Money with a dash of Funny: February 2018

Wednesday 28 February 2018

Loud and Cloud

To market to market to buy a fat pig. Chatting with many clients, most people hate buying at all-time highs. The feeling is that a correction is coming or at the very least, you have already missed the opportunity. Their proposed solution, keep your gunpowder dry and sit on cash. Ready to deploy at a moments notice, during the next correction.

Kicking off this year, markets went into correction territory; "A stock market correction is when prices fall 10 percent from the 52-week high". If you were on the sidelines, sounds like a perfect time to buy right? What happens in reality though, is that when the market is down 10%, it looks certain that the market will drop further in the coming days. Then a few days later, when things have settled and the market is only down 8%, you promise yourself that you will buy when the market gets back to being down 10%.

Yes, you guessed it. While you were worrying about how far the market will fall, the market dropped and then recovered all without you deploying a single cent. We have seen it many times, where clients have cash on hand to buy the dips, but when it comes time to buy the dip nothing happens. This Tweet from Byron sums things up nicely.

Its far easier to accept that you can't predict where the market will go tomorrow; just buy when you have long-term capital available. As the market adage goes, "It is time in the market, not timing the market".

Market Scorecard. The market didn't like what Jerome Powell had to say to Congress yesterday. The Dow was down 1.16%, the S&P 500 was down 1.27%, the Nasdaq was down 1.23%, and the All-share was up 0.27%. Unless US markets have a rip-roaring day this afternoon, February will be the first down month in 13-months! It has been good to be an equity investor.

Linkfest, lap it up

One thing, from Paul

I've heard that getting divorced can be really bad for your finances? That makes sense, since usually a couple's savings are split and immovable assets have to be sold in a hurry. Setting up two new homes can be really expensive.

The problem is, marriages seem to be ending sooner. Here's a chart which shows the percentage of people who are divorced, separated or in a second or later marriage in America in 1960, 1980 and 2016. In other words, these are people who are probably trailing a number of financial "ex-dependents". That number now peaks at over 40% of the total population.

Here is a link to the the article which contains that graph:

Here's when you're probably getting divorced

Byron's Beats

Imagine the billions of photos, videos, songs and files that get stored on Apple devices. These days, not even 256GB phones can handle all this content. Then this needs to get backed-up onto a computer which duplicates the storage requirements. Step in Apple iCloud. I cannot even comprehend the amount of storage capacity iCloud requires.

I was always under the assumption that iCloud was done in-house. Apple has the capital available. But this CNBC article titled Apple confirms it uses Google's cloud for iCloud suggests that Google has secured a massive cloud storage deal with Apple. The details in the article are a little "cloudy" because these businesses tend to be secretive about their deals with each other. They are supposed to be fierce rivals after all. It seems that Amazon Web Services and Microsoft's Azure used to be the cloud providers, but Google has replaced Azure over the last two years. AWS still seems to be involved.

I recently spoke about Google's cloud business as the next big thing for the business. This is certainly a step in the right direction.

Michael's Musings

Eddy Elfenbein has a great piece this morning in his blog post called, Crossing Wall Street. He speaks about how market guru's make forecasts that they can not be held accountable for. At the start of each year there are a set of people who get wheeled in-front of the cameras to talk about all the reasons the market is going to do badly. Their claim to fame is calling the 2008 crash. As the saying goes, even a broken clock is right twice a day - "A 40% Chance"

Home again, home again, jiggety-jog. Following the path set by the West, our market is down this morning. Added to that, the idea of interest rates rising this year has resulted in a stronger Dollar, currently at $/R 11.74. International data out later today is EU CPI and then US GDP.

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Tuesday 27 February 2018

Buffett, Bekker and Bezos

To market to market to buy a fat pig. If you do any form of long-term investing, Warren Buffett is the man you aim to emulate. As such there are two big 'Buffett' events investors look forward to, the first is the annual Berkshire AGM and the second is Buffett's annual letter to shareholders. The man has an amazing ability to make complex matters sound simple! Here is an awesome example of his way with words and concepts.

"That last requirement proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far from spectacular, businesses hit an all-time high. Indeed, price seemed almost irrelevant to an army of optimistic purchasers.

Why the purchasing frenzy? In part, it's because the CEO job self-selects for "can-do" types. If Wall Street analysts or board members urge that brand of CEO to consider possible acquisitions, it's a bit like telling your ripening teenager to be sure to have a normal sex life."

I came across this WSJ article on Friday, Investors' Zeal to Buy Stocks With Debt Leaves Markets Vulnerable, which ties in rather well with another point Buffett made. Using debt, backed by the stocks (margin) is a sure fire way to blow up at some point. Someone who comes to mind, is Christo Wiese, he used margin to increase the size of his Steinhoff holding. The result is that he was a forced seller, locking in huge losses (not to mention the losses to the banks!).

Anyone would agree that buying Berkshire 50-years ago would have been an inspired purchase, one that would set you up for stress-free retirement. If you used debt to buy them, you probably would have sold them in the early 70's. The below table shows the four biggest pullbacks in the Berkshire share price over the last 51-years. Note that even great investments over the long-term can lose half its value in the short term.

"This table offers the strongest argument I can muster against ever using borrowed money to own stocks. There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren't immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions."

Lastly, here is a breakdown of their top stock holdings. Note how big their Apple position is, not bad considering that they only started buying it during 2016. Buffett was asked when he is going to buy an iPhone. His reply was along the lines of, for as long as he doesn't own one, the market is not saturated; there is scope to sell more phones.

One thing, from Paul

Our most important local stock holding, by far, is Naspers. Its our largest holding in almost all JSE portfolios. In our view, it should be trading at twice the share price that it is today. The aggregate value of its various Internet and media assets far exceeds its current value on the market.

So it's pleasing when we see other market participants who hold the same view. London-based Goldman Sachs analyst Lisa Yang had this to say about Naspers in a short note issued overnight (I have lightly edited her comments, and spelled out abbreviations, to improve the readability):

In our view, Naspers' recent underperformance was mainly driven by technicals and currency moves, overshadowing several positive developments surrounding fundamentals, transparency and improvements in the political and macro environment in South Africa. With the stock down 15% relative to JSE All Share Index over the past three months and its net asset value discount back to 41% (near all-time highs), we see a compelling entry point and reiterate our Buy rating (on our conviction list).

We believe local selling pressure has largely played out and Naspers should benefit from an increase in foreign inflows into South Africa.

While currency moves may be a further headwind for the stock, we note a lack of relationship historically. Additionally, a stronger Rand would benefit Naspers' Pay TV division, (22% of 2018 earnings, >100% excluding Tencent and Mail.ru).

Disclosure and transparency have improved, and we also see management optionality to navigate technical headwinds through increasing the liquidity of their depositary receipt listing in New York, or a full dual listing.

Fundamentals are showing a positive inflection as demonstrated by interim (6 month) results, and we expect further improvement and potential corporate action to crystallise the value of the private assets. Overall, our sum of the parts-based 12-month price target changes by around 10% to R4,198, mainly due to currency issues.

Naspers is currently trading at around R3,300 per share, so this target of Yang's at Goldman Sachs is almost 30% higher. Consider buying some more here! Of course, the trick with successful investing is to own stocks before everyone else starts liking them.

Market Scorecard. Green on the screen all around. The Dow was up 1.58%, the S&P 500 was up 1.18%, the Nasdaq was up 1.15%, and the All-share was up 0.26%. Looking at the list of companies at 12-month highs, it is packed with retailers and banks. Pointing firmly to local consumer and business confidence. The cabinet re-shuffle last night, was a bit of a mixed bag. Reputable people are in the key positions though, which should boost confidence further. In time, the list of ministers will shrink as departments are removed, which will probably see some questionable appointments removed? The one thing that the re-shuffle shows though is that change takes time. It also means that this song will make a comeback - Stomach in Chest out.

Linkfest, lap it up

Byron's Beats

I have always enjoyed reading Business Insider USA. They have a unique style which keeps things interesting. It may not always be deep analysis but they do manage to find facts and stories which demand my attention.

Business Insider SA is now up and running. Subscribe to their newsletter or follow them on twitter. You will enjoy their articles. Like this one about our new (and returned) finance minister, Nhlanhla Nene.

He farms cabbages and sold life policies - 8 things you didn't know about Nhlanhla Nene.

Bright's Banter

Amazon A Monopoly Or Nah?

The latest sector that Amazon has put in jail? The shipping sector! Amazon announced it was getting into delivery of goods. Immediately, the share prices of UPS and FedEx tanked five percent on opening bell or around $8 billion in market capitalisation, continuing a pattern of cascading stock prices within hours of Amazon announcing interest in any given sector.

Analysts claim the threat is overblown, pointing to UPS and FedEx's complex infrastructure. Amazon accounts for approximately just five percent of total revenue and pointing to all the CapEx expenses of about $5 billion each for FedEx and UPS in the most recent year. Last year after seeing Amazon lease delivery jets and buying tractor trailers, my colleagues alluded to the fact that Amazon might be planning on taking some of the delivery burden in-house and maybe taking over the sector once they understand it's ins and outs.

However, Amazon's Spokeswoman Kelly Cheeseman said "Our own delivery efforts are needed to supplement that capacity rather than replace it" referring to the surge in holiday demand and basically brushing off any speculation of Amazon becoming a full-time player in the delivery sector. Well it would appear that FedEx and UPS should get ready to be supplemented. It doesn't matter what the reality is — the perception that Amazon will win is a self-fulfilling prophecy as they will begin choking access to the mother's milk of business: capital.

FedEx and UPS, regardless of the reality, will lose a big chunk of their value as analysts begin to sharpen their pencils and look at a new gangster in the town of shipping: Amazon!

Below is an article which is the total opposite of my argument.

Here's why Amazon isn't a monopoly

Vestact in the Media

Bright chats to SAFM about Sasol's 6-month numbers yesterday - Sasol's liquid fuels volume down.

Home again, home again, jiggety-jog. Asian markets started well in the green but have since slipped into the red, Tencent is down 0.7%. On the data front, it is a rather quiet day. New Fed Chair, Jerome Powell, will appear before congress later. Given how Fed sentiment has been driving markets this year, I'm sure every word he says will be scrutinised.

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Monday 26 February 2018

Batting for Batteries

To market to market to buy a fat pig. Last week Paul spoke about the rise of Lithium, this week we will talk about the sister metal Cobalt. Like Lithium, it is a key component of the modern battery, and as a result has also seen its price sky rocket.

As the infographic below shows, cobalt is an important raw material in the iPhone battery. If Apple wants to continue selling 200 million phones a year, they need to make sure they can get enough of the metal. Here is their solution - Apple in Talks to Buy Cobalt Directly From Miners.

One of our readers last week pointed out that the commodity industry has a way of balancing itself out. At the moment demand out strips supply, and the expected growth in battery powered technology is enormous. If the Cobalt price continues to rise there are a couple scenarios to consider. The most likely scenario is that the global mining houses double down on their efforts to find more of the metal and find clever ways to bring down the price of mining it. Just like with oil and the frackers, high oil prices forced business to go in search of new reserves and new ways to extract it.

Another scenario is where the high prices of cobalt forces the use of an alternate metal. Then lastly, there have been over a billion iPhones sold, recycling the materials in those phones becomes more feasible as commodity prices go higher. The beauty of the free market at work. You will probably find that the future will be composed of a bit of all three scenarios; that goes for all the metals used in batteries.

Market Scorecard. The US markets had a good day on Friday, with a big rally going into the close. The Dow was up 1.39%, the S&P 500 was up 1.60%, the Nasdaq was up 1.77%, and the All-share was up 0.96%.

Company Corner

Spur has been in the news for all the wrong reasons recently. Given how important entrepreneurs are to job creation, I feel that we need to pay tribute to those people who start and grow businesses - Spur Corporation Limited - Retirement Of Spur Founder And Executive Chairman.

"Mr Ambor (76) founded Spur when he opened the first restaurant in Newlands, Cape Town, in 1967 and has served as executive chairman of the board since the company's listing on the JSE in 1986."

Wow!

Linkfest, lap it up

One thing, from Paul

This week on Blunders: KFC runs out of chicken, Iberian ham prices run wild, MiWay agent calls Zulu king and disaster strikes in Hulene (Maputo) - Blunders - Episode 89

Michael's Musings

The days of Diesel engines may be numbered, a German court is ruling on the legality of driving diesel cars in the cities - German court delays ruling on diesel ban to next week. In South Africa, the big impact will be felt in the platinum price. Here is a piece from last year talking about the subject - Will The Death Of Diesel Ruin Platinum?.

Bright's Banter

In my last piece on Facebook I said the following "Facebook is going back to first principles by revamping the News Feed and prioritising posts from friends and family over advertised viral videos/content from publishers with an agenda. This will help avoid hurtful content (aka "fake news") that goes viral from time to time and dilutes the user experience. Most importantly, it'll help curb the invisible hands that have been swaying election results all over the world by perpetuating fake news on the platform. This move could see Facebook's advertising revenue growth slow in the interim, but it'll boost the company's growth long-term, as advertisers/brands will value and trust the platform more, and engagement will be more meaningful for users.

This sounds all good and well but advertisers are now skeptical of the average time spent by people on Facebook. According to a report by a crowd called Shareaholic, traffic on the Facebook platform is starting to decrease at a fast pace in the second half of 2017. This will not directly link to a fall in ad sales for the company because advertisers are still keen to have the attention of the +2 billion Monthly Active Users. To be honest Facebook and Google still own over 80% of all ad revenues worldwide. The infographic shows the decrease of Facebook traffic compared to other social media platforms.

You will find more infographics at Statista

Home again, home again, jiggety-jog.

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Friday 23 February 2018

Bonding with your Shares

To market to market to buy a fat pig. At the start of the year, there are often clients asking if they should invest in the stock market or their bond. If the subsequent year had strong market returns, normally we have people saying they are dipping into their bond to send money. The opposite is also true, during lacklustre years, we see clients selling shares to pay down their home loan. So what is the best route to go?

If we don't take emotion into consideration, having money in the stock market is a much better long-term return than having money in your house. Having a look at the recent FNB House Price Index, if you bought property in January 2000, on average it is now worth just over four times what you paid for it. Over the same time period the JSE All-share is up over 11 times! See the graphs below of how each sector has done over the years.

Found at South Africa's FTSE/JSE All-Share Index Returns By Year

We are not comparing apples to apples though. The real choice you need to make is - put spare capital into your home loan and pay less interest, or put it in the stock market and hope for superior returns. Do you remember the late 90's and early 2000's when interest rates were around 20%!? Between the period 1 January 2000 and 31 December 2008, it was better to have your money in your home loan than the stock market. Expanding the time frame though to 1 January 2000 until the 31 December 2017, stocks beat your bond. So when people say stocks are a good long-term investment, they mean LONG term.

For many people, it is worth something knowing that they own their property. Knowing that if you hit a financial speed bump, the roof over your head is not going to be taken away by the bank. That is worth giving up a few percentage points of return. The ideal situation is having enough capital to pay a bit extra into your home loan and still have some money to top up your share portfolio. My strategy is to have spare funds sitting in my home loan that I can draw on during market pullbacks. I still put something into stocks monthly though; dollar-cost averaging is a very powerful weapon in the arsenal of long-term investors.

To conclude, generally keeping your life simple is the best strategy. Don't stress about where you will get the best return, rather focus on making sure that your budget leaves room for monthly saving.

Market Scorecard. New York kicked the day off, seemly forgetting all about the Fed minutes from the day before. The Dow was up 0.66%, the S&P 500 was up 0.10%, the Nasdaq was down 0.11%, the All-share was down 0.77%.

Company Corner

Michael's Musings

Yesterday Woolworths released their 6-month trading statement. Off the bat, you can see the company is in a transition phase. Locally they no longer have the luxury of taking market share from Edgars and Stuttafords, coupled with three years of poor economic growth. In Australia, the David Jones turnaround is still in full swing and still has another 18-months to go before tangible results will be seen.

The David Jones purchase is part of a string of poor international purchases by South African CEO's. Poor South African growth and cheap debt, were excellent reasons to spread their wings on the international stage. For Woolworths shareholders, the David Jones asset was bought for A$ 2.1 billion and has now been written down by A$ 712.5 million. Not to mention the R400 million odd spent on the rights issue needed to raise the funds.

Here are the headline numbers, Sales are up 2.5% to R38.8 billion, HEPS are down 15%, and the dividend is down 18.4% to 108.5c. The pain has come from 'Fashion, Beauty and Home' where sales were down 3.4%, this was compounded by operating profit margin dropping from 16.5% to 14.4%. In Australia, with all the changes being made, David Jones saw sales decline 3.3% and its operating margin drop from 9.6% to 6.9%.

The bright spot is the food offering. Sales were up 9.4% and operating margins grew from 6.9% to 7.4%. That is the beauty of the Woolies business model, there is some diversification. It is not like a TFG that is purely clothes or a Shoprite that is mostly food retail. In our view, the biggest short to medium term threat to the Australian business is the recent arrival of Amazon. Ian Moir on CNBC last year said he wasn't concerned about Amazon; maybe he was just putting on a brave face? In the next two years David Jones wants to have 10% of their sales coming from online, the company definitely acknowledges the importance of being online.

The stock was up 2% on these results. Going forward there is RSA optimism, which should be good news for retailers. Added to that the David Jones turn around should start showing in the Woolies share price in the not too distant future. The stock market is forward-looking, if profits are expected to rise in the next 18-months, it will be featured in the valuation today.

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One thing, from Paul

Chinese people really like fast cars. China accounted for almost 90% of sales growth at leading luxury automakers in 2017.

The top global luxury brands are BMW, Mercedes-Benz, Lexus (part of Toyota), Jaguar Land Rover, Volvo, Cadillac (part of General Motors), Infiniti (part of Nissan) Audi and Porsche (both part of Volkswagen).

According to a report by Nikkei, that group of companies increased sales by 5% to just under 10 million vehicles last year. All but Lexus logged their highest-ever annual sales, while the Japanese brand scored its second-best year on record.

China made up 27% of overall global luxury vehicle sales. Growth in that country was 17% year-on-year, compared to a sputtering 1% rise in the rest of the world. German models did especially well.

They should call 2018 the year of the car, not the year of the dog!

Here is a link to the report summary: https://asia.nikkei.com/Business/Trends/Chinese-buyers-spur-rise-in-global-luxury-car-sales

Byron's Beats

If you read my recent commentary about Discovery's latest results you may have picked up my passion for preventative healthcare. This Business Day article titled Discovery offers aid in public health got me thinking about how this could be implemented.

Clearly, this needs to be targeted to the poor. It should be implemented along with the social grant's network. If you qualify for social grants, you qualify for a special Vitality programme. Discovery can offer their networks and manage it for a fee (they have shareholders, they cannot do it for free). It needs to be subsidised by the government as part of government's healthcare spend.

The first target should be consistent healthcare screening. Members can be rewarded with incentives for getting their blood screened for all sorts of potential ailments including diabetes, cholesterol and HIV.

Eating healthy should also be rewarded. A simple card swipe or phone scan can reward members for buying fruits and vegetables. Rewards can include Shopping vouchers and airtime. You can even get more specific like school uniforms or electricity vouchers. Incentivising people is easy.

Virgin has opened a few low-cost gyms. Subsided contracts that rewards exercise can also be implemented. In fact, any small gym can join the program whereby members can check in their workouts.

Judging by the data Discovery have gathered over the years, this will save much more money than it will cost over the long run. We just need private and public to cooperate.

Home again, home again, jiggety-jog. Byron is really excited about Super Rugby being in full swing this morning. The biggest data out today are CPI numbers from the EU, the expectation is that it will remain stable at 1.3%. Still well below the 2% target. The rumours are we will get a new cabinet next week? I have learnt that when it comes to politics, it will happen when it happens.

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Thursday 22 February 2018

Now we Grow

To market to market to buy a fat pig. It was budget day yesterday, which made many people nervous. Back in the days of Trevor Manual, the anticipation was around how big your tax cut would be. The market reacted favourably to the budget, with the All-share swinging from red to green and our bonds dropping below 8% for the first time in three years (read 'before Nenegate'). The reason for the positive reaction from the equity and bond market is due to the government showing they are willing to do what needs to be done by raising VAT.

Step one has been completed, we have avoided a debt downgrade. There is very little room to raise taxes further. Going forward, the government needs to be more effective and SOE's need to send corrupt employees to prison. Let's not kid ourselves though, there is still a monster hole in our budget. We desperately need growth, to get back to a balanced budget and to bring our debt to GDP ratio under control.

A VAT increase means less money for both rich and poor. The reality however is if we did not have a VAT increase, we would as a nation be in an even worse position down the line. A debt downgrade and potential bailout from the IMF won't stimulate the economy. Zero economic growth hits the poor the hardest.

An unintended consequence of raising VAT or a tax on consumption, may be increased savings. There are studies that indicate taxing consumption, leads to less consumption and higher savings. As you can imagine though, trying to predict people's spending habits is fraught with assumptions.

Market Scorecard. It was a very mixed day for US markets yesterday. Things were going along swimmingly until the Fed minutes were released, then all fall down. The Fed noted that the US economy is in its best shape since the crisis. What the market heard was that there are going to be more interest rate hikes than currently assumed. The Dow was down 0.67%, the S&P 500 was down 0.55%, the Nasdaq was down 0.22%, and the All-share was up 1.17%.

Linkfest, lap it up

One thing, from Paul

One of our core holdings in New York, Priceline, is changing its name to Booking Holdings. The company will begin trading under a new ticker symbol on the NASDAQ: BKNG from February 27. Remember that the group is made up of these six primary brands: Booking.com, priceline.com, KAYAK, agoda.com, Rentalcars.com and OpenTable.

The CEO Glenn Fogel said yesterday, "Over the last two decades, our business has expanded from just priceline.com, operating solely in the United States, into six primary brands with headquarters around the globe, operating in more than 220 countries and territories in over 40 languages, fulfilling one unified mission of helping people experience the world. Today, our largest brand is Booking.com, which has more than 1.5 million properties, averages over one million bookings per day and produces a significant majority of Booking Holdings' gross bookings and operating profit."

I approve of this kind of thing! Investors like simple names, simple business models and simple corporate structures. Some of my favourite companies have names made up of letters that you can count on both hands. Like Amazon, Netflix, Discovery, Google, Aspen, Naspers, etc. Oh, and Vestact too!

Michael's Musings

With all the concern about rising interest rates, what does history tell us about how markets react? It seems that when interest rates come off a low base, rising interest rates are coupled with higher stock returns. It is only when interest rates are above 5% that an increase in rates has a significant negative impact on the stock market. History is not the future, interesting numbers none the less - Are We Out of the Woods Yet?.

How can a disease that requires an inexpensive shot, be returning ? - The return of measles in Europe is "a tragedy we simply cannot accept"

Home again, home again, jiggety-jog. After the finish for US markets, it is no surprise that the Alsi is lower this morning. The prospect of higher interest rates from the Fed has also strengthened the Dollar, currently we are at $/R 11.66. Data out later today is GDP from the UK, the expectation is for YoY growth of 1.5%.

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Wednesday 21 February 2018

The World is Discovering Vitality

Market Scorecard. After their long weekend, US markets were red yesterday. Walmart, a player in both the Dow and S&P 500 was down 10% after poor results! (Walmart just saw $30 billion in market cap destroyed by Amazon fears) The Dow was down by 1.01%, the S&P 500 was down 0.58%, the Nasdaq was down 0.07%, and the All-share was down 1.32%. Bidcorp released their six-month numbers this morning, which the market seemed to like. The stock is currently up 2%.

One thing, from Paul

I always view Budget Day with trepidation. The state has a vital role to play in a healthy society, taking on many functions which are more efficiently handled by public entities. It is vital to save the lives of the poorest of the poor with ongoing social grants, and to provide basic healthcare, schooling, infrastructure and security services. All this has to be funded by taxes, and I'm OK with the idea that rich people should pay more, as often they have had the benefit of generations of state support. I'm also OK with the idea that the democratically elected government of the day should get to decide on its main priorities, within the bounds of the constitution.

However, public entities are seldom run well, and many people go into politics and public service for the money, or to gain control of state resources, and to divert public funds in corrupt ways for their own personal gain. In South Africa, it's hard to find an organ of state which isn't in a state of crisis.

Tax revenues have slipped badly in the last decade, and SARS's credibility has plummeted, but state spending has roared ahead. Our public sector wage bill is huge and rising (but productivity is poor). Add to that the ghastly capital spending overruns at Eskom, and we are facing a dire fiscal shortfall. South Africa's debt to GDP ratio has spiralled out of control.

Spending needs to be cut, but that is hard for politicians. So, expect tax hikes today. That's on top of last year's unfortunate hike in the top marginal income tax rate to 45%, and the recent increases in both dividend withholding taxes and capital gains taxes.

This is really Cyril Ramaphosa's greatest challenge. It's very nice to go walking in the morning with the people, but can he take the hard decisions that are required to put our country back on a sustainable fiscal path?

Company Corner

Byron's Beats

Yesterday Discovery released their interim results for the six months ending 31 December 2017. As expected from the trading update, the numbers looked good. Operating profit increased by 19% while normalised headline earnings per share increased by 31% to R4.11. The big drivers behind the growth in earnings was a solid showing from the UK business as well as profits coming through for the first time from the short-term insurance business as well as the Ping An joint venture.

The image below shows the contribution of each segment.

As always, Adrian Gore was very confident and passionate. He didn't skip a beat in his presentation. You can see he truly believes in his product and is genuinely proud that it is making the world a better place.

The local businesses all did well in a tough environment. Discovery Health and Life are the bread and butter of this business. As you can imagine, growth has slowed, but they are still stealing market share. If our economy goes through a growth spurt, these businesses will thrive. That includes Discovery Insure and Discovery Invest who have both leveraged off a good brand and some great incentive schemes.

Vitality UK is finally doing well. They now have over 1 million lives insured in a country where healthcare is mostly free. When your friends are getting free Apple watches, Starbucks coffees and discounted gym contracts because they exercise three times a week, the clients become the best salesmen. The preventative healthcare model is genius. It is cheaper and far better for your standard of living, to prevent than being cured.

Vitality Group. This is the part of their business that sells the Vitality model to third parties. This is what excites me most about Discovery. Selling on the preventive healthcare model to other insurers who have millions of clients has huge potential. This also includes corporates who have large employee bases. It benefits the insurers and their clients and it certainly benefits corporates and their healthy employees. Vitality Group now has 1.7 million members. Could this become the biggest healthcare membership in the world? The product certainly has the potential.

Ping An Health has been a slow process but the growth coming through in this last six months is very encouraging. Membership grew by 60%, and the business finally made a decent profit of R36 million. Within this joint venture, there are over 3 million people on the rewards program. They have a great partner in a tough country to crack. The potential here is huge.

These numbers represent good progress in the Discovery story. So many of the goals are becoming realities. We are very happy shareholders and clients of Discovery. This must be the only insurer on the planet that actually has happy clients!

Linkfest, lap it up

Michael's Musings

Do you know that in Japan, only around 10% of houses sold are used houses? Most houses lose their value after 15 - 30 years, as a result Japan compared to the US, has four times as many architects - Why Are Japanese Homes Disposable?

Bright's Banter

Ryan Coogler's Black Panther grossed around $235m at the box office on opening weekend across North America making it the biggest solo superhero, non-sequel, black directed movie of all time. It doesn't end there, it's also the 5th biggest movie debut of all time and the second largest Marvel debut after The Avengers (2012) and the list goes on. This movie is not done breaking records as non-US sales keep flying in.

If you haven't watched the movie yet, stop everything right now and buy tickets tonight for yourself and your loved ones (it's half-price Wednesdays at NuMetro today). Don't forget to dress up and have fun! #WakandaForever. This movie is worth every penny and the reviews such as this one (spoiler free) speak volumes.

Let's see if all this success translates to the well-deserved awards.

You will find more infographics at Statista

Vestact in the Media

Byron gets a mention in a recent Forbes article - How To Lose $2.1 Billion In One Day.

Home again, home again, jiggety-jog. Our market has been bouncing between red and green, ahead of the budget speech this afternoon. Good news for consumers, our CPI read for January was 4.4%, lower than the corresponding period and economist forecasts. Then expect some currency movements this evening, when the FOMC minutes are released.

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Tuesday 20 February 2018

Will Gigaba be the VAT Rat?

To market to market to buy a fat pig. As we get closer to the budget speech, the two key questions being asked at the moment are, "Who will deliver the speech?" and "Will VAT be raised?". Twitter is convinced that we will have a new Finance Minister. Our current debt to GDP ratio is over 50%. If we like it or not. the people who are lending us money need to feel secure in who is appointed to oversee the coffers.

VAT is a far more touchy subject than who will be finance minister. When change hurts your back pocket, people pay attention. It seems that there is very little alternative than to raise VAT in tomorrows budget speech though. I get grumpy about having to pay extra tax due to corruption and the billions spent on blue light brigades. The low-security, morning runs taken by the new president is hopefully a sign of how things will change. Reading this article, Cosatu warns against VAT hikes, austerity measures ahead of Budget, Cosatu has some good points about government cleaning up its own act instead of burdening the people with extra taxes. Housecleaning takes time though, time we don't have.

In terms of the fairest way to increase tax collections, in my opinion VAT is the answer. It is targeted on consumption and you can't avoid it by lying to the tax man. The following slide from treasury shows which items are VAT zero-rated, they are the necessities needed for survival. Items that are VAT exempt include, transport and education.

"Cosatu will not support any attempt by government to balance budget shortfalls and deficits upon the backs of struggling workers. Workers are not the ones who have looted Eskom, SAA and the state."

As a country, workers, management and the unemployed, we elected the people who were responsible for Eskom, SAA and the state. As such, surely we all carry the responsibility and burden when those leaders loot?

Market Scorecard. It was a very subdued day yesterday due to the US being closed for presidents day and the Chinese market being closed for their new year. The All-share was down 0.71% on the day

Linkfest, lap it up

One thing, from Paul

Did you miss the Blunders last week? I get disappointed if we can't get at least 1,000 views within five days and we are currently on 922. Go and watch it now!

This week: Jacob Zuma OUT; Valentines Day in India; Iceland runs short of electricity due to Bitcoin mining; and Kruger National Park lions eat poacher - Blunders - Episode 88

According to a research firm called Global Market Insights, the worldwide seaweed industry will surpass $87 billion by 2024. I hardly knew that it existed?

The major uses are food and beverages, fertilisers in agriculture, cosmetics and pharmaceuticals. There are also applications in the manufacturing of biofuels, biomass and wastewater management.

Significant global companies in the industry are Aquatic Chemicals, Seasol International, Indigrow Ltd., Algea AS, Yan Cheng, Pacific Harvest, Chase Organics GB Ltd., Mara Seaweed, Acadian Seaplants Ltd. and CP Kelco.

Here is a link to the report, if this seems interesting? - https://www.gminsights.com/industry-analysis/seaweed-extracts-market

Michael's Musings

Ask most people, what was the first financial bubble, and they will more than likely tell you 'Tulip Mania' - Tulip mania: the classic story of a Dutch financial bubble is mostly wrong.

"I was able to identify only 37 people who spent more than 300 guilders on bulbs, around the yearly wage of a master craftsman. Many tulips were far cheaper."

Bright's Banter

Carl Icahn has been very sceptical about investment products that buy and track the markets mindlessly and he's dead certain that it's the next bubble, as he explains in his short movie here titled Danger Ahead. Basically the gist of the story is that BlackRock is gonna cause the next market meltdown. Larry Fink (CEO of BlackRock) is the one driving the markets to the edge of the hill and the bus is gonna hit a "BlackRock" and that will be the end. It is worth noting that the video is from 2015.

Below is his most recent comments on index trackers and it seems like his mind is set with a determined resolution!

Carl Icahn Says There's A Dangerous Bubble In The Hottest Investment Product On The Market.

Home again, home again, jiggety-jog. Locally, we are down this morning. On a data front, there is very little out today. As South African's all eyes will be on parliament today. Discovery came out with their six-month numbers this morning, they look solid and are in line with what the market was expecting. Their results will be broadcast from their new head office in Sandton this morning. Exciting times!

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Monday 19 February 2018

Is Lithium Lit?

To market to market to buy a fat pig. Local markets continued to take a breather after the absolute scorcher on Wednesday. SA inc, which was leading the pack last week was hardest hit on Friday. But all in all it was a great week for markets and a great week for SA. All topped off by an inspiring SONA.

US markets had another great start as the "massive correction" of February 2018 slowly fades away into memory. I would say that the volatility will still be around, especially relating to news about inflation.

The good start unfortunately faded away as news about Russian interference in the US elections reared it's ugly head again. Trump went on another Twitter rage about the issue. Interesting times indeed!

Market Scorecard. Both the Dow and the S&P 500 had five straight days of gains last week, not bad considering the volatility at the moment. The Dow closed up 0.08%, the S&P 500 closed up 0.04%, the Nasdaq was down 0.23%, and the All-share was down 0.69%.

Linkfest, lap it up

One thing, from Paul

Investors who like physical commodities are often excited when demand seems to exceed supply, prices are rising. Tulips! Whale oil! Platinum! Crude oil! Lithium! Easy money to be made!

Well, this article by Bloomberg correspondent David Fickling (based in Australia) takes a different view. His argument is that commodity markets never really stay in deficit for very long. Suppliers find ways of bringing more of what's needed on line. Consumers find ways of using the stuff more efficiently, and recycling where possible. If they don't, production innovations are sought to bypass the commodity altogether.

To be specific, he says that the current fixation with shortages of lithium for electric batteries is unlikely to last, so speculators loading up on lithium stocks might not make the quick fortunes that they hope for? Its not as if these elements are really rare, in the earth's crust.

Fickling uses the example of Platinum in the mid 1970s. Demand for catalytic converters was going through the roof, and all of the supply was trapped in apartheid South Africa and the Soviet Union. Prices spiked. Over time though, supply rose and prices calmed down. You can see this in the next two charts:

Here is a link to the article: Platinum's Lesson for Lithium-Ion Batteries

Michael's Musings

I really enjoy watching the Olympics, the skill levels of the athletes is amazing. These robots are at the cutting edge of robotic technology, they still have a far way to go though to reach the impressive feats of olympians - Robots skiing reminds us how far away the apocalypse is.

For anyone who has done a forex payment recently, you will know that the bank you used made a tidy profit. The reason for the crazy transfer fees is because to send currency you need to use the SWIFT system. Blockchain (the system behind crypto currencies) is trying to change the monopoly financial institutions have - Saudi Arabia's central bank signs blockchain deal with Ripple. Having a central bank involved is pretty big.

Vestact in the Media

Byron gets a mention in CNN Money, talking about the renewed optimism in South Africa - Is now the time to invest in South Africa?.

Home again, home again, jiggety-jog. Our market followed the negative tone going into the close of the US market, we are down around 0.5% this morning. It is a very quiet day on the data front, both the US and China have public holidays today.

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Thursday 15 February 2018

He Gone

To market to market to buy a fat pig. An hour before the US market opened, we had as one analyst put it "The most highly anticipated inflation number for the last 10-years". The expectation was for inflation of 1.7%; it came in at 1.8%. Confirming market fears, inflation is coming and so are interest rate hikes. Futures immediately dropped over 1%.

You will then be surprised to hear that yesterday was the fourth straight day of gains for US markets. Why the gain then? At the same time as the inflation number release, US retail sales came out; Retail Sales in U.S. Decline After December Revised Down. Huh? The biggest part of the US economy went backwards and stocks went up?

As you might have guessed, it has to do with interest rates again. Weak retail sales today, means that demand push inflation dissipates tomorrow, and the concern of increasing inflation is gone. So there you have it, bad data is 'good' data again. Until it isn't, but you will only find that out after the fact.

Market Scorecard. Our market spent the day in the green, until 15:30 when the US inflation data sent global markets crashing. Luckily with only minutes left of trading our market managed to squeak into the green again. The Dow was up 1.03, the S&P 500 was up 1.34%, the Nasdaq was up 1.86%, and the All-share was up 0.33%.

Company Corner

Michael's Musings

Last week one of our smaller holdings, Cerner released their FY numbers. They are the guys that are trying to remove all the paperwork you have to fill in every time you visit a medical professional. The goal is to create a network where you complete your information once, then from there, all doctors have access to it. Saving trees and saving you time. More importantly though, having the data in digital format, lowers the risk of bad handwriting leading to wrong diagnosis or the wrong procedure being done.

Built on to that is Cerner's management system, where hospitals can then use the information to easily see revenue and expense figures. It also allows them to see what operations are in the pipeline, meaning accurate forecasts can be made. Probably the most exciting part of the business is where they unleash AI onto the data. The clever algorithms take the data fed to it from all your medical tests, and at some stage in the future from your smartwatch too, and issue early warning signals around potential health issues.

Due to the time required and the capital-intensive nature of revamping a hospital group's computer systems, Cerner has a 'book' similar to that of construction company. For the 4Q, they had a record number of bookings, $2.3 billion, up 62% YoY. Over the last year, their revenue came in at $5.1 billion up 7% YoY. From that revenue they made a profit of $867 million.

Cerner ticks all the boxes, it is a technology company in the medical space. It is also defensive because once a hospital chooses Cerner, it is not easy to move to a competitor. Thanks to those characteristics, it trades on an 'expensive' 24 times earnings. Management expects earnings to grow by 11% over the next year so the multiple isn't going to unwind in a hurry. With many things in life, you get what you pay for. Paying up for Cerner is one of those things in our opinion.

Byron's Beats

When Aspen released their full year results last year, the second half of the year was much better than the first half. Stephen Saad, at the results, mentioned that he expected this momentum to continue into the financial year 2018.

This morning we received a trading update which indicated as such. Here are the numbers.

This is all the info we have access to but let's delve a little deeper into each 6 month number over the last 18 months. To be consistent let's look at the normalised headline earnings per share (NHEPS). Last year this time the company made 692c for 6 months. For the full year they made 1463c which means they made 771c in the second half. This trading update suggests they have made 860c (middle ground) which shows an 11.5% improvement on the second half of last year.

The first half of last year was off a low base but the growth off a very solid second half base still looks strong. The market has reacted very positively to the news, the share is up 6%. The detailed numbers will come out on the 8th of March, more details then.

Linkfest, lap it up

One thing, from Paul

Finally, Zuma is gone! Under his leadership South Africa slipped very badly. He says that he doesn't know what he did wrong? Well, apart from anything else, the country faces a dire fiscal crisis, thanks to his bungling.

His involvement in the gross mismanagement of public enterprises is well known, and the debts of a looted and bankrupt Eskom will doubtless be added soon to the sovereign debt mountain.

The ANC leadership crisis had already derailed the State of the Nation Address, and the postponement of the Budget Speech was next.

The Moody's Baa3 rating is the only thing keeping our bonds debt in the Citi World Government Bond Index, given that the grades from S&P Global Ratings and Fitch Ratings are already below investment grade.

The rules of the index require that a borrower can no longer be included once it's rated junk by all three rating companies. Moody's deadline is 23 February. They are probably waiting to see if the Government has the guts to do what must be done: raise the VAT rate from 14% to 16%.

Bright's Banter

My favourite academic Prof. Scott Galloway has been singing this song of breaking up big tech i.e. Apple, Amazon, Google/Alphabet, Facebook and Microsoft. Here's his reasoning on why we should build em and break em up!

Bust Big Tech Silicon Valley

Apple's smart speaker, the HomePod is now available for purchase, the sales went live this past Friday and the reviews are flying in! Apparently its a great quality speaker but is not in the same league as the competition when it comes to being "smart".

I think the problem is not the speaker, but Siri. Siri's had the first mover advantage but never really grew from there. On the other hand Alexa just lapped Siri on her amazing ability to learn.

The graph below shows how these speakers (Google, Amazon Echo, HomePod etc.) perform head to head.

You will find more infographics at Statista

Home again, home again, jiggety-jog. The Rand is stronger this morning, trading at $/R11.68. No, not because we no longer have a president but because of the US inflation data. We know who our future president will be, the question that the market will be asking is who will be delivering the budget speech next week Wednesday? With the Chinese New Year, Chinese markets are closed today and tomorrow, and Hong Kong had a half day of trading today. After a busy news data day yesterday, there is nothing major out today.

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