Taking Stock of our GDP

"Interestingly, if you lay a graph of the share price performances of Standard Bank and Nedbank over that of Barlows, they look same-same. Perhaps the stock market, which is forward thinking (you pay today for future profits), is telling you that we are through the worst. Through the worst of the droughts, through the worst of the low commodity prices, through the worst of global politics (maybe debatable that one). There is little that you can do about many factors, much is beyond your control."

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To market to market to buy a fat pig Stocks in Jozi ended the day lower, down one quarter of a percent by the close. An economic read pointed to low business confidence, we knew that business confidence was at the lowest level in decades, we had been told that already. Recession or not, it will take something special to get South African companies spending money locally, there is a slow moving bunny and headlights scenario, and I am not too sure which one is policy and which one is business (the bunny and the headlights). Is the economy the stock market and is the stock market the economy? The answer is no. You can read the whole thing here, StatsSA is equipped with good people producing good publications, like this - Gross domestic product - Fourth quarter 2016.

Economic growth has been a stop start affair over the last three years, we have experienced 4 negative quarters out of the last 12. And if the current quarter clocks another downer, i.e. a reversal in GDP (It always sounds strange, negative economic growth), then the technical term is recession. Somehow the standards are so low that "just avoiding" a recession seems like a good thing at the moment.

Manufacturing has been hit particularly hard, experiencing 10 negative quarters over the last 16. Technically we are in a manufacturing recession. And with mining having been so volatile, it looks a little ropey out there too. See the manufacturing graph that we are referring to in the release:

How does that stack up against Barloworld being at a 12 month high? They supply goods and services to these industries? Most of their revenues are from selling equipment and through their automotive business (rentals and motor trading). A couple of sessions ago Nedbank and Standard Bank were trading near 52 week highs too, they provide finance to businesses and consumers. Barlows (as they are affectionately known in the industry) are up nearly 70 percent over the last year, the stock is "only" up 41 percent in five years.

Interestingly, if you lay a graph of the share price performances of Standard Bank and Nedbank over that of Barlows, they look same-same. Perhaps the stock market, which is forward thinking (you pay today for future profits), is telling you that we are through the worst. Through the worst of the droughts, through the worst of the low commodity prices, through the worst of global politics (maybe debatable that one). There is little that you can do about many factors, much is beyond your control. In the end, and I think we can all agree, we should be doing better, if there was stability in politics and leadership stability and accountability, I am pretty sure confidence would be better. And as our colleague Byron said/says, confidence is the best form of stimulus. Look what has happened in the US as an example, consumer confidence hasn't been this high since Intel and Cisco were way cool.

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Stocks in New York, New York were lower through the session, by the time the market ended, the Dow sank 0.14 percent, the nerds of NASDAQ sank nearly one-quarter of a percent whilst the broader market S&P 500 lost nearly three-tenths of a percent. Energy, materials and healthcare sank. The Tweet of Trump was at work again, a "wonderful new Healthcare bill" is on the way as well as Trump Sends Pharma Stocks Down With New Tweet on Drug Prices.

Whether or not it passes all the way through remains to be see. In our corner, where we bat for crude capitalism, all we are looking for is lower regulation and tax reforms. That would be good for businesses and by extension profitability and broader society. Or would it? The old trickle down effect?

Snap sank another 10 odd percent, the stock is down nearly a third from their highs intraday on Monday. Everyone is saying, "see, told you so", all of those everyones who didn't get stock in the different rounds earlier. Did you see this story - How US school turned $15,000 into $24m with Snapchat flotation.

Give the governing body of the school free lunch for a year, for agreeing to what would have been a pretty "risky" investment at the time. More specifically, a fellow by the name of Barry Eggers, a parent at the school at the time, and a VC fellow who on his LinkedIn profile says he is a partner and founder at Lightspeed Venture Partners. Who themselves became a shareholder (and rich on paper) in Snap. Research? Seeing how obsessed his kids were with Snap. Interesting, right? Same as Buffett and his Apple investment. Barry actually tells you the story himself via his LinkedIn profile - Five years ago my daughter told me about a new app called Snapchat and the rest is history. You may need to log into your LinkedIn account.

Makes you always think, investing home runs are sometimes under your noise. Mind you, it mattered who the investors were in the VC fund and proximity to the company itself, if this was a VC fund in India, do you think that they would have been able to meet Evan Spiegel and Bobby Murphy? And equally, if Evan and Bobby were not there (in the US), would they have been able to happen?

"Ten days after meeting Evan and Bobby, we made our seed investment in Snap. Later, we offered them a small space in our building to get going."

Regardless, the fellows over at Lightspeed Venture Partners have done pretty well for themselves, with multiple seeding capital provided for some pretty big ideas that have gone public and become big businesses. According to their Wiki page: "The fund has 24 early stage enterprise investments that have gone public, the most of any fund in the world." Although, who maintains the Wiki page? I still think that Wiki is a good model, fake and erogenous entries are marked as such. Lucky for Lightspeed? Nope, they ask questions it seems and it is more a case of when Barry met Bobby.

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Linkfest, lap it up

When your portfolio goes up you think you are a genius, regardless if your share selection was flawed. It is like wining a coin toss 3 times in a row and then thinking you are a good at calling them, other the long term your flaws and wrong assumptions come to the surface. Remember that making a profit or loss in the short term doesn't say anything about how good your investment system is - How Bull Markets Affect Your Intelligence.

Here is another place that having access to the internet helps people. The internet provides information on where/ from whom to get the cheapest product offerings. Due to being poorly informed the more vulnerable in society end up with bad deals - Getting more consumers to switch.

This looks more like stuff out of science fiction, if it didn't come from Airbus, I might say "yeah right". As the article points out, the design of the vehicle is to have a drone "relieve you" of traffic. Wow. Futuristic. Airbus unveils Pop.Up: An autonomous transportation concept that uses drones to carry cars.

From the Geneva automobile show, comes a VW concept car named Sedric, no gears, no steering wheel and the headline says it all - This self-driving van concept from Volkswagen looks like a pissed-off toaster. Inside of ten years I think we will be using these vehicles, I have very little doubt about that.

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Home again, home again, jiggety-jog. It is Women's Day today. Treat the special people in your life extra specially, ok? And make it a daily occurrence, rather than once a year. Treat each other nicely every day, and then we can all just get along. Talking of what day it is, Eddy Elfenbein has a short piece - The Bull Market Turns Eight. On an inflation adjusted basis that hardly seems "huge" now, is it?

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

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Primary sector irrelevance

"As you can see, most economists are bleating, the primary sector of the economy experienced the worst of times recently. The more advanced your economy, the more reliant on technological innovations to drive your primary sector, more industrialised machinery doing the logging, the harvesting, the planting, the maintenance (fertilisers and pesticides) and so on. There may be fewer people doing work in that segment of the economy, that does not mean it is not as important to the rest of the economy."

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To market to market to buy a fat pig. It's complicated. More complicated than Ross, Joey, Chandler, Phoebe, Monica and Rachel, all sitting on a couch in their favourite coffee shop, trying to figure what life is all about. That show. In the Middle East it is so complicated that when I tried in my simple way to explain, using history going back, I found myself being spun right round. Like, why exactly is Bashar al-Assad and his dictatorship, friends with the Russians? Equally, why do the Iranians support Bashar al-Assad? How did the Daesh (Islamic State - IS) form and take control over multiple territories and millions of people?

If you read about the precursor to the IS, the leader fought against the Russians in Afghanistan. The history goes a little further back than you think. So why did the Turks down a Russian plane yesterday? The Turks suggested that the Russian plane had violated their airspace, multiple warnings were given. The Russians deny they were in Turkey, they were in Syria, which of course is by "invitation". It is very complicated and very tense, the Russians, NATO, Turkey themselves, the French looking for allies in the area, the involvement of the US in that region for decades, the history goes a little further back, thousands of years. Yip, it truly is complicated.

Markets took a swoon as the news started appearing on the screens, futures fell and the decent enough European GDP numbers (albeit still weak), evaporated along the way. Then later on in the day US GDP numbers were a comfortable beat, revised higher for the third quarter on beefed up inventories. Whilst markets in New York, New York opened much lower, stocks clawed their way back and managed to close marginally in the green on the day. Spurred on by the energy stocks, tensions in the Middle East and geopolitical tensions in general lead to higher energy prices.

On the local front, again it was a mixed bag for stocks, we never got the lift at the end from an improving US session and closed down nearly three-quarters of a percent, most of the day was spent wallowing in the red. Richemont continues to slide, the company no doubt suffering from the strains of cancelled bookings to the city of lights, Paris. There was also a gloomier outlook from Tiffany & Co. in a global world all the stocks I guess are impacted by the same factors. You cannot have it both ways.

Talking of not the best outlook, the local GDP number disappointed yesterday, although as Stats SA pointed out, in nominal terms this is the first time that the number has topped 1 trillion Rand for a quarter. And barring a disaster, I suspect that the next quarter will be better. Bright spots included food and beverages, wood and paper, as segments of the economy. There was obviously pain felt in the agricultural sector, the weather is always something that you cannot control, the mining sector was understandably lower too, with commodity prices having shrunk drastically over the last twelve months and the demand side looking floppy (equally too much supply), the sector might remain muted for some time. In fact, Omnia who operates in that space suggested as much yesterday. There was a nice graphic from Stats SA that is worth sharing.

As you can see, most economists are bleating, the primary sector of the economy experienced the worst of times recently. The more advanced your economy, the more reliant on technological innovations to drive your primary sector, more industrialised machinery doing the logging, the harvesting, the planting, the maintenance (fertilisers and pesticides) and so on. There may be fewer people doing work in that segment of the economy, that does not mean it is not as important to the rest of the economy.

Anyhow, as the divergent US and our local economic numbers, which resemble more European looking number, suggest, we are in a tough patch here. What does help, in my little opinion, is the president telling the far left that the capitalists set the price of bread and oil (it is the market ultimately), and then ask the private sector to invest. I shall reserve judgement and avoid this sensitive area, I have found that in the past there are too many divergent opinions, which is what makes South Africa great, many divergent views. Imagine the level of agreement in Scandinavia relative to here, no wonder they all have similar looking flags.

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Linkfest, lap it up

Commercial space travel is now one step closer with the team at Blue Origin managing to land a rocket - The reusable space rocket is nearly here with Blue Origin's first successful landing. You might have not hear of Blue Origin before, it is the space company headed by another pioneer Jeff Bezos.

One of the most influential people of the last decade is Ben Bernanke. His knowledge of economic history helped to avert another great depression - Ben Bernanke on bubbles, bitcoin, and why he's not a Republican anymore. The interview gives a brief insight into his thoughts on politics, monetary policy and fiscal policy.

Here is a look at the largest bankruptcies in history. Lehman makes Enron look like child's play. It is a reminder that things do go wrong and it can happen to huge, very old companies - Largest Bankruptcies in history (Click on the link for a clearer view of the image)

 

One advantage of having a super computer is that it can process vast amounts of data and pick up patterns - IBM wants to predict earthquakes and volcanoes with Watson. To give perspective of how much data needs to be crunched to better understand the what is going on below the surface of the earth: "Were you somehow able to run this model on a regular home computer, it'd take you three years to get a sense of what's going on under the Earth's surface. The Sequoia can do it in a day."

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Home again, home again, jiggety-jog. Stocks across Asia are a mixed bunch, mostly lower other than the Shanghai markets, that has a mind of its own. Although as Byron tweeted the other day, and it is worth looking at almost every single day, the US markets are so colossal, relative to the rest of the world. See here, a tweet from BI Markets: This map shows how some US corporations are worth more than the entire stock markets of other countries. JP Morgan Chase is marginally smaller than the whole of our market. JNJ is worth more than India. As long as we beat India over the next five days, I am happy! What is pretty amazing is that Google and Amazon collectively are bigger than the entire Chinese market. Makes you think about the anxiety of the recent Chinese stock market swoon, not so? Perspective as ever.

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

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OMG, China is tanking! Or is it?

"If you add the UK, France and India together, it is still not bigger than the second biggest economy in the world. See? Amazing to think that just a little bit of context is needed to stop people running around like lunatics telling you that Chinese growth is slowing and that this is the worst news that they have ever heard. If China grows at 6.5 percent this year, that is an extra 650 billion odd added to their GDP, which is, if you needed reminding, around the entire economic output in China sometime between 1994 and 1995."

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To market, to market to buy a fat pig. The big story yesterday was the big drop in the Naspers share price, this after Pony Ma indicated that he had sold a portion of his Tencent stock. Just how much? Well, according to Bloomberg, he cut his stake from 9.86 percent to 9.65 percent. That is 0.21 percent of his wealth now in cash, of a 1.55 trillion Hong Kong Dollar market cap, which is 3.15 billion Hong Kong Dollars. Which is 4.9 billion Rand. Which is 410 million Dollars. Which is a lot of money in anyones language. So what is Pony Ma telling you by selling shares? I don't know, really, there is one reason you sell, it is taking some money off the table.

You must remember that Pony Ma (actually his real name is Ma Huateng) is inside of the top 100 richest people on the planet and amongst the top handful of richest people in China. He is worth around 20 billion Dollars, somewhere around there. I am pretty sure that it is not about the money, and I know that he would care if the Tencent share price was at 130 Hong Kong Dollars, that is actually where it was in March this year. The 52 week low is 90 odd Hong Kong Dollars, the high is 171 from a few trading sessions ago. He took a little off the table, good for him. Should you worry? No. Pony Ma still owns 9.65 percent.

And by the way, it suddenly occurred to me yesterday that Naspers themselves have never sold a single share. Koos Bekker is a genius, his timing is almost always spot on. Let the team at Naspers decide when it is time to sell, OK? It is a bit disconcerting that the Chinese have such wild swings in their share prices as a collective, all in or all out, this is what this graph below tells me, courtesy of Google Finance, this is a (maximum) 16 year view of the Shanghai Stock Exchange:

The point that I make in the "way below the all time high" is that for the Shanghai Composite. Over the same time period, the S&P 500 is up 70 percent. That is it. 16 years, 70 percent gain in the US Stock market. The Shanghai Composite is up 251 percent. Chinese GDP, seeing as that is the "other" thing that people are talking about? It clocked 7 percent growth for the first quarter, that is not good and the trajectory of growth in India is expected to eclipse that of China. Which is good, right? For the time being the slowing Chinese economy needs a little bit of context. In 1999 Chinese GDP was 1.083 trillion Dollars, according to Index Mundi -> China - GDP.

In 2013 it was 9.24 trillion Dollars. With a 7 odd percent growth rate in 2014, let us say 7.5 percent, GDP would have crested 10 trillion Dollars for the first time. GDP in aggregate went from 1 trillion Dollars in 1998 to more than 10 trillion Dollars in 2014. A 10 fold increase in GDP, the stock market only registered a 251 percent return. Remembering always that we stress that the market is not the economy, the economy is not the market. If you have a look at the Chinese GDP trajectory from 2005 onwards, you will see that ten years ago the Chinese economy was roughly the same size as the French and UK economies.

And now? If you add the UK, France and India together, it is still not bigger than the second biggest economy in the world. See? Amazing to think that just a little bit of context is needed to stop people running around like lunatics telling you that Chinese growth is slowing and that this is the worst news that they have ever heard. If China grows at 6.5 percent this year, that is an extra 650 billion odd dollars added to their GDP, which is, if you needed reminding, around the entire economic output in China sometime between 1994 and 1995. True story. So whilst the pace of growth is slowing, that is natural, you cannot deliver the same year after year as the base grows.

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Company corner

Oh no. It is sad when a company of any sort goes into business rescue. In this case it is Evraz Highveld Steel and Vanadium, see the announcement: SUSPENSION OF LISTING AND CAUTIONARY ANNOUNCEMENT. Why? The announcement fleshes it out: "Shareholders of Highveld are hereby advised that the board of directors of Highveld ("the Board") has resolved that the Company does not have adequate funding to meet its obligations for the short term. This is primarily as a result of historical operational difficulties and sustained financial losses within a capital constrained operating environment"

Anglo American owned this business for a long time, as part of their divestment from noncore assets, the majority of the shares ended up in the Evraz stable, the giant Russian company (31 percent of which is in the hands of Chelsea football club owner, Roman Abramovich) listed in London. So they lose everything, is my best guess, the part that irks me is that monster dividends were ripped out of the company during the period 2006 to 2008. This is however a sign of the times, the unfortunate thing will mean that eMalahleni (Michael's home town) will suffer here, we have heard a few horror stories already, none confirmed however. Another sign that the business of business is tough, ordinary workers need to understand that this can happen.

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Things we are reading

Peoples creativity is what pushes us forward as a species - Here's what the world's design mavericks created in the last year

Sasol is up close to 8% this week, here is the reason why - Oil Bulls Boost Wagers by Most Since 2010 as Output Seen Peaking. I think the only consensus about the oil price is that it is going to be volatile over the short run - Shale Oil Boom Could End in May After Price Collapse

Learning from history helps us put things into perspective - 9 Lessons From The Great Depression. The one thing that I have noticed about any author from the depression is their aversion to leverage, watching the damage of being over geared makes a life long imprint. I like number 6, "It's right to be an optimist, but be prepared for the worst."

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Home again, home again, jiggety-jog. Resource stocks are on fire, up sharply. With the collective resources up nearly three percent today, the rest of the market is being dragged much higher.

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Sent to you by the Vestacters, Sasha, Michael, Byron and Paul.

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