To market, to market to buy a fat pig. Amazing footage over Russia with the meteor streaking across the sky. I guess if we are amazed by one, imagine what the dinosaurs must have gone through! The G20 were shuffling papers last week in Moscow talking about currency wars and how they should end, but gee, what does that really mean in the short run? Merger & Acquisition activity is starting to pick up, Buffett is even getting involved. Which tells me that this little cycle is a little like the last time that he stepped in, he only steps in when he recognizes value and the investment makes. The WSJ has a nice table of all the Berkshire deals over the last 10 years: Biggest Berkshire Deals. This one is sizeable. Really sizeable. Although Heinz is not the market, this deal does tell me something positive.
Perhaps this graph tells you something, that expectations are either low, or that companies are starting to do slightly better than some folks anticipate: Percentage of companies beating earnings estimates by quarter: 2000-present. That graph is from the Jeff Miller post, which is always fabulous: WEIGHING THE WEEK AHEAD: IS THE HOUSING REBOUND FOR REAL? The reason why I quite like Jeff is that he is measured, he is neither overly crazy in terms of being bullish or bearish, as he says, he likes to present a balanced view. Another graph that got me really thinking and I have seen it several times is this one: Federal Government Finances. Perhaps it is just me, but if both the revenues and spending continue along the same trajectory, then shouldn't those lines converge at some stage before we reach 2020? Why does everyone freak out? Because of the sheer size of the debt? Make no mistake, the US federal debt outstanding is a huge problem, but had there not been forced intervention "things" would have been much, much worse.
Talking about much, much, worse this is possibly the most amazing story that I have read in a long, long time. I keep saying that the time for the time (how do I say this nicely) for a low skilled job is gone. And I found the best article that I have read in this regard titled: The Mystery of the Incredible Shrinking American Worker. Ok, you have to read this really, really carefully. Why I like this is because I met and had a wonderful conversation with a client last week and we agreed on several themes over the next decade. More mechanisation. Robotics. Those were two key investment themes that we agreed on, amongst many others. Robots never sleep, they work overtime, they don't get paid, sure you need to buy them once off and it requires humans to fix them if they break, but it improves the companies output over the short, medium and long term. So, instead of being many folks on the factory floor as a low skilled worker, you instead are getting skilled workers whose jobs it is to make sure that the robots works. That is the simplest way of putting it, I think.
The article asks the simple question: "People are becoming less valuable to companies. Why?" The answer is fairly forthright and rather obvious: "Simply put, the world shrank. Two seemingly unrelated inventions -- the microprocessor and the shipping container -- conspired to create a global market for all assets, including people. A century of achievements in computing power and shipping ushered in an era of global trade so expansive that it completely disaggregated the process of doing business (especially in manufacturing), allowing firms to treat finished goods as a bundle of globally sourced components and services." Faster computing power, the internet and easier dissemination of information and the remarkable take off of the shipping container handling. A remarkable look at the global trends and it underscores that a hell bent approach to industrializing rather focusing on the digital age is the incorrect one. We need more high end jobs, which unfortunately requires a large amount of work on the education sector. Or, am I completely off the mark here?
Jozi, Jozi 26o 12' 16" S, 28o 2' 44" E Whoa, precious metal stocks got crushed as the underlying metal prices took a turn for the worse. The decade plus long gold rally looks rather old and stale, and some serious names are starting to sell. The whole thinking is rather simple, and perhaps holds true for sovereign bonds that carry the safest of safe tag. Some are calling it the great rotation out of fixed income to equities. And that has a negative impact on the lustre of gold as either a "safe" place to park cash for the disaster trade, or for inflation that never appeared. What now though? Unfortunately this is not good news for the local gold industry that have been battling high costs and less attractive ore bodies for years. The only thing keeping them afloat is the much stronger Rand price of gold. Profitability has been scratchy at best.
There was some stunning insight from a friend about one of the gold miners in South Africa: "Harmony went from 28,5m shares issued in 1996 to 428m, buying the gold mines that everybody wanted to sell and paying over the odds all the time. In the 12 financial years 1997 – 2008, Harmony cumulatively lost R1,17bn nett profit after tax while the gold price was going in their favour." Wow. What an amazing destruction of value ongoing here. I suspect that whilst Harmony Gold might have stabilized, South African gold mining is not what it used to be. Still, we have valuable minerals that we need to exploit. We might just have wasted valuable time flipping a flopping however focusing our attention on all the wrong things.
- Byron beats the streets. The Tiger Brands share price has been very bumpy of late. It peaked at R335 a share on the first day of the year then dropped throughout January to around R290. It slowly started recovering until the trading update last week which knocked the share price 8%, back to R290. It has since recovered, now trading at R305. We looked at the trading update but not in full detail, last week was very busy. What has seemed to spike the price again was the Pioneer update on Friday and then of course, Berkshire Hathaway paying a 20% premium for Heinz.
Tiger Trading update. There were no numbers mentioned. Obviously the change in earnings is not big enough to legally announce a percentage. What it did say was that trading conditions have been tough on the back of a constrained consumer, mostly because of high inflation. They also give us some clarity on the financial impact of the Dangote Flour Mills acquisition. In the short term it will be earnings dilutive and benefits will only be seen over the next two years. Short term speculators do not like that kind of news.
Pioneer Update. Pioneer foods, one of Tigers biggest competitors released a trading update for the four months to 31 January 2013 on Friday. Revenues increased 12% for the four months. Inflation was responsible for 7%-9% while volumes grew 3%-5% according to the group's estimates. Much of this was also due to a weakening rand and increases in the wheat price.
You see, this is a perfect example of inflation directly impacting the consumer at the heart of their necessity requirements. It is tough out there and getting tougher. But what does this mean for the food producers? There is no doubt that higher prices are going to negatively affect volumes. But these are necessities so the impact will fall on less defensive discretionary spend.
As for the long term picture, we are still optimistic. The growth in Africa is very exciting. As Massmart, Shoprite and Pick n Pay expand they will bring Tiger with them. Tiger fortunately do not have to build the shopping malls. They do have logistical challenges and producing directly in other countries is clearly a growth opportunity as with the Dangote Mill acquisition.
We are not concerned about the short term dilution. Those who sold on that news only created a buying opportunity for us long term investors. The other day I downloaded the last 15 of Warren Buffet's annual investor letters onto my iPad. I started reading 1998 last night and one thing he said is very relevant in this case. Talking about volatility he said that he would choose a lumpy 15% return over a smooth 12% any day. This being over the long term. We feel the same about Tiger, this is a good long term investment, we are not concerned with the volatility.
New York, New York. 40o 43' 0" N, 74o 0' 0"W Stocks started the session well, but soon traded lower around lunch and beyond before clawing their way back to end about flat. Gee, that sounds pretty idiotic to describe the collective indices as a collective crowd or the like. Today is Presidents day in the US, the third Monday in February. I like the way that the Americans take their public holidays, something that is done in other parts of the world too. Mondays and Fridays for the important holidays leads to greater productivity both before and after the holidays. Too many holidays in the middle of the week. OK, back to Wall Street, basic materials and energy stocks took some heat for the same reasons described above. Commodities sold off as part of the rotation trade. I suspect unfortunately this might spill across to other commodities, if of course you are a commodity bull. Good for the inflationary outlook however, although it is pointed out that gasoline prices continue to go up in the US, whilst we are expecting another petrol price increase here locally.
Crow's nest. The next ten days are really crazy from an earnings point of view. Shoprite tomorrow, BHP Billiton, Truworths and JD Group on Wednesday and Thursday sees Discovery and Mondi report. On Friday we have Exxaro, Imperial and Northam. An action packed week, and next week it does not let up with some big names too. I must admit, I miss the days of everyone telling me all the time was the Credit Default Swaps are for Greece, or Italy or Spain, and equally what their ten year bonds are yielding. You see, the less bad news, because humans are mostly reactionary means that in general people feel a little more cheerful about the state of the world. And as we well know a little bit of confidence goes a long way. Oh yes, and the Proteas ratcheted up their performance yesterday, amazing.
Sasha Naryshkine and Byron Lotter
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