Jozi, Jozi 26o 12' 16" S, 28o 2' 44" E. We ended the day off in the green, but at around the lowest point of the day. There were gains across pretty much all of the major indices, resources again leading the way. The Rand did weaken through the day, perhaps the downgrade by Moody's was weighing heavy. I read in the BusinessDay that the finance minister warned that the ruling party must Look after SA's image. Or, in Brendan Venter speak, "we must try harder". And really we must. There is (are?) all sorts of nonsense happening right now, politically I mean. This paralysis around the ruling party conference seems to be almost a whole year before. Perhaps a more open process of lobbying all the way into the conference in the open, rather than behind the scenes, is what is needed for democracy. Live TV debates between the candidates. I would love to see that. I for one am tired with average. I don't like average. Nobody should settle for average. Search for excellence.
Digest these links.
Glenstrata or Xstracore back on track. If you missed it, on the wires: Xstrata Board Recommends Glencore Deal. We thought that they might do exactly this, perhaps the sweetener of Mick Davis staying on as chief for half a year was enough to push the board. Now, the all important shareholders have to decide. The Xstrata share price is up quite strongly in early trade. The screens in front of me also suggest that Davis has agreed to forgo any bonuses associated with a deal. Good, perhaps shareholders would be swayed by that gesture. A 28.8 million pound gesture. Whoa! But it turns out, according to this piece: Xstrata endorse Glencore takeover, that Davis will still get a 13 million Dollar termination contract. Ah well, turns out that we have no say in the matter whatsoever, but it does impact our country, because Xstrata have assets here, as do Glencore. Well, Glencore have a 70 percent stake in Shanduka Coal.
Did Spanish banks fail or pass? Well, at least 7 banks "failed". 7 might not sound like a lot, but it is half of the banks that were stress tested. But, of the 59.3 billion Euros of funds needed, 25 billion of that is needed by one institution, Bankia. But when I finished reading this piece: Spain stress tests fail to dispel clouds, I actually felt the opposite to what the headline suggested. Why? Because Bankia was actually cobbled together by the authorities and is the fourth largest financial institution in Spain, by "risk weighted assets". If you check out the graphic there, and this is the reason that I said I feel hopeful, the top three banks in Spain, Santander, BBVA and CaixaBank are all fine in the case of the base and stressed scenarios. 5 of the top 6 banks would be fine in the base case scenario. I wonder if the smaller banks by assets on this list are looking increasingly juicy to someone with a multi decade view. No doubt.
You are not surprised when you read headlines that China's economy has quadrupled over the last twenty years. So with wealth comes happiness then? Or not. Sometimes the best things in life are free, even though as in the original song version of "Money (That's What I Want)", you can give those to the birds and the bees. I like the flying lizards version, but the Beatles did a great job too. This article, When Growth Outpaces Happiness, however, from the New York Times, raises a few issues around social stability and rising incomes. The more you have, the more you know, the more you want. It turns out that a secure job with lots of oversight and benefits makes you happier. But not more productive.
That is just amazing. You have heard about the process of fracking, you no doubt have seen the T-shirts that ask Shell to frack off from "their" Karoo. But did you know that in the process of fracking, a specific sand is required? That is why in the US, there are little towns that actually are making the same decisions as the bigger ones, but only because they have the SAND that farmers have on their land. Really, check it out: Sand mining frenzy and controversy hits small Minnesota town where farmers can become "sand millionaires". I am starting to wonder if South African farmers are going to be looking for a similar kind of sand. Of course this is based on whether or not we get fracking off the ground in South Africa. When I see the first gas I for one will be happy.
- Byron's beats
This morning the high flying Famous Brands came out with a trading update leading up to its results for the 6 months ended 31 August 2012.
- "Accordingly, shareholders are advised that the Group expects to report headline earnings per share (HEPS) and earnings per share (EPS) (calculated on an IFRS basis) of between 147 cents per share and 152 cents per share. This is an improvement on the prior year comparable HEPS and EPS of between 18% and 22%.
On a diluted basis, the Group expects to report diluted HEPS and diluted EPS of between 143 cents per share and 148 cents per share, an improvement of between 19% and 23%."
Now there is no doubt that this is a good company but is it a good investment at current prices? The stock has been a fantastic performer coming all the way from R13 in October 2008 to R72.50 today. Let's take the middle of the range diluted expectation of 146c and we can see that the stock looks expensive. Last year the company made 242c for the full year, 115c of that in the first half. The second half is usually better than the first because it includes the festive season. On that basis let's say they make 310c for the year. That means that the stock trades on a 23 forward PE.
As an investor is it worth paying 23 years worth of current earnings? According to Google Finance Yum! Brands, the $30bn global fast food franchiser with brands such as KFC and Pizza Hut trades on a PE of 21. McDonalds trades on a PE of 17. But Famous Brands is certainly growing faster than these two giants who also look quite expensive.
I have always maintained that I like the industry. It falls within our aspirational consumer theme as more and more people can afford the small luxury of fast food. The dynamics of the family set up also supports this model. As more women enter the jobs market you will find that demand for quick easy food will increase. I also like the Famous Brands franchise business model as they roll out their well known Brands to franchisees and take a fat stake of the profits.
On this basis as well as their potential to carry on opening stores here in SA and up into Africa I would still add to this stock. We will wait for the full report to get into more details about the business.
New York, New York. 40o 43' 0" N, 74o 0' 0" W It was choppy on Friday for stocks, choppy at best. Stocks struggled as the economic data was worse than anticipated. Chicago PMI was a pretty big miss and fell below 50, a Michigan consumer confidence report looked OK, but was a miss as was a personal income read. At least personal spend was heading in the right direction. All the major indices sank Friday, led lower by energy stocks. Technology also sank, I must say that I did not like the Tim Cook apology on the Apple Maps, Google must be laughing. And Byron pointed out that Steve Jobs would have been livid with such a decision. Byron even suggested that in the Steve Jobs era no such error would have occurred. It does suggest that there is almost certainly a kink in the Apple armour AND perhaps the new vision is going to make mistakes.
Currencies and commodities corner. Dr. Copper is last at 373 US cents per pound lower on the session, the gold price is lower at 1766 Dollars per fine ounce. The platinum price is also lower, but off the worst levels, last at 1657 Dollars per fine ounce. The oil price is lower, at 91.74 Dollars per barrel. The Rand is marginally weaker. It is a wildly busy week from a data point of view. For now the market is higher. Not because the PMI data looked bad, but rather that the PMI data was not as bad as expected.
Sasha Naryshkine and Byron Lotter
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