkfest, lap it up

One thing, from Paul

This week on Blunders: SA Government finances are in a pickle, 25-year old is the "face" of Dior anti-ageing cream, cats are big in Japan, and KFC is only following 11 herbs and spices on Twitter - Blunders - Episode 77

Michael's Musings

For the rapid creation of wealth, there needs to be strong economic growth and more importantly, you need to be investing in a young disruptive industry - One billionaire created every two days in Asia.

In order to bring down costs and become more accessible to a greater number of people, airliner configurations have become more cramped over time - Vintage photos show what air travel looked like in every decade. Would you rather spend 13-hours in the below configuration or current configurations, which includes in flight entertainment and wi-fi?

Given that Tokyo has some of the highest property prices in the world, the following headline caught my eye - Abandoned land in Japan will be the sizeof Austria by 2040. Location and bureaucracy seem to be the main culprits, more interesting is that only 10% of home sales in Japan are for second-hand homes.

Amazon is a monster, have a look at the size of its workforce. As one market commentator said, they are now the size of a small country - Amazon's Workforce Grows at an Unprecedented Rate.

You will find more statistics at Statista

Home again, home again, jiggety-jog. Asian stocks are mostly lower today, our market is bouncing between red and green. Nothing much on the data front today, this week holds the Fed Meeting though. Then company results to look forward to in the coming days are, Apple, Facebook and Tesla.

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Friday 27 October 2017

This Elephant can Dance

To market to market to buy a fat pig. Earnings galore coming from the US. What a time to be alive! Not because companies are releasing earnings, they do that every quarter. But because the earnings coming through are looking fantastic. Alphabet (Google) grew sales by 24% off a massive base. This equated to operating income of $8.8bn for the quarter. Just phenomenal. That stock is up 3% on the news

Amazon also reported cracking numbers. Revenues grew 33.7% to $43.7bn. Wholefoods contributed $1.3bn of that. People are loving their cheaper avos. The Amazon share price soared 8% on the numbers.

The Vestact brains trust will be working hard to get these numbers to you in more detail throughout next week.

Unfortunately south of the Limpopo, things are not looking as upbeat. We can no longer blame slow global growth for our woes. In fact, if things were bad globally we would be in a lot more trouble. The Rand got klapped. There is no other better way to explain it. We are now at R14.25 to the dollar.

Market Scorecard As you know, the market doesn't mind a weaker Rand. The all share closed 0.8% thanks to many of the larger dual listed stocks having a good run. SA inc stocks like the banks and retailers did not fair as well. In New York the S&P increased 0.1%. Those big moves mentioned above happened after the close, they will impact positively on today's open.

Company corner

Bright's Banter

- $30 Billion acquisition of Actelion was successful and benefits are flowing in already.
- Completed the sale of Codman to Integre for over $1 Billion.
- Janssen Pharma has been busy getting clearance for new drugs and acquiring new businesses.
- JNJ declared a $0.84 dividend.

JnJ shares were up 2% after the company posted another strong quarter. This was thanks to the strong performance by the pharmaceuticals business and the Actelion acquisition as well as other small recent acquisitions. JnJ also had a few sales of non-strategic businesses within the JnJ portfolio.

How did the company do compared to Wall Street's expectations?

1) Third-Quarter Sales of $19.7billion an increase of 10.3% which was a $370m beat
2) Third-Quarter Earnings Per Share was $1.37
3) Adjusted Third-Quarter Earnings Per Share of $1.90 an increase of 13.1% which beat expectations by $0.10

The consumer business did fairly with $3.4 Billion in Sales for the quarter, showing an increase of 2.9% with the most growth coming from non-U.S. sales. Baby care products took a hit but that impact was not felt much because the portfolio is well spread out. OTC products like Tylenol, an analgesic product, international smoking cessation aids, OGX, and Neutrogena beauty products continued to perform well in their categories.

Pharmaceuticals business was by far the biggest winner. During the quarter JnJ sold their brand Compeed to HRA Pharma. Pharma sales were up 15.4% to $9.7 Billion where Actelion contributed 7.9%. Strong growth came from the sale of new drugs such as Darzalex which treats patients with multiple myeloma and Imbruvica which is an oral treatment for certain B-Cell malignancies, a type of blood cancer. Other drugs that contributed to the growth were Stelara, Xarelto, Zytiga, Invega, Sustenna etc. These drugs treat everything from immune-mediated inflammatory diseases, metastatic cancer, prostate cancer, all the way to schizophrenia.

The medical devices business was another strong performer with Sales of $6.6 Billion for the quarter, an increase of 7.1%. Both U.S. and non-U.S. markets growing at 4.6% and 9.6% respectively. The growth in this portfolio was driven by the electrophysiology products in the Cardiovascular (heart related) business and Acuvue which is the contact lenses brand in Vision Care business.

The company acquired TearScience a company that manufactures products dedicated to meibomian gland dysfunction, and Sightbox which is an e-commerce business that makes vision care affordable by providing a subscription service that connects consumers with eye care professionals for their contact lens needs.

We like JnJ here at Vestact as an anchor position for our offshore portfolios. We think this giant still has legs to run; especially the Pharma and Medical Devices businesses. This Elephant can dance baby!

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One thing, from Paul

Vestact's most recent investment recommendation for SA portfolios was private education group AdvTech. They are a very promising business, with solid assets in both secondary schooling and the tertiary sector (colleges and universities). Remember that a tiny fraction of school goers and undergraduates in South Africa attend private institutions, but that is set to grow. State-run schools and universities are taking strain!

Private educational institutions are at the forefront of adopting internet technology to supplement in-class activities. Online lectures, assignment management systems and web-based examination processes are proliferating. Are 100% online courses the way to go? Certainly, not having to build a campus upfront is a massive capital saving!

Not so fast. This article from the Brookings Institute was based on a study at Stanford University. They found that in a large, for-profit college, online courses are a poor option for the least well-prepared students. Online students did substantially worse than students in the same face-to-face course: They earned lower grades, were less likely to succeed in subsequent courses, and more likely to drop out. Clever kids, of course, did well and liked not having to go to lectures - Who Should Take Online Courses

Home again, home again, jiggety-jog. Stocks in Asia are up this morning after the good results coming through from the US. Remember that these US businesses are global. We have had a muted start. The Rand hedges still looking solid.

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Thursday 26 October 2017

Lock it in with Amgen

To market to market to buy a fat pig. Wow! Yesterdays MTBPS was ugly. While Minister Gigaba was talking the quote attributed to Margaret Thatcher came to mind.

"The problem with socialism is that eventually you run out of other people's money to spend."

We may not be a socialistic state, but the 'chickens' of state capture, corruption, nepotism, hobbling SoE's and billions in wasteful expenditure by municipalities are coming home to roost. The problem with running out of money is that the closer you get to rock bottom, you need to borrow more to keep your head above water. Increased borrowing means an increased interest bill, which in turn leads to even more borrowing. Then hit repeat. The graph below shows how troublesome things have become in the last 6-months; with our national debt getting out of control, a debt downgrade to junk from Moody's looks like a foregone conclusion now.

If we do get a debt downgrade, the image above and the image below are going to get worse.

Then lastly, how serious are we about cutting costs if we still spend R9.3 billion on travel? How much does a corporate Skype account cost?

Market Scorecard US markets seem to have run out of steam for now. The Dow was down 0.48%, the S&P 500 was down 0.47%, the Nasdaq was down 0.52% and the All-share up 0.38%. Thanks to the weaker Rand, Naspers and Richemont are at all-time highs!

Company corner

Byron's Beats

On Wednesday we had 3rd quarter results from Amgen. Remember these guys discover, develop and manufacture various human therapeutics. When looking at this company, all focus needs to be on their portfolio of therapies; what they cure, competition, FDA approval, medical aid adoption, doctor adoption, side effects, how the therapy is administered, regulation and many more factors. Fortunately, Amgen has a market cap of $130bn (30% bigger than Naspers) and boasts a portfolio of more than 13 mainstream products with annual sales ranging from $150m to $6bn.

My point here is that, yes the industry can be volatile with lots of moving parts, but Amgen is diversified enough to absorb these factors while growing within a very exciting and fast-moving sector.

Let's get into those numbers.

Currently, the portfolio is in a transition phase. Some of the blockbusters are slowing, while a few potential big sellers are showing progress. This meant that revenues declined by 1% for the period. However margins were much better, and there were fewer shares in issue. This resulted in earnings per share growing by 8% to $3.27 for the period. Expectations for the full year are for earnings per share of $12.60.

The share trades at $177 or 14 times earnings. For a company with operating margins of 55% and a cash position of $41.4bn (debt sits at $35.8bn) these are very solid fundamentals. Not to mention the 2.7% dividend yield.

In case you are interested (we do have a few Doctors as clients) here is their product mix. These therapies attempt to cure all sorts of diseases that range from arthritis, heart disease, cancer, osteoporosis, migraines and many other awful ailments you never want to have.

As you can see, Prolia which helps cure osteoporosis in women after menopause was responsible for some solid growth. They expect this drug to continue to power ahead and become a major revenue driver. Repatha which brings down cholesterol is another potential blockbuster. This drug saw sales increase 123% year on year albeit off a low base.

So far this year Amgen has spent $2.5bn on Research and Development. That should breach $3bn by the end of the year. You are buying this company for its size, diversity and ability to attract quality talent. These factors will result in a constant supply of quality therapies in a booming sector. Not all of them will be major successes but the ones that are will result in outperformance. We are conviction buy on Amgen at these attractive levels.

Linkfest, lap it up

One thing, from Paul

As you probably heard by now, Saudi Arabia has a bold new plan.

NEOM (spelled with four uppercase letters), is a planned 26,500 square km city in northwest Saudi Arabia, Jordan, and (via a proposed bridge over the Red Sea) Egypt. Presently, its just a arid, rocky piece of mountainous coast land.

It looks like a long shot to me, but given time and enough money, who knows? I'm in favour of investment over consumption!

Mind you, the copy writer who prepared the text for the website must have been on some strong drugs:

"Unrivalled in concept, unmatched in intelligence, unconstrained by history and built on humanity's greatest resource: imagination.

NEOM is a new kind of tomorrow in the making a place on earth like nothing on earth a new blueprint for sustainable life on a scale never seen before where inventiveness shapes a new, inspiring era for human civilization.

And NEOM will redefine what urban entertainment means, by turning up the dial and raising the scale. With futuristic, record-breaking theme parks. Endless natural parkland. The world's largest garden in the heart of the metropolis. A waterpark with a wave machine where Olympians will perfect their technique. It will attract tourists from thousands of miles around. And for residents, bring epic to the everyday."

Feel like moving there yet? Go and take a look for yourself - Welcome to NEOM

Michael's Musings

As millennials become the biggest spending group, their tastes will come to shape industries - Eight Travel Predictions for 2018, as Revealed by Booking.com. The use of technology to get the perfect trip, customised around your own tastes is where the future lies. We own Priceline in our offshore portfolios. They in turn own booking.com.

With the current low volatility bull market most investors get lulled into a false sense of safety. When the next bear market hits, many people won't be emotionally prepared for it, which will result in very poorly timed selling. One thing I have learnt is that the market can do things that you think will never happen - What the Charts Don't Tell You

Bright's Banter

We were promised flying cars but Tesla can't even give us a fully autonomous vehicle. Well…not fully autonomous, just a car that can keep the correct distance, change lanes, take off-ramps and on-ramps, park itself etc.

Customers who were interested in this self driving car had to pay an additional $8000 for the service on their Model X and Model S. Unfortunately the cars still do not have autopilot! Elon Musk in a tweet (see below) said it'll be available in 3 months maybe, 6 months definitely - Can Tesla Make Up For Autopilot's Lost Year

Home again, home again, jiggety-jog. After yesterday, banks and retail are under pressure this morning; dual listed stocks though are flying. On the cards today for international news: ECB rate decisions and their plan with their huge balance sheet and then initial jobless claims in the US.

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Wednesday 25 October 2017

Stryke While The Iron is Hot

To market to market to buy a fat pig. Generally, the Medium Term Budget Policy Statement (MTBPS) is a bit of a non-event because no major policy changes are announced. Today though it will be different, rating agencies will be watching closely before their 24 November rating review. The maiden budget speech from Mr Malusi Gigaba, will be a tough one. How good will his icebreaker joke be?

Standard Bank forecast that our current revenue shortfall is around R45 billion, which could increase to over R70 billion next year. When you collect less tax than expected, there are two options. Either you can run things at a wider deficit, or you need to pull back expenditure. We already have a wide deficit and are teetering on the edge of being classified as junk by all three major rating agencies; it would seem there is only one choice, cut expenditure. Between SAA, Eskom and the SABC, our budget is already needing some TLC. All eyes will be on Gigaba for where he plans to cut costs, not an easy task for any government.

Market Scorecard. Markets returned to their green ways yesterday. The Dow was up 0.72%, the S&P 500 was up 0.16%, the Nasdaq was up 0.18% and the All-share was down 0.16%. To get the ball rolling on company news, Visa releases their 4Q numbers tonight, before Amazon, Google, Twitter, Stryker and Cerner report on Thursday. I am particularly keen to hear from Amazon how the integration of Whole Foods has gone.

Linkfest, lap it up

One thing, from Paul

It's amazing how much money is managed by firms that have a relatively low profile. For example, privately-held Edward Jones is based in St. Louis, Missouri in the central part of the USA. It has 15,000 advisors, over 7 million clients and and 1 trillion US dollars in assets under management - Edward Jones Hits $1 Trillion in Assets

Byron's Beats

Stryker, one of our US based healthcare stocks has been doing well lately. They operate in a segregated sector (medical devices) with lots of technological innovations happening at the moment. Of course they do their own R&D but being a massive player, they are also consolidating smaller businesses that have proven track records and supply agreements with hospitals.

Yesterday it was announced that they have bought a stake in a French business called VEXIM which specialised in mechanical implants for spinal injuries. Stryker have bought half the business for around 90 million Euro. This consolidation tactic is one of the reasons we own the stock, long may it continue - Stryker to acquire VEXIM

Michael's Musings

When most people hear the term blockchain they think of cryptocurrencies, it is a whole lot more than that though. Blockchain is the technology that uses computers from all over the world to store data and execute tasks; each computer gets a tiny fraction of the data to store - The Power of Smart Contracts on the Blockchain.

Here is a graph from the Ray Dalio piece, Bright spoke about yesterday. The graph shows that income inequality is not a new problem, at the turn of the 20th century, when there were the titans of industry like Ford, Carnegie and Rockefeller, inequality was worse - The top 0.1% of American households hold the same amount of wealth as the bottom 90%.

It is interesting to see how different nations feel about autocratic rule. Each nation's history plays a prominent role in what type of rule the people know and feel comfortable with. I watched a documentary recently on Russia; after overthrowing the Tsar, the people still expected the new communist rule to have an autocratic ruler because they were used to having an individual calling all the shots - Where Support For Autocracy Is Strongest

You will find more statistics at Statista

Bright's Banter

The future is here! Algorithms are taking over analogue processes and simplifying them using formulas. Artificial intelligent (AI) learns faster than any human, which will help us make better decisions in the future.

The newly developed computer by Deep Mind, AlphaGo Zero has beaten the old AlphaGo version in a game of Go 100: 0! This shows what you can achieve with significant development and sharp minds programming these computers - AlphaGo Zero Learning Scratch

Home again, home again, jiggety-jog. Our All-share is out the blocks today in the green; thanks to Tencent in Hong Kong being higher by 1% today, Naspers is also 1% higher. Year to date, Tencent is up 85% and Naspers is up 62%. Apart from the MTBPS, we have 3Q GDP numbers from the UK and oil inventory numbers from the US.

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Tuesday 24 October 2017

Is Yellow the new Black?

To market to market to buy a fat pig. Yesterday the S&P 500 hit another record. No not another record high but the most number of days without a 3% drawdown. The previous record was 241 days and was set in 1996. It is amazing how calm markets have been this year. In years gone by, the likes of the crisis in Spain and the Nuclear threat, would have had a much bigger impact on the market. Remember how volatile the market was when Greece was in the middle of their debt crisis?

The Business Insider has the following to say about markets in 2017.

"Here are three other stats that illustrate the market's lull, via LPL Financial:

1) As of Friday, the S&P 500 had gone 33 straight days without a 0.5% drop, the longest streak since 1995.
2) The S&P 500 has fallen by 1% or more in a single day only four times this year, the fewest for a full year since 1964.
3) Its average daily close on an absolute basis has been 0.3% this year, the lowest since 1965."

Market Scorecard It wasn't a record high close for a change, even though all three US indexes opened in the green and at record highs. The Dow closed down 0.23%, the S&P 500 was down 0.40%, the Nasdaq was down 0.64% and the All-share was up 0.09%. Our market opened on the front foot, ticked higher for most of the morning and then at 11:00 turned around and slowly slipped back down to its opening levels. Yesterday we spoke about GE, which opened down 6% on Friday, only to close the day higher by 1%. Yesterday it opened down 2% and then finished off the day down 6.4%; it seems the market is still deciding what to make of the results and restructuring plan.

Company corner

Michael's Musings

This morning, MTN released their Quarterly update for the period ended 30 September 2017. Off the bat, it looks like the things that they can control seem to be going well and the things beyond their control, like currency and regulation are hurting them.

On a constant currency basis, Group total revenue increased by 6,9%, with Group service revenue up 7,4%. Data revenue increased by 31,4% and digital revenue was up 19,6%. Probably most impressive was MTN Nigeria, who reported a 11,2% increase in total revenue driven by data revenue growth of 72,1%. Another key region for the group is Iran, which saw revenue up 16.8% and Data revenue up 64.8%!

Here is a quick look at their subscriber numbers, they had to disconnect 750 000 subscribers in Uganda due to regulatory sim registration (the equivalent of being discontinued here due to not being RICA'ed).

They also say their executive team is now fully assembled, expect their new direction and flavour to come through in reporting periods going forward. All in all, things looks to be back on track.

Another company that has had a tough 2017, Steinhoff reported that they repurchased 78 million shares. The repurchase represents around 1.8% of the company and is a sign from management that they think the shares are currently undervalued; at least in my book that is how I read it. We still have to wait a couple more months until we hear the outcome of the tax evasion case.

Linkfest, lap it up

Byron's Beats

It's lovely to see this making international news. This CNBC article titled You can get an Apple Watch for only $25.. with one small catch speaks about fitness schemes which reward health insurance clients with a free Apple watch. Does that sound familiar?

Of course it does! Discovery have a partnership with John Hancock to white label Vitality in order to get health insurance clients to look after themselves. After seeing a 20% increase in activity under the program John Hancock have extended the product to all U.S members. They are the first U.S insurers to do this.

I hope to see more of this. Discovery's Vitality program is truly unique and has the ability to become massive amongst insurers all over the globe.

Bright's Banter

Here's what I'm reading this morning:

I enjoyed this CNBC interview of Prince Alwaleed bin Talal talking about markets and of course Bitcoin! - Bitcoin 'Going To Implode' Like Enron

This guy is betting against Warren Buffett. In the past this has been a bad money making strategy. The question remains though, is this guy up to something here? - Warren Buffett's Mosquito

Bridgewater has a lot of haters and thats usually a sign of success. The latest person that Ray Dalio has to add to his haters list is Jim Grant. Without going into detail, Grant was wrong - Jim Grants Botched Bridgewater Takedown

I found this very interesting, short Ted Talk by Ray Dalio explaining the concept of radical transparency and idea meritocracy. I must say I learnt a lot about decision making here - Ted Talk On Bridgewater's Idea Meritocracy and Radical Transparency

Home again, home again, jiggety-jog. Our market is up this morning, along with most Asian markets. Investors seem happy with the MTN update, the stock is higher by 1.5%. Both the EU and Germany had positive manufactory reads out this morning; later today the US will report their manufacturing PMI number.

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Monday 23 October 2017

Mediclinic Makes Inspired bid

To market to market to buy a fat pig. The first stock that comes to mind when people say, 'Blue Chip' is GE. On Friday, the stock wasn't behaving like a blue chip company at all. The company reported below-par 3Q numbers before the market open on Friday morning, causing the stock to open down 6%! If ever an earnings call saved the day, it was John Flannery's call with investors, where he spoke of restructuring, asset sales and cost-cutting. After starting the day down 6%, the stock finished the day higher by 0.97%; Blue chip companies are not meant to fluctuate by 7% in a day!

Market Scorecard. Japan's Nikkei has now had a record close for 15-days in a row, a new record for the index! Sticking with Japan, Shinzo Abe won a landslide victory over the weekend, where his party now has a supermajority in the Japanese parliament. On Friday, the Dow was up 0.71%, the S&P 500 was up 0.51%, the Nasdaq was up 0.36% and the All-share was up 0.09%.

Company corner

Byron's Beats

As you know, Mediclinic owns 29% of UK listed Healthcare Group Spire. Spire provides care services via 39 hospitals and 10 clinics in the UK. Much of that is focused on cancer, sports medicine, physiotherapy and rehabilitation. They have 17% market share of the UK private acute hospital market and 24.4% in private hip and knee replacements. You can check them out here in the About Us section of the website.

On Friday afternoon rumours started circling that Mediclinic were looking to make a bid for the rest of the business.

This morning Mediclinic came out with an official SENS confirming the offer.

Under the Proposal, Spire shareholders would receive 0.232 Mediclinic shares and 150 pence in cash for each Spire share. Based on the closing price of Mediclinic shares as at 17 October 2017, being the last business day prior to the Proposal being made, the Proposal valued each Spire share at 300 pence, representing a premium of:

1) 30% to the closing price of Spire shares on 17 October 2017(1); and
2) 31% to the volume weighted average closing price of Spire shares in the one month prior to and including 17 October 2017(2).

This values the business at around 1.2bn pounds, half cash, half shares. Although Spire are also sitting on around 436m pounds in debt. The company made 8.7 pence for the half year ending June 2017, if you annualise that, the price Mediclinic are offering is around 17 times earnings.

The Spire board have rejected the offer. Mediclinic have until 20 November 2017 to revise it or officially say they won't make another bid in the near future. We will keep a close eye on the proceedings.

Linkfest, lap it up

Michael's Musings

China's National Congress came to an end last week, with many leadership changes. I found this interesting article about the history of the congress and an informative three-minute video of what Xi Jinping has done over the last five years - The Real Message for the World in China's First Global Congress.It is paradoxical that China talks about free global trade but the country itself is still very closed to outside businesses.

Sticking with China and foreign companies, Tesla looks set to open up a factory in China without needing a local partner - Tesla Strikes Deal With Shanghai to Build Factory in China

One of the advantages of having a diverse society is the increased choices when it comes to food - American Soft Power

You will find more statistics at Statista

Bright's Banter

The most common question that we have been getting from clients before the recent rally was the following:

How can you invest in company A, B, C, etc. if you knew Brexit was going to happen and share prices would go down?

I can't remember where I got this, but I will use it as an example to explain how we cannot know the future but how you can prepare for it. What we can do to take advantage of low share prices.

The most conservative companies in South Africa are life insurance companies, Discovery and the likes. How can these businesses insure peoples lives when they know we're all going to die? How do they do it?

1. The key is knowing the risk involved. They know we're all going to die, it doesn't come as a surprise like "oh we had someone just die".

2. There are risks they can analyse; we have to do medical check-ups every so often to update their risk profiles for us.

3. There are risks they can mostly diversify away; they have a diverse client base. They do not only insure people in the Cape Flats, or only Skydivers, or only Smokers.

4. They are well paid to take the risk. The insurers get to sit on all your premiums, investing them, until you do claim one day. If you reach retirement and decide there is no longer a need for expensive life insurance and cancel the policy, then those premiums are pure profit.

The point here is that if you understand risk and you are aware of it. You can price the asset right and you can get a bargain.

Howard Marks says:

"Most things are governed by cycles. Yet people believe that trends will go on in one direction repeatedly into perpetuity. That trees will grow to the sky. That things that are going down today and are worth less today will go to zero.

These are the times when biggest errors are committed by investors. People get more excited as share prices rise and they want to buy more. The same people get more depressed as share prices fall and they want to sell them. This is the opposite of what you should do."

Here at Vestact, we see these market gyrations as an opportunity to buy more of the same quality businesses that we liked before. The only difference now is that they are cheaper.

Home again, home again, jiggety-jog. Our market is green this morning; Mediclinic opened up and then dropped, currently down 2%. Since around 8 AM the Rand has significantly weakened against all major currencies, currently sitting at $/R13.76

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Friday 20 October 2017

Amazon Is Coming For You

To market to market to buy a fat pig. Business Insider has a daily blog, called Closing Bell, which gives a quick summary of the day's events and links to top stories. Here is how they described yesterday:

"Thursday didn't get off to a good start. On Thursday morning, Apple was down as much as 2.8% on reports of the company cutting production orders linked to the new iPhone 8. Apple led the S&P 500 down as much as 0.5% in early trading. But, the markets weren't going to let a single stock drag them down, so at about 10:15 AM, the S&P reversed course and started a long march upward to end the day above its break-even point."

Market Scorecard. Locally most of the market was red yesterday, the only 'bright' spot were the gold miners, up 1.45% as a whole. The Dow was up 0.02%, the S&P 500 was up 0.03%, the Nasdaq was down 0.29% and the All-share was down 0.44%.

Company corner

Michael's Musings

On Friday last week, before the US market opened, Wells Fargo reported their 3Q numbers. Whenever I read their results, I am amazed at their size and the size of the US economy as a whole. Here are some of the massive numbers, for reference bear in mind that South Africa's GDP last year was $295 billion. Over the previous quarter, they had applications for $73 billion in home loans, $59 billion were approved. Over the period, the average deposits in the bank were $1.3 trillion and the average outstanding loans were $952 billion. Shifting to the Wealth and Investment Management division, it had $1.9 trillion in assets! When people talk about the most prominent asset managers, Wells Fargo is never mentioned, even though there are only a handful of firms with over $1 trillion in assets.

A sign that the US economy is back on track, is the number of nonperforming loans is decreasing. Half of the improvement comes from their commercial and industrial customers, and the other half comes from what they call 'Real estate 1-4 family first mortgage' segment. Even though they have $9 billion in nonperforming assets, it is less than 1% of their loan book.

Unfortunately, the number overshadowing the results was their $1 billion they had to spend in legal costs. To make matters worse, it is not a tax-deductible expense. Thanks to that $1 billion expense, Net Income was down 18% to $4.6 billion. When you type, Wells Fargo and scandal into Google, there are a few that pop up from the last year. Wells Fargo employs just short of 300 000 people, the hope is that there were a few bad eggs that have now been removed and that it is not a company-wide culture problem. It seems that the strategy from management is to comb through the company, find the practices that are questionable, stop them and then refund customers any potential damages. By doing this, it may be costly upfront, but they then get to start with a clean slate.

The reason to own Wells Fargo is that their performance is closely tied to that of the US economy, which should continue to grow for generations. Added to the growth of the US economy is the ability of Wells Fargo to cut costs by encouraging customers to go electronic. Over the last year, they have consolidated 145 branches into existing branches; they still have around 6 000 retail branches in their network. Americans love using cash though, less than 1 in 2 customers have a credit card. There has also been a big push to move customers online; you can now apply for a home loan through their webpage, and they have made doing an EFT easier. Management is starting to see behaviour shifts in clients, who are beginning to embrace electronic channels.

Wells Fargo is a juggernaut that keeps rolling forward, despite all the scandals swirling around them. If they can cut out the cancer of putting profits above the customer, they will survive and probably be stronger down the road for it.

Linkfest, lap it up

Byron's Beats

I love seeing modern, extravagant, large buildings popping up around Johannesburg. It just smells like progress! The new Discovery head office in Sandton is the largest single-phase commercial office development in Africa. It also has a 5 Star green rating for its environmentally friendly design and infrastructure.

As you can imagine, it features a fully equipped gym, a running track, yoga decks and multipurpose courts which encourage health and well-being. You have to practice what you preach.

This cool article explains all the features and green credentials - New Discovery Head Office is Certified Green.

Bright's Banter

A few days ago, I was watching a Bloomberg interview of one of my favourite Professor Entrepreneurs, Prof. Scott Galloway. They asked him about his new book The Four, Or How To Build A Trillion Dollar Company and his thoughts on Amazon. Below is what he had to say about the company, and here at Vestact we kinda liked what he had to say because Amazon is one of our biggest holding for our offshore portfolios.

Supermarkets in the U.S. are declining fast at the hands of the Amazon and Whole Foods tie up. Foot traffic to Whole Foods has increased tremendously, up 17% year-on-year following the acquisition. Here is the split of where they're stealing the customers from.

However, if you control for the size of the competitor, Trader Joe's and Sprouts were clearly the losers.

Amazon is not just stealing foot traffic they are disrupting the grocery market. The past few months have shown that they're masters at storytelling and have found different ways to rise to the top in markets they play in. When Nike announced it was going to start distributing on the Seattle Giants website, its shares were up 2% on the day, compared to shares of traditional sports retailers like Footlocker, Finish Line, Dicks Sporting Goods tumbled.

On the 6th of this month when Amazon announced they might be entering the prescription drugs market; shares of CVS and Walgreens dropped by 4% and 5% respectively, while Express Scripts is now trading at its lowest point since 2013.

Even Swatch shares flattened when negotiations between the watchmaker and Amazon stalled. As Prof. Scott Galloway observes, we may be on the precipice of a Singularity but not the good kind. . . The Amazon Singularity!!!

Prof. Galloway said that one of the key components of the free market is that no one individual or firm controls the market. However, concerning the consumer market or specifically the market capitalisation of consumer companies, it's not interest rates, consumer trends, not even the underlying performance of the company that matters. The one factor driving shareholder declines right now is whether or not Amazon is planning to come into your category or distributor your products.

Home again, home again, jiggety-jog. Our market has bounced back from yesterday, currently up 0.8%. US data out today includes existing home sales and Baker Hughes oil rig count. Get your rest this weekend, next week is going to be busy; most of our US holdings report and we have the South African mid-term budget.

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Thursday 19 October 2017

Creaming it by Streaming it

To market to market to buy a fat pig. We have had many students come through our office, the number one thing we tell them is that we can't accurately forecast the future. The only thing you know for certain when you make a forecast is that it will be wrong. Broadly speaking, stock markets go up because more wealth is created globally, through a function of us becoming more efficient with our resources and through population growth. We can be fairly sure that global population will reach around 10 - 12 billion people (big margin of error in that estimate) and that humans will continue to innovate.

Based on two assumptions above, if you are in the market long enough you will make money. Buffett points out, one of the only things that could derail the global wealth creation machine would be something like a nuclear war. If the Northern Hemisphere starts dropping atomic bombs on each other, the value of your Apple shares is probably not very high on your list of problems? The key to successful stock market investing is not to chop and change. Add regularly and then be patient; let compounding do its thing.

Market Scorecard. Another day and the records keep tumbling. Yesterday our market opened the day in the red but gradually drifted higher. Around lunch time we broke into the green and then pushed on higher. It was great to watch, every time I refreshed my heat map it would change colour; from a light red to a light green and then finished off with a dark green. The Dow closed up 0.7%, the S&P 500 was up 0.07%, the Nasdaq was up 0.01% and the All-share was up 0.47%.

Company corner

Byron's Beats

On Monday we received great results from Netflix. What a story it has been so far, you could even make a series about it. . . Streaming revenues increased 33% year on year, operating income doubled, and they added a record 5.3 million members in the quarter, much higher than their own expectations of 4.4million adds.

Year to date they have added a whopping 15.5 Million subscribers, 29% higher than last year. Most of this growth is coming from the international business. Many countries have just gained access to the wonders of Netflix and users are coming in fast. Estimates predict 115 million global users by the end of this year. The image below highlights the magnificent growth in subscribers over the years.

A streaming business like this may sound like a profit machine with low capital expenses, but that is not the case unfortunately. It is a very competitive industry and the only moat these businesses possess is their content. Netflix plan on spending a massive $7bn on content creation over the next year. Compare that to revenues for the full year of just below $12bn and you realise how much capital needs to be deployed here.

However, I fully agree with this strategy of quality content before profits. If you do not have your clients locked in, they will easily move on to the next provider. The other providers are also getting more stingy with their content. Hence original content is vital. It also gives you pricing power, Netflix increased their prices just before the release of the hit series, Stranger Things Season 2. If you're hooked, an extra $2 a month is worth every penny.

The share price has had a phenomenal run, up 58% so far this year. The forward PE sits at 86 times earnings; expectations are certainly high. I love the business model and I love the company as a consumer. I think the valuations may be a bit stretched at these levels. Mainly because I believe the desire for quality original content will never end and the competition will increase (Apple and Amazon getting on board). Netflix will have to spend big bucks on content as long as they are in this industry.

On the other hand, 115 million subscribers are just a blip in the ocean, of series hungry consumers. I expect subscriber additions to continue to explode over the coming years. There is certainly a place for Netflix in more risk tolerant portfolios.

Linkfest, lap it up

Michael's Musings

With Richard Thaler winning the Nobel prize of economics this year, our inherit cognitive biases is a popular topic - These Five Cognitive Biases Hurt Investors the Most

Bright's Banter

The media has portrayed hedge fund managers as crooks, liars, corporate gangsters, greedy, fat capitalist pigs that prey on the rest of society. Even the best investor of our time Warren Buffett (a person who started as a hedge fund manager) doesn't like these guys. So what's the story? To try remedy this perception of an ugly fat man in a speedo, I will be sharing a story of a very charitable hedgie. Remember that hedge fund managers are human too, they also have varying human characteristics!

What the media doesn't tell you is that hedge fund managers, as a profession are the most charitable people, when compared to any other profession on earth. They contribute more towards fixing the inequality gap than most government will ever achieve.

George Soros has endowed $18billion of his personal net worth to his charitable foundations, dubbed the Open Society Foundation. It takes its name from a philosophical theory, by his all-time favourite philosopher, the Austrian-British Karl Popper. Open Society has been active all over the world, combating issues ranging from human rights, public health, gender inequality, education, promoting democracy, supporting refugees, fighting hate crime etc.

George Soros is a Hungarian emigre who lived through communism and Nazi occupation of his home country, Now you can understand why all of the causes above are so close to his heart. He really cares about changing the world. The Open Society Foundation is probably the second biggest charitable foundation after the Bill & Melinda Gates Foundation.

Thanks to Stanley Druckenmiller, who used to work for Soros, for calling all of these billionaires out for not giving away their riches to charity. There is no point in hoarding that much cash. There's an old saying, "he who dies rich dies a disgrace!" A wise man once said, "If you're in the luckiest 1 percent of humanity, you owe it to the rest of humanity to think about the other 99 percent."

Karl Popper would be proud!

George Soros Transfers $18 Billion To His Foundation Creating An Instant Giant

Home again, home again, jiggety-jog. Things are heating up in Spain, global markets are red across the board. Data out this morning showed China grew 6.8% over the last 12-months while their retail sales are growing faster than estimated. Uk retail sales on the other hand, shrunk by 0.8%, not good news for the likes of Brait and Steinhoff. Then later today, we have US Jobless Claims data out.

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