Money with a dash of Funny: March 2018

Monday 5 March 2018

Talking Polony

To market to market to buy a fat pig. When Viceroy's short of Capitec and Steinhoff came to market, it was the first time that many investors had heard of the concept of 'short selling'. The initial reaction for many people was some form of outrage; the thought that someone can benefit when others lose money didn't sit well with them.

Short selling is more common than many people think. Most companies that you own have what is called a short interest in them. For example Tesla currently has around 169 million shares in issue, 30 million of those have been shorted. Having 17% short interest is much higher than most companies have. Because investors in Tesla have such polar views on the company, it has attracted many short sellers. If you were short Tesla over the last 2-years, you have watched the stock more than double. Ouch!

Short sellers take their chances just like everyone else, their job is actually harder than most. On average stocks go up more than they go down, short sellers are betting against that trend. No for me thanks!

If you have Netflix, you might have seen the documentary Betting on Zero. Bill Ackman shorting Herbalife, is probably the most public short position of the last couple years. Ackman put $1 billion on the line, as he pushed for Herbalife to go to zero because his research pointed to the company being a pyramid scheme that preyed on poor people. After being in the position for 5-years, and fighting the rising tide Ackman celled it quits on Herbalife.

I think short sellers have a role to play in the market. They help keep management honest and help keep a lid on inflated share prices. Maybe we should think of them with less disdain, and remember not all short sellers make money.

Market Scorecard: Last night the All-share closed up 0.29%, the Dow closed up 1.37%, the S&P 500 closed up 1.10%, and the Nasdaq closed up 1.00%. Yesterday Tencent announced that their WeChat platform now has more than a billion users. The news has pushed the stock up 3% this morning.

Linkfest, lap it up

One thing, from Paul

JP Morgan Chase is another core holding in the Vestact (New York) portfolio. It's the largest US bank and operates across retail and commercial banking, investment advisory and financial trading. Our basic theory is that rising interest rates and lowered costs (from greater use of fintech) will fatten up their margins.

The company recently announced that they would rebuild their headquarters, at 270 Park Avenue, in midtown Manhattan, New York City. The current building was erected in 1961, has 52 floors and was previously known as the Union Carbide Building. It's between East 47th and 48th Streets.

Interestingly, that building was heavily renovated in 2011, at considerable cost, to the US Green Building Council's highest environmental rating, LEED Platinum. Now, just six years later they will demolish the building and start again. It currently has about 6,000 employees crammed into a space that was built for 3,500.

During the demolition and construction process the banks bigwigs will be accommodated in nearby buildings — 237, 245 and 277 Park Avenue, as well as 390 Madison Avenue.

The new building will be a 70-storey world headquarters for 15,000 employees.

Out With the Old Building, in With the New for JPMorgan Chase

Michael's Musings

The skills needed to survive living in caves and running away from lions, are very different from the survival skills needed to survive modern living and investing. Here are some of the mental biases that served us well when we were cave men but are not so great when it comes to the stock market - 18 Cognitive Bias Examples. It is interesting to note, research has shown even being well versed in these cognitive bias doesn't prevent us from being directed by them.

Click on the link to get a full screen, clear picture.

Vestact in the Media

Bright gets a nice mention in this Business Insider piece - Why Tiger Brands' CEO couldn't say sorry

As you can imagine, Tiger Brands was big news yesterday. Michael gets a mention in this Reuters article - Tiger Brands, RCL Foods lost R5.7 billion in one day.

Home again, home again, jiggety-jog. Our market has kicked off into the green this morning, thanks to Naspers being up 3%. The only major data out today is RSA 4Q GDP. The data only covers to the end of December 2017, so we won't see much impact from renewed confidence, we will have to wait another three months to see that.

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Peering into the Portfolio

To market to market to buy a fat pig. Listening to the Animal Spirits Podcast on Friday, Michael and Ben were talking about how most people don't know what their financial advisors investments look like. I have always wondered what some of the more prominent market commentators hold. When on TV, it is very easy to talk, especially if you don't have skin in the game. To give you an idea of what I (Michael) personally hold, here is my portfolio below.

As you will see, my portfolio contains companies not listed on the Vestact homepage; some people collect spoons or rare books, I like to collect companies. Part of the process of selecting new companies for clients to invest in, is for one of us to own the company first. What better way to stay on top of a company than to have a stake in their future? Nvidia is an example of a company where we bought it first, then after doing further research, we released the potential of their GPUs (graphics processing units )for AI (artificial intelligence) and self-driving cars.

So there you have it, the companies that I am putting my hard earning money into. If you are a Vestact client and have any questions about my holdings, feel free to send in the questions.

Market Scorecard. US markets started in the red due to Trump's trade comments, and then headed slowly higher over the day. At the close, the Dow was down 0.29%, the S&P 500 was up 0.51%, the Nasdaq was up 1.08%. Earlier in the day the Johannesburg All-share index had closed down 0.31%..

Company Corner

As you were probably made aware of over the weekend, the listeria outbreak in South Africa has been partially traced back to facilities owned by Enterprise, a division of Tiger Brands. The stock is getting beaten down a bit this morning, currently down 8%. Here is the SENS announcement from the company - Tiger Brands To Recall Identified Enterprise Products. This is an extract from the company statement:

"Since the confirmed outbreak of Listeriosis by the Department of Health in December 2017, the company proactively amplified its testing for Listeria of raw materials and finished goods and also introduced additional hygiene monitoring of our processes, equipment, storage and waste areas at our facilities. Although our testing had detected listeria at low levels (<10 Colony Forming Units (CFUs)), which is well within the current industry guidelines (SANS 885), in a batch of one product on 14 February 2018, the presence of the ST6 strain had not been confirmed by our tests. The relevant samples have been sent to an external laboratory for the identification of the strain, and results are expected back on 5 March 2018."

This sounds like something that is going to be expensive for Tiger Brands? Apart from the cost of product recalls and brand damage, there have been 180 deaths linked to the listeria outbreak. There may be legal claims from the families of the deceased? Tiger isn't the only company mentioned as a source of the outbreak, but they may have to foot part of the bill if some some kind of restitution settlement is agreed.

The Value Added Meat Products division contributes about 7% of revenue and only 2.2% of group profits. The Tiger Brands market cap loss this morning is about R7 billion.

We will monitor this situation and keep you posted. For now, we are holders of Tiger Brands shares.

One thing, from Paul

We have all been very patient with MTN. The JSE-listed telecommunications giant has been a core holding in local portfolios since 2003. Here's what the share price looks like over that period.

As you can tell, it was a good one to hold from the get go, until 2014. At that point, the stock traded at over R250 per share. Now it trades at R124, half of the all-time high!

What went wrong? MTN's major business in Nigeria sagged when falling oil prices undermined a consumer boom in that populous nation. Sadly, it was then mugged by the Nigerian government, who imposed a US $ 5.2 billion fine on the company for not disconnecting customers who had failed to validate their IDs and proof addresses by an arbitrary deadline. After much bleating, the fine was reduced to $3.2 billion, to be paid off over a few years, from Nigerian profits. That debacle even has its own Wikipedia page, if you are interested:

MTN $5.2 billion fine

In any event, we are still holders and buyers of MTN shares. They operate in 21 countries across Africa and the Middle East and serve over 232 million subscribers. The product that they sell is connectivity. They have the customer base, and smartphones are more and more desirable.

We like the current company leadership too. Former CEO Phuthuma Nhleko is the chair of the board. Rob Shuter is the CEO.

The company put out a trading statement on Friday evening, noting that it expects headline earnings per share to be in the range of 170 to 190 cents per share for the full 2017 financial year. Not as high as we would like to see, but getting there. We look forward to the day when the share price makes new all-time highs.

Linkfest, lap it up

Bright's Banter

Apple Music is now growing faster than Spotify. In the U.S, Apple Music is gaining subscribers at a rate of five percent per month versus Spotify's two percent growth. Spotify still has twice as many subscribers (see graph below), but Apple Music has a built-in advantage as it comes pre-loaded on 1 billion iOS devices.

You get in your car and Apple Music begins playing automatically; Apple Music has helped me enjoy old school hip hop again #staywoke! Apple takes a 30% cut of all subscriptions sold through its App Store. Spotify decided to avoid the charge by preventing new customers from subscribing to Spotify Premium through the App Store. Apple retaliated by blocking the Spotify update.

This does not make me feel comfortable! When you're building a platform, and you unfairly restrain the competition, surely that's abuse of monopoly power?

You will find more infographics at Statista

The Apple vs Spotify fight is symptomatic of a bigger trend in technology startups. Budding entrepreneurs probably don't try to compete with Microsoft, Amazon, Apple, Facebook or Alphabet/Google. Mind you, they would love to be bought out later by these mega companies!

This sounds like an oxymoron. You can raise billions of dollars as long as you don't compete with he giants, but you want them to buy you out? As Prof. Scott Galloway said in his book "It has never been easier to be a billionaire and never been harder to be a millionaire."

Disclosure: we hold Apple, Amazon, Facebook, Alphabet in our client portfolios.

Home again, home again, jiggety-jog. Talk of quicker interest rate increases in the US, has made the Dollar stronger and the Rand weaker. Looking ahead during this week, MTN and Aspen release numbers, and then South Africa's GDP number is out tomorrow.

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Friday 2 March 2018

Buy Bidcorp, Not Bitcoin

To market to market to buy a fat pig. The 'Trump rally' seems to have come to an end thanks to the interest rate concerns; February was the first down month since Trump was elected. I can't say that I am a fan of the term 'Trump rally'. In my opinion, if Hilary had won markets would have also done well. Maybe markets would not have run as high, without the Republican the tax cut benefit, but higher none the less.

What makes this recent run of gains amazing is how long it lasted, without an interruption. Global markets went higher for 15 straight months, the longest streak ever! Since 2009, the market has been on the up. There have been a few hiccups along the way but many more up days than down days. The problem with that is we now have a generation of investors who think that markets only go up. We have seen high returns and low volatility (the calm waters of the last 15-months).

Found at Global stocks end a winning streak that's never been seen before

Market Scorecard. The US market wasn't sure which direction it wanted to go yesterday, bouncing between red and green for most of the morning. Then at around mid-day Trump announced that he was going to implement trade tariffs on steel and aluminium, pushing markets firmly into the red. The Dow ended up down 1.68%, the S&P 500 was down 1.33%, the Nasdaq was down 1.27%, and the All-share was down 0.69%. As Larry Summers said to Bloomberg yesterday, there are far more people in the US using steel and aluminium, than people who produce those metals.

If you live in the US and make use of any of the following products, you are about to pay more. Also, if you work in an industry that produces any of these products, your job security just dropped a few points.

Company Corner

Bright's Banter

On the 21st of February I went to Bidcorp's results presentation which was held in the beautiful Standard Bank head office building in Rosebank. The company was reporting their half year results to the end of December 2017. Just a quick refresh, this business has diverse food service operation across 30 countries. 90% of Bidcorp's earnings continue to be offshore. Only 10% is earned locally, making it another useful Rand-hedge.

We've seen the Rand strengthen in recent times, so that's not helpful. Notwithstanding that headwind, the company reported total revenues of R61.4 billion, that's up 7.7% from the previous year. Headline earnings per share were up 8.6% to 640c and the company increased the interim dividend by 12% to 280c.

The segmental analysis below shows that the Australasian region continues to be largest contributor to both the top and bottom line. Food inflation was mixed and muted on average (never forget the 6-foot-tall man who drowned crossing the stream that was 5 feet deep on average). Wage inflation has been relentless across the board, management worry about that.

The company confirmed that they were reinvesting in their business and expanding capacity in Australia & New Zealand in order to fill territorial gaps and be closer to the consumer. In those two countries Bidcorp is expanding from one distribution centre each to about three to five smaller, more manageable urban facilities.

Trading in Europe was fantastic with revenues up 16.2% and trading profits up 32.9% in constant currencies with improving margins from 3.6% to 4.2%. Overall the businesses in Europe are making steady progress notwithstanding some avian flu outbreaks which led to a shortage in eggs and dairy products. The disruptions were temporary.

They business continued to make small bolt-on acquisitions as a way to enter new regions or to supplement existing capacity for broader reach. Emerging markets revenues were up 0.7%, trading profit was up 1.7% but the margins stood at 5.9%. The business entered the Vietnam market and Malaysia is starting to contribute. The Greater China region was also affected by the dairy and poultry situation.

The CEO Bernard Berson was asked if the likes of Uber Eats and Delivery Hero were eating their lunch? He explained that in order for a restaurant to deliver food directly to the customer, they still need Bidcorp for the ingredients. Ex-restaurant or ghost/shadow kitchens use platforms like Uber Eats to get the food to the customer but they need food ingredient suppliers. Bidcorp will benefitting from more eating out and more takeout food delivery. Sounds good! #KaChing.

I would argue that Bidcorp's edge is their complex infrastructure, and "routes to market". They have spent billions over the years to develop the infrastructure to reach their customers. Adding more customers to that system is easy and adds to margins. I don't want to get too excited here but management mentioned that they are using "big data analytics" to better understand their customers. They have all the data already! This tech spend makes good sense.

The food services industry remains fragmented with only a few big players spread across the globe. Bidcorp is a consolidator and sees more opportunities to grow. The company trades at a historic PE of 21 which is cheaper than its peers. Bidcorp believes that a low-debt balance sheet is a strong competitive advantage. For the moment, the strong Rand is a bonus when considering capital purchases.

Linkfest, lap it up

One thing, from Paul

Boston-based Harvard University has an endowment fund worth $37.1 billion. That's permanent capital that they have saved up, or received from alumni grants. The university uses the income that the fund generates to supplement student financial aid and develop its infrastructure and teaching programmes.

The management of that portfolio has always been the subject of much debate. In addition to conventional equities and bond holdings, the fund has huge bets on natural resources. It accumulated a $4 billion portfolio of Californian vineyards, Central American teak forests, a cotton farm in Australia, a eucalyptus plantation in Uruguay, and timberland in Romania.

The current endowment chief, Narv Narvekar, decided to write down the value of that natural resources portfolio last year by $1.1 billion, to $2.9 billion.

Over the past decade, Harvard's fund posted a 4.4 percent average annual return. That's worse than its university peers, and worse than a market-tracking index fund (60/40 equities/bonds) which would have earned an annual 6.4 percent. Vestact's all equity US portfolio generated average returns of around 10% per annum!

So much for the best brains at the world's top university. Read all about it here:

Harvard Blew $1 Billion in Bet on Tomatoes, Sugar, and Eucalyptus

This week on Blunders: Xi Jinping is now Chief for Life in China, Cape Town is Superdry, Egypt is awful and Snapchat has a Kylie Jenner problem - Blunders: Episode 90

Michael's Musings

As your smartphone becomes your most important possession, having access to the internet is something you can't live without. Here is how each South African network ranks in terms of coverage - The mobile network with the best coverage in South Africa.

When times get tough humans adapt to get stronger and more efficient - How this 78-year-old Cape Town company became one of the most water-efficient manufacturers of Coke in the world.

Home again, home again, jiggety-jog. As expected, our market is down this morning, in line with global markets. The most important thing on our screens today will be day two of the test between the Proteas and Australia; not much out today in terms of key market data.

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Thursday 1 March 2018

My Banana is Bigger Than Your Cucumber

To market to market to buy a fat pig. I (Michael) am reading Thinking, Fast and Slow by Daniel Kahneman. I have been since December; a recent reading test told me that I read at the speed of a high school student, a few words a minute slower than the global average. Kahneman is a Nobel prize winner, for his work on behaviour economics (cognitive biases). Basically his work proved that people are irrational and economists need to come up with better models for how the world works.

One of the experiments spoken about in the book is how unhappiness can derive from comparing. Researchers took two chimps, in separate cages. First, they gave each one a cucumber and then observed. Both Chimps ate the cucumber and were content. Then the researchers gave one chimp a banana and the other chimp a cucumber again. As you can imagine, one of the chimps was happier than the other. The chimp with the cucumber went as far as throwing the cucumber at the other chimp.

It is amazing what happens when we feel that we are being treated unfairly. What the experiment demonstrates is that unfairness and unhappiness is relative. If the second chimp never saw the first chimp with the banana, there wouldn't have been a problem. Imagine if the first chimp got wilted spinach instead of the banana? Apply this to a very emotive subject, income inequality; has social media made the problem seem worse than it is? The graph below is one of the arguments presented for the rich getting richer and the middle class going sideways.

My argument is that focusing on real wages is the wrong metric. Surely what is more important is what you can do with what you earn? If your salary doesn't go up in real terms, but thanks to technology things get cheaper, that is progress? These below tweets show how far we have come in the last 100 years.

I agree that there is no point in having a society build tremendous wealth that only benefits a few, but at the same time, things probably aren't as bad as the media would have you believe?

Market Scorecard. Tuesday's tough time continued on Wednesday. The Dow was down 1.50%, the S&P 500 was down 1.11%, the Nasdaq was down 0.78%, and the All-share was down 1.19%.

Company Corner

Yesterday after the market closed, Steinhoff released its Quarterly update, for the three months ending 31 December. Meaning the post-implosion period only accounts for three weeks of these numbers. The first thing I looked for was an update of when PWC would release their findings.

"It is not possible at this stage to provide any definitive timing for conclusion of the PwC investigation, but the company will provide regular updates on any material developments and clarity on timing as soon as possible"

Here is a look at their top line performance.

As you can see, Mattress Firm (US operation) is hurting while they are in the process of revamping the business. Here is what management had to say:

"During the quarter under review, 99 stores were closed, while eight stores were opened. Management aims to close approximately 175 stores and open 75 new stores"

"Furthermore, management has identified that the change in major supplier has resulted in gaps in the product range that are being urgently addressed."

"Mattress Firm's like-for-like sales being down by 10% for the period under review, largely driven by lower average unit selling prices. Like-for-like unit sales for the group declined by 3%."

It all still looks rather ugly. To make matters worse, German media and Moneyweb are reporting that incriminating emails between Jooste and senior management have been uncovered (#SteinhoffLeaks Part 1: 'Some big mistakes'). If you are still holding the share, the end to this sh*t show doesn't look to be any closer.

Linkfest, lap it up

One thing, from Paul

Strikes by organised labour are on the decline (in developed countries at least). The collapse of unions in the private sector is the principal reason. Globalisation of manufacturing and services is also a factor, as enormous companies with worldwide operations simply adjust to avoid work stoppages.

This trend seems true of South Africa too? We have high levels of unemployment, which further strengthens the hand of companies. Trade unions only really have much traction in the state sector, where their employer is a pushover?

Here is a link to the article (might require a WSJ subscription) which contains that graph:

Why Workers Are Striking Less Than Ever

Michael's Musings

If you are on Twitter you need to follow Wandile Sihlobo. His blog post from yesterday has a look at the unused land which can be used for agriculture, the low hanging fruit for land redistribution - These Provinces Have Unused Land Suitable For Agriculture.

Todays chart from Visual Capitalist fits perfectly with what I wrote above - These 6 Charts Show How the World is Improving.

The mind still boggles a bit, when you think about how much China has changed over the last 30-years. It shows what can be accomplished when the government is focused on the people and not their own benefits.

Vestact in the Media

This an interesting question to think about. Michael gets a nice mention when talking about the impact of our currency on the stock market - Does South Africa really need a stronger rand?.

Home again, home again, jiggety-jog. Our market is slightly down on the open. A strong Dollar means the Rand is heading back to the $/R 12.00 level. Local data today, we have manufacturing PMI and vehicle sales numbers; how big will the impact of the renewed optimism be?

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