Tip toeing towards tapering

"And that is what we try and do around here, learn something and empower the readers and clients. Knowledge is powerful. Back to markets and the Fed, tapering and the inevitable. And then the deal around the budget, long before any deadlines and likely to pass, getting closer. And then the news from the people that make the news? Nothing really. Because it is not close to a disaster. Good news does not capture the imagination in quite the same way that bad news does."

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To market, to market to buy a fat pig. Tick, tock, the taper clock, tip toe the Fed draws near, sigh slow the markets says no. OK, that was so very, very poor from the point of view of rhyming. If I had a voice though I might be a rapper. I would feel uncomfortable in outsized pants, big vests, sneakers without laces and sideways caps, not to mention chains. Yip, I think that my rapping career has no chance. Perhaps I could be a sign language interpreter seeing as the quality is low and there seems a desperate need for it. Ouch, that is embarrassing, the FT and Bloomberg were running stories on the box and on their online platforms yesterday and this morning. Sucks, I hope for the sake of us all that this fellow is not a friend of a friend of a friend, if you know what I mean. He says that he is qualified, the interpreter, I have no way of knowing.

My eldest daughter and I learnt a sign alphabet, only to find that there are more alphabets! We learnt the BSL one, there is an American one too! I suspect that one has to learn both. You can sit there and shake your head and wonder how this happened, meanwhile in the economy that is supposed to throw us off the top of the pile as the biggest economy in Africa is having worse problems. Nigeria, according to the FT, along with a leaked letter or two: Mentor adds to Nigeria president's woes amid missing $50bn. Missing 525 billion Rand? Missing? Try Switzerland. There are problems and then there are problems, but we must always demand excellence. Starting with education. If I were to fix only one thing, that would be it. Everything else would then fall into place. You cannot steal or take away an education. All the great leaders of the world were measured. And remember, the more that you know, the more that you realise that you have so much to learn.

And that is what we try and do around here, learn something and empower the readers and clients. Knowledge is powerful. Back to markets and the Fed, tapering and the inevitable. And then the deal around the budget, long before any deadlines and likely to pass, getting closer. And then the news from the people that make the news? Nothing really. Because it is not close to a disaster. Good news does not capture the imagination in quite the same way that bad news does. Not everybody thinks that this is the best deal around, but a little more spending after the sequestration, and a very modest addition to US GDP is welcomed by both sides. Do not cheer all at once. The budget deal could pass through the House as early as today, and then be handed over to the Senate. Who knows, perhaps there will be a budget deal by Christmas. Now that would be a turn-up for the books (err... internet?), bearing in mind that there has been a lot of animosity in Washington DC lately. You will not be surprised that the idiom, turn-up for the books has to do with bookmakers and unexpected happenings.

Whilst we are on that subject, the folly of forecasting and the unexpected: Missed It By *This* Much. And that is why I have no view on where the market is going this year, the remainder of this year, all of next year. Why? Because when we speak to real people about investing their hard earned money, we explain that this relationship with investing your money should be the same, or not too dissimilar to owning a personal business. Because that is what you are doing, buying into an existing business at a specified price. It matters more what you buy at the beginning rather than the absolute timing. Quality trumps the Fed each and every time. Why would you want to be held to a forecast, when things can change so rapidly? But I guess that is part of the beat.

I recall that Johan Rupert choice observation, in amongst many choice ones, in which he beat up on the analyst community after a set of results. He said something along the lines that the people in the room are always critical of their business, but how many of them had been at the same institution for ten years. There were a few show of hands in amongst all of the masses there. He then pointed out that in their business, Richemont, they had been in business for years and years, doing the same thing. Trying to strive for perfection and make it happen for the folks that judge them over a longer period. That was a point well made, the folks that are critical of the business, the analyst community and the media want action quarter in and quarter out, but as Rupert explained, it takes many years to build and grow a business of that scale. And that is the point, that is why you own companies and not share prices.

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It comes to that time of the year when we head for the hills and make our separate ways. I am away from next week, Paul is away and will return early January and Byron and Michael will be here through to the 20th, also returning in early January. But as ever, we will be in contact, the very best way to contact us all is on the email address (that this message is sent from). We will respond! For those of you that need to speak to us in person, you have our mobile numbers! If you desperately need them, email us again, we will hand out those numbers. There will be a message of how the year was and how you should expect to see the following few pan out, but you pretty much know our views.

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Byron beats the streets. South African retail sales in the spotlight.

Yesterday we received retail sales numbers for October 2013. I must say, the Stats SA website is looking much better from when I last checked it out a few months ago. Well done. Back to the numbers we saw a 1.3% year on year increase for the month based on constant 2012 prices. Textiles, clothing and footwear grew 7.6%, hardware, paint and glass grew 3.3% and medicines, cosmetics and toiletries grew by 2%. Out of the laggards Food and beverages were down 1.5% while household furniture and appliances were down 6.1%. Ouch.

We also saw CPI numbers come out yesterday which showed a 5.3% increase for November compared to 5.5% compared to October. This was lower than expected and is taken as good news.

So what do these stats tell us? Firstly that 1.5% retail growth is not good enough with current inflation rates. Most of the growth is coming from price increases, not volume. It also tells us which sectors are struggling. People love clothes and love to look good. It makes you feel good and in relation to many other things, is not that expensive. You can never have enough clothes but certainly only need one dining room table. Clothes shopping is a hobby for a lot of people, a way to pass time. Buying furniture and food is a necessity.

Should we be worried? The short answer is no. People love to shop all over the world. The shopping malls are so full at the moment it is almost unbearable. Maybe they are not buying as much but they are there and they want to buy. The buying will pick up as soon as more income streams in. And it will, yes the economy is not growing as fast as it should be but it will pick up. These things have cycles and once the rand stabilises we should see our retail sector stabilising along with it.

Well managed companies in growing sectors will do well over the long run. The retailers we are invested in are fantastically run and world class. The economies they operate in are certainly going to grow in the long term. The sector is down 12.6% for the year. If you are not already invested, now is a good time to get in.

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Home again, home again, jiggety-jog. Markets are taking some heat today, taper squash we can call it. All the way through to next week I am afraid, but we could go almost any way. I want to leave you with this amazing graphic that I saw online, via my old favourite professor, Mark J Perry, click on the graphic below to get a larger one. It basically is what happens on the internet every minute and how fast internet traffic continues to grow:

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Sasha Naryshkine, Byron Lotter and Michael Treherne

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Buffett serves up, time and time again

"Buffett's amazing performance can be seen in that if you invested $1 dollar in Berkshire Hathaway in 1976, it would be worth $1500 in 2011 (the stock is up about 40% since then!!!), so his formula clearly works. Would you have stuck with him though when Berkshire's share price dropped by 44% compared to the market going up by 32% from 1998 to 2000? Few would."

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To market, to market to buy a fat pig. What an amazing day it was yesterday, the rain poured down all day, for some that was a wonderful sign. The ancestors crying tears of joy is another way you could interpret it. President Obama was late, but he made up for it with a superbly delivered speech. Were the selfies a disappointment to you, or rather just a president (and 2 prime ministers) keeping up? If he wants to take a selfie with two besties, then who am I to judge? And then Michelle Obama swapped places with her husband when he went and gave that inspiring speech.

If you are looking for the speech, and want a permalink: Remarks by President Obama at Memorial Service for Former South African President Nelson Mandela. I loved the speech, the delivery overpowered all the other speeches, other than the grandchildren, their speeches were also right up there for me. That opening line:

To the people of South Africa, people of every race and walk of life, the world thanks you for sharing Nelson Mandela with us. His struggle was your struggle. His triumph was your triumph. Your dignity and your hope found expression in his life. And your freedom, your democracy is his cherished legacy.

It was awesome. I cannot find the text of the grandchildren's tribute to their grandfather, but, you can see it on YouTube: Mandela's Grandchildren Pay Tribute to Madiba. Amazing. Well done to all concerned, well done to the people for having turned up in the driving rain, even if those folks were not thanked repeatedly, or at all.

I guess the other talking point was the booing of the current president whenever his picture was shown on the big screen. Do you think that the ruling party is concerned at all? I guess we have around half a year or so to find out, the polls will reflect whether or not there is dissatisfaction, and if so, in which direction. What I mean by that is simple, will the voices be heard on the right or the left of centre.

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Markets wait for nobody, great or small. They are open all the time. With electronic markets there is no stopping, giving the forever after trading crowd their liquidity that they crave. And that is good for all of us, good for those big and small. Without liquidity you do not have the ability to execute the necessary trades. Everyone has their different ideas in terms of time frames and investment philosophies. If yours entails stop losses and stop gains and charts, then perhaps I had better be less rude about it. If that works for you, then it works for you.

Markets on Wall Street were mixed, lower at the end, better at the start. We are five years on from the Bernie Madoff Ponzi scheme cracking finally, not withstanding all of the repeated efforts of one whistleblower by the name of Harry Markopolos. Markopolos was an industry peer of Madoff and thought very early on that there was absolutely no way that Madoff's returns were legitimate. He (Harry) repeatedly presented his case to the SEC, over a ten year period, and was shunted from pillar to post by bureaucracy and inefficient SEC employees. If the SEC dug harder they could have saved greedy people a lot of money. Because in so much that there are victims of a Ponzi scheme, there is greed involved when parting with money in order to get steady (outlandishly steady as it turned out) returns. But that was the clever part of it, the "giving" of smaller returns was what kept the illusion going forever.

You can credit Markolopos with the current shakeup at the regulatory body and you can credit people like Markopolos for their efforts to keep the industry clean, his current job title (Harry) is "independent forensic accounting and financial fraud investigator". Madoff is Bureau of Prisons Register number 61727-054. Just a bad number. Madoff, according to his Wiki entry sent a letter to his daughter-in-law to suggest that in prison that he is treated like a mafia don of sorts, but then why should we believe anything that comes out of his mouth? We learnt three things from Madoff. Insiders can be crooks, people are still greedy and the regulatory bodies designed to protect them were not up to the task. #tripleepicfail

What is still true, and this super article from Barry Ritholtz highlights that, is that many people are sitting on piles of cash. Waiting for another event like the last one. Perhaps that is like waiting for the next natural disaster. Maybe. Perhaps it will not happen for another ten years. And then compare the cash returns to the long term equity returns. Read this: Why Is Everybody Sitting on Huge Piles of Cash?. The conclusion that Barry has/had is the same as the one I have, no bubble in equities.

Elevated levels relative to the March 2009 lows, but since the turn of the century the return of the S&P 500, without dividends has been only 24 percent. Hardly exciting. As ever, it depends where you draw a line in the sand, which is why I tend to think that measuring returns on a year by year basis is dumb. In my very humble opinion. But that is the way it works, the scoreboard HAS to say something.

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Michael's musings. Buffett's Luck

There is an active debate in academic circles about whether having an active stock portfolio is better than just buying an ETF. On the one side there are those who say that the market is efficient and that there is no way to continually have better returns than the market. On the other side there are those who say that the market is inefficient and as such picking stocks will give you above market returns. These contradicting views were highlighted earlier this year when the Nobel Prize winners in economics this year, each held one side of these conflicting views. Warren Buffett's success is part of the debate, where some say that his success for the last couple decades is proof that it is possible to do better than the market, and where others say it just comes down to luck. The imagery used is that of someone continuously winning a coin toss; Buffett would be the coin toss champion! (no skill involved, just luck).

A paper was published last month looking further into Buffett's success, with the intension to help settle the argument.

The statistic used to measure Buffett's success is the Sharpe ratio. The Sharpe ratio measures returns in relation to the volatility, and the higher the Sharpe ratio the better. An example is you would rather have a consistent return of 15% per year over 10 years than a return where you are up 50% one year then down 30% the next. This is what their research found; " Looking at all U.S. stocks from 1926 to 2011 that have been traded for more than 30 years, we find that Berkshire Hathaway has the highest Sharpe ratio among all. Similarly, Buffett has a higher Sharpe ratio than all U.S. mutual funds that have been around for more than 30 years. ". The paper also found that Buffett's Sharpe ratio is almost double that of the overall U.S stock market.

Through doing many fancy statistical things, their conclusion was that Buffett's success came down to the following: "stocks with these characteristics - low risk, cheap, and high quality - tend to perform well in general, not just the ones that Buffett buys". It sounds simple right? The formula is simple enough, which is echoed by Buffett himself, "Ben Graham taught me 45 years ago that in investing it is not necessary to do extraordinary things to get extraordinary results"

So now that we know the formula, what are the working parts? According to the researches they gave the following characteristics to "low risk, cheap and high quality". Two characteristics of a low risk company were, that they are large companies, you would agree that a blue chip is less risky than a start-up, and then companies that had low Beta's. A companies Beta, is a measurement how closely a company's share price moves with the market. This makes sense because if you are buying quality companies, they should be going up by more than the market in good times, and coming down by less than the market in down times, resulting in the low Beta.

The criteria for a cheap stock is a stock that has a high book value relative to its market value. They are quick to point out though that Buffett has said "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." Then lastly and key part of the formula; what is a quality stock? A growing, high-payout and profitable company would be considered a quality company. If a company is not quality then the other two metrics do not matter, so Buffett's success can be put down to buying quality companies and then having patience (sitting on his hands).

Buffett's amazing performance can be seen in that if you invested $1 dollar in Berkshire Hathaway in 1976, it would be worth $1500 in 2011 (the stock is up about 40% since then!!!), so his formula clearly works. Would you have stuck with him though when Berkshire's share price dropped by 44% compared to the market going up by 32% from 1998 to 2000? Few would.

His investment approach is to ignore all the short term noise, invest in quality and then wait for that quality to shine through. We happen to agree with Mr Buffett and follow the same approach.

The paper's conclusion is that Buffett does have investing skills and it is not down to luck (good news for us). You can find the paper here: BUFFETT'S ALPHA, and it is well worth a read.

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Home again, home again, jiggety-jog. We have started lower here. I am guessing that it is going to be a wait and see until the Fed meeting in the middle of next week. Yes. These are the worries of the masses, at least there is a budget deal on the table, far ahead of time.

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Sasha Naryshkine, Byron Lotter and Michael Treherne

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Goodbye Tata

"Money won't create success, the freedom to make it will."

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To market, to market to buy a fat pig. What a day already. I think that all of us have a little Madiba in us, and by that I mean forgiveness. We should all use that a little bit more, no, a lot more. And give each of us the respect that we all deserve. In short, just be nicer and forgive. But also I think that we are and were exceptionally lucky to have such a leader, to have lived in the same time and space. My wife was lucky enough to have been a journalist inside of the front rows there when there was the inauguration of the first democratically elected president of South Africa.

In the first elections my vote was simple, I lived in Mozambique at the time and walked into the embassy and had two people in front of me. So I did not really feel the real vibe, the long queues, heck I wasn't even in the country. I did return after the holidays and come back to South Africa, a friend of mine who's dad owned a hotel which had a hall that was an election centre. That friend of mine kept an election banner with Mandela's face on it, I hope that he still has it! We hung it up in our dorm, it was massive and wrapped around the wall. So I guess for the rest of 1994 I woke up to that banner and the face of a free South Africa. But the greatest thing about the man is that everyone has a story like that. Everyone was touched and inspired by that one individual, share your stories and moments.

If you are in Cape Town and have never done the tour of Robben Island before, do it, it is possibly the most amazing trip you can take in South Africa, to relive and imagine history. But then again, I am a sucker for history. It is bizarre, you would think then that I would be drawn to technical analysis. I had read the book, The Long Walk to Freedom before visiting, try and do that if you are going to do the tour. The view looking back to Cape Town is spectacular, we were lucky to be there on one of those amazing Cape Town days. The quotes are beautiful and inspirational, keep reading them, one market commentator suggested he gave us two things, freedom and hope. There is a JSE 5 minute period of a pause where there will be no trades. Rather than pausing for a short time yourself, think about how you can change someones life for the better. Change one life, impact on many.

The best article that I have read this morning, and there are thousands, were by a good friend and equally visible South African: Tutu: We thank God for Madiba. Of course Vilakazi Street, here in Jozi, Soweto, is the only street in the world where two Nobel Peace prize laureates have lived. Not a very long street, but for those of you that have done the Soweto marathon, you will know how steep this street is.

The one quote, the one right at the top (in the intro) is a Mandela quote: "Money won't create success, the freedom to make it will." That is important and what it means is that creating an equal field means that everyone has an equal shot. "Education is the most powerful weapon which you can use to change the world." That is also a favourite, because in my opinion, the two go together. Education is key to success, empowering people and making sure that they use their skills to obtain financial freedom. And unfortunately that comes with great sacrifices too, personal and financial, I hope we are all committed to those!

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Discovery news yesterday, someone, somewhere is buying shares from a strategic shareholder that is selling down their stake. At a discount to the prevailing market price. Standard Bank of course wouldn't say who, other than it was not Adrian Gore. It turns out that it was the refinancing of a BEE transaction, the strategic investor being the WDB. The WDB of course is the allocation of funds to women in rural areas of South Africa. As much as we like to think that we are all equal, it is true that rural woman in South Africa are amongst the most vulnerable in our society.

As per the WDB website, on their Discovery stake:

(A) 3.2% stake in this health and insurance business, alongside the Discovery Foundation (2.4%), a BEE staff Trust (0.9%), Vincent Maphai (0.2%) and Black Non-Exec's (0.1%). Through FirstRand Empowerment Trust ("FRET"), WDBIH has an additional 0.42% shareholding in this holding company was acquired by WDB post the FirstRand unbundling of its interest in Discovery Holdings.

It looks like a refinancing at a higher level. So there is no change in the shareholding, just refinancing by WDB as per the initial agreement, back in 2005. Keep calm and carry on.

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Byron beats the streets. iChina.

Yesterday Wall Street Journal made an announcement about Apple which is probably the biggest Apple announcement since the iPhone 4 was released. If you know much about Apple, that was a huge announcement. The release titled Apple, China Mobile Sign Deal to Offer iPhone explains how the carrier could be selling iPhones as soon as 18th of December. China Mobile has a whopping 759 million subscribers. To put that into perspective, that is 3.8 times the size of MTN. Everything in China is just that much bigger, even bigger than Texas.

According to the WSJ Apple only has a 6% market share in China but estimates reckon that this deal will sell around 17 million iPhones. The company sold 33.8 million phones in the last quarter so that estimate will be very significant. I know there are concerns about the iPhone being too expensive for the Chinese market but I couldn't disagree more. The Apple brand is so strong I believe that the iPhone will become the ultimate aspirational product in China now that it is readily available. The cool factor of the iPhone will force people to eat only plain rice for a few months.

Let's also not forget that along with those 17 million extra phones sold, Apple will now have 17 million brand new entrants to the Apple platform. Music, Movies and Applications all make Apple a solid income. In fact if iTunes was separately listed it would be a very exciting company to invest in and would probably afford a higher multiple. I cannot explain how valuable it was having an iPhone on my travels. The apps helped me with translations, navigation and pictures while the music and reading features came in very handy on the long buses.

As always the market had already anticipated this deal with the stock up nearly 10% over the last two weeks. Trading at $567.90 we're still well off the highs of $700 reached in September last year but even if you bought at the very top I believe your decision will be justified over the next five years. If you picked up my rhetoric from what I said above about the Chinese consumer, I believe the market underestimates Apple's official entry into China. Because let's be honest, until you have cracked China Mobile you are just not quite there. They will sell more phones than expected and they will convert millions of people into Apple lovers. The knock on effects of that will be difficult to quantify. And that is not even considering the possibility of a new blockbuster product. Good things to come.

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Michael's musings. Leaner, stronger US.

The US GDP grew by an annual rate of 3.6%, in the third quarter which is higher than the expected 2.8% growth, so true to the current times where good news is bad news, the US market closed down.

I won't go on a rant about QE and the market, but will give Sasha's short response to the topic, "If you are worried about what the Fed are going to do, how short is your investment timeline?"

Part of the increase came from durable goods sales being up 7.7%, which points to greater confidence in the long term prospects of the economy, because generally durable goods are more expensive, and you can't but them if you don't have the cash and if you are worried about the future.

After tax profits were 11.1% of GDP, compared to the average of 6.1%. Down turns are good for economies because it is during those times that companies get rid of all their excesses and become stronger, nimbler and more efficient. This builds a solid foundation that companies can then launch off of when things turn around. Interestingly corporate tax for the third quarter was down $4.8 billion dollars, compared to the previous quarter, even though this is a very small figure in the grand scheme of things, it still a decrease. In the office we had a chat, and the decrease in taxes we think is down to companies starting to expand, where the added expenses come through ahead of increased revenues.

Another interesting piece of information from the data release was that of the increase in profits, $ 23.6 billion of it came from domestic operations and $16.7 billion came from companies international operations. For me, it points to a global recovery, which I think will gain more momentum in 2014. So good news in the long run is good news.

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Home again, home again, jiggety-jog. The one story is dominating the headlines today. Elevating our country on a global scale, because we managed to produce an amazing person. We are all part of that and should celebrate that. And to think that non farm payrolls are later today, it almost seems now like a non event.

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Sasha Naryshkine, Byron Lotter and Michael Treherne

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Clock ticking, sometimes broken

"Which presents this very difficult situation for central banks in emerging markets, whilst there is not a single central bank in the developed world who is looking to raise rates in the medium term, that option is very real (and has happened already) in the developing markets. India, Russia, Brazil and Indonesia have raised rates in the last 15 months, we cut rates here last July. It is going to be hard to justify elevated inflation rates and not raise rates, the Reserve Bank will have to maintain their independence. Regardless of whether you think that there is going to be an emerging market rout when the Fed starts reigning in their bond buying programs or not, perception sometimes is reality, and you are starting to see the signs. Ironically higher emerging market yields could lead to inflows over a longer period, as rates remain low."

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To market, to market to buy a fat pig. A fat pig? There are many people around the world who do not eat pork for both religious and health reasons, but there are many more who eat pigs than who do not. The Chinese for instance account for more than half of total pork production globally, with 475 million pigs that live in China, but more astonishingly is that the production is a massive 723 million pigs a year. 1.275 billion a year. Add to that over 1.034 billion cattle on earth, of which 329 million live in India. And of course, again for religious reasons are not eaten. Pork of course is almost always eaten, unless you do not count the Vietnamese pot bellied pigs (the miniature one of course), I want one as a pet! What do you feed them? And I suspect that they trash your garden, this is then not for me, secret, I love planting indigenous plants. Waterwise and learning that local is lekker.

Local is not leaker here, with regards to the currency, but the Brazilian Real has taken a pounding over the last few days too. Not so much the Indian Rupee, but that grouping, in amongst that lot, we are the worst performer this year. I cannot imagine that our public finances are in any better or worse shape than those countries, I think that not to be underestimated is the sentiment factor. And more importantly what the impact on imported inflation has been on all emerging markets. Deflation is currently being experienced in Greece, Switzerland, Portugal, Spain, Ireland and Sweden. But in India, Indonesia, Turkey, Russia, Brazil and South Africa, inflation is more than a little problem.

Which presents this very difficult situation for central banks in emerging markets, whilst there is not a single central bank in the developed world who is looking to raise rates in the medium term, that option is very real (and has happened already) in the developing markets. India, Russia, Brazil and Indonesia have raised rates in the last 15 months, we cut rates here last July. It is going to be hard to justify elevated inflation rates and not raise rates, the Reserve Bank will have to maintain their independence. Regardless of whether you think that there is going to be an emerging market rout when the Fed starts reigning in their bond buying programs or not, perception sometimes is reality, and you are starting to see the signs. Ironically higher emerging market yields could lead to inflows over a longer period, as rates remain low. Today the currency has sunk below 10.50 to the US Dollar, which means petrol price hikes are a distinct reality early in the new year. Ouch.

Just think about this a little. The Fed last changed interest rates on the 16th of December 2008. Astonishing! It will be 5 years on of no interest rate move, but MANY MANY programs and successes (in my mind at least) along the way. This is the longest period in decades that the Fed are going to stay put on rates, and there is a long time between now and then. First taper, and the jobs number tomorrow will be key for that as to when it is likely to happen and then of course the whole argument around rates, when will those tick higher. I am guessing that the two are independent of one another, right? Must be. So rates higher in emerging markets sooner than developed markets where it may take a long, long, time.

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You have heard the saying, a broken clock is right at least once a day. Or in the case of an Analog clock at least twice a day. So unless your prediction is way out of kilter, then I guess you are going to be right. Remember the other day when we discussed that you must read loads of stuff that you do not agree with. Why is this important? Well, when forming a view, you need all sides of the story to put forward your thesis as valid, from an investment point of view. And I guess that is why when the analyst community put forward their arguments, there are catalysts (positive or negative), key risks to your analysis and lastly opportunities for the company. As well as the obvious valuation one. And all of that unfortunately leads some of the smartest people in our industry to come to something that I can't find myself doing, predicting what the 12 month price target is, or should be.

Of course you can change your mind, should something change. And you should, if the prospects of the company either improves or they hit some hurdles, your former predictions are proved wrong. Predicting companies futures is hard, predicting anything in the future is hard. Very hard. And that is why I guess you have to pay attention to what is happening around you. But as much as you pay attention, consumer behaviour can change very quickly, Blackberry versus iOS and Android is one of the best recent examples. Samsung and Apple ate Blackberries for the next decades breakfast, prompting the question, if Blackberry was really going to be a force in the future why don't the cash flush corporate American companies buy it. The current market cap is 3.22 billion Dollars. Apple could retire that business in a heartbeat.

But I have diverged away from what I am trying to get across and that is the relentless perma-bears who always disseminate the same information that the market is always going to plunge, or is due for a correction. Always. The opposite of that is believing that the equities market is always going to go up. And tied into both of those arguments are time frames. I genuinely believe, every single fibre in me, that the best way to outperform all other asset classes is to find the best companies operating in a growth sector of the economy and then stick with them. Solid management. Remember that quality businesses attract quality employees. People want to work for businesses that are innovative and are likely to advance their careers, that part we can agree on. Quality attracts quality.

What sparked this was an article from Barry Ritholtz: No, David Rosenberg's Bullishness Was Not "Purchased for $3M", which was a rebuttal of the bear of all bears, ZeroHedge. The twitter handle (ZeroHedge) of what is thought to be an ex Wall Street trader of Bulgarian descent, Daniel Ivandjiiski, is permanently filled with doom and gloom and makes for sorry reading. Now the very little that I can find about Ivandjiiski is that he was barred from the securities industry for insider trading. Do you think that if the very industry that booted you out for illegal activities would take you seriously if you blogged under your real name.

Instead the fellow blogs and posts frantically under the pseudonym Tyler Durden, who is the character portrayed by Brad Pitt in the movie Fight Club. Fighting with the world is one thing, realising that there are another 7 billion people out there who are not on your side is another. The anonymous (almost) ZeroHedge account has a wide and deep reach, 180 thousand odd followers. What is the clincher for me is the funny (but needs an ages restriction, warning for bad language) post: Are You A Perma-Bear? Take The Zero Hedge Test, which if you answer e) all the time, you are likely to fall into that category that the world is always ending. No, it is not. Warning, not PC, that link is meant to be funny and not insulting to anyone, OK? Plus it wasn't written by me. If you were not interested before and didn't click, then I bet you did now. At the end of the day you should exercise your judgement, do not let your bad experiences get into the decision of making investments. Quality over everything.

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Michael's musings. Interesting SARB..

According to the SARB quarterly bulletin the South African economy only grew at 1.9% in real terms, compared to the same time last year. The third quarter had a very large negative impact on our growth for the year so far, with the motor sector strike getting a mention as a contributing factor.

The second quarter of the year had really good results and the third quarter undid most of the gains made, where the SARB made the following observation, "Excluding the contribution of the generally volatile primary sector, growth in the real gross domestic product decelerated from its most recent peak of 4 per cent in the second quarter of 2013 to a contraction of 0,1 per cent in the third quarter." Ouch "The adverse third-quarter growth outcome is largely due to a quarter-to-quarter contraction of 2,1 percent in the manufacturing sector"

The market saw red because of the growth number but, also I think because Gill Marcus is starting to hint at a rate increase in the near future, if inflation doesn't stay below the 6% mark. A big contributor to inflation is the weak currency because of all the products that we import, but more importantly the oil that we import, which then turns into the fuel used in transporting our goods around the country. Due to South Africa's current account deficit (we import more than we export), the currency only gets weaker, because we are selling more Rands to buy our imports.

On a side note, our current account deficit was made worse by the motor sector strike because the cars that weren't made, we couldn't export.

An increase in interest rates should strengthen our currency, because foreign money should flow in to take advantage of the higher interest rate. A higher interest rate should also 'cool' off the economy a bit (which is not what we need at the moment), because people will be borrowing less to buy things they don't need. The problem with 'cooling' off the economy is that the economy is very far from overheating, with retail sales only up 0.4% QoQ and 0.7% down MoM! Add to that, general lending to households is down 14,2% YoY, and household debt as a percentage of disposable income dropped 0.3 percentage points, so the consumer is not taking on loads of debt.

I'm glad that I don't have to make the interest rate decision. In days gone by where inflation was everything I think that interest rates would have been raised, but monetary policy is evolving to take into account growth rates. So even if inflation is above the 6% band, but not accelerating, I don't think that the SARB will raise rates. Good news for our economy is "Encouragingly, the construction sector is showing signs of recovery with a generally steady upward trend in the value of real building plans passed" . Construction is a leading indicator for the economy (just my drive from home to work I see numerous new buildings) and real disposable income is up 2.8% compared to the second quarter, which is good stats for the future. What to make of the quarterly bulletin? We are not growing as fast as we should be, but we are growing and the consumer is in a stronger position.

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Home again, home again, jiggety-jog. Markets locally are being buoyed by the much weaker Rand, but that has reversed a little, good thing that. US GDP here today, but that is the second look, and more importantly the preliminary corporate profits, those should be interesting.

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Sasha Naryshkine, Byron Lotter and Michael Treherne

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The swords are drawn, Adcock in the middle. Sort of.

"More importantly, how many shares in issue that side, and potentially this side? Lots. The company has annual revenues of 571 million Dollars last year, roughly 6 billion Rand, when compared to 5.445 billion Rand of Adcock. 2012 CFR profits were 80 million Dollars, around 850 million Rand, Adcock had a poor year and registered income of 587 million Rand. You are quickly starting to see why CFR cannot pull out a massive check-book and pay for all of Adcock. They cannot."

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To market, to market to buy a fat pig. What the hell? The third quarter SARB bulletin was released yesterday -> Quarterly Bulletin December 2013. And a few people were spooked, the currency got slammed. We are off only 30 cents over the last two weeks, so I guess that is not all that bad. But ugly signs, admittedly in a quarter that was messed up by labour ructions.

But locally the market sold off harder than the rest of the globe, financials and banks were the hardest hit, as were the retailers. Yech. The only thing that worries me is that the bond vigilantes have deeper pockets that are quicker than our wagging stick could possibly hit. If someone decides that we are "not good for it", bond yields could spike in a hurry. But that is always a concern, I would think that emerging market bond funds have nimble enough feet, but more importantly pain tolerance and understanding of the country.

No two markets are the same anywhere in the world, Byron has already told us some juicy stories this morning about South America and getting off buses in the middle of the night and being searched by the military. Nope. That does not happen here. But at the same time we are still not in the top 40 countries when it comes to global reading and maths standards. China tops both lists for 15 year olds, on what I presume is a standard measure. If you want to know what I am talking about, check this Economist graphic: Education performance of 15 year olds. Wow. How is your 15 year old doing with regards to their math or reading? We all like to think that our respective children are geniuses.

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Adcock, CFR and Bidvest. Adcock obviously are scrambling here to indicate to their shareholders, which include the PIC and Bidvest (26 odd percent between them) that the CFR deal is best. The Adcock release from yesterday, this part is probably the most important:

the cash offer price of ZAR70.00 per Ordinary Share is below the current value of the proposed scheme consideration offered by CFR Pharmaceuticals S.A. ("CFR") (approximately ZAR75.00 per Ordinary Share based on the volume weighted average price of CFR shares for 30 trading days up to and including 2 December 2013, excluding the potential value of synergies that could arise from the combination of Adcock Ingram and CFR);

OK, we need a refresher. The offer to Adcock shareholders from CFR had the support of a whole host of parties (around 45 percent), including Sanlam Asset Management, Visio Capital, ABSA asset management, Stanlib, Afena Capital and 36One Asset Management, who collectively (Back in the middle of November) owned 29.3 percent of the stock back then. This process of courting Adcock has been an 8 month process (nine now) by CFR and I am pretty sure that they have invested a lot of time, not to mention money in trying to get this deal done.

The specifics of the original CFR are as follows:

A minimum of 51% and potentially up to a maximum of 64.3% of the R12,6bn total consideration will be settled in cash, with the remainder in new CFR shares.

So you will possibly get somewhere around 55 percent cash and then the balance will be new CFR shares, rough price 73.51 Rand a share. The most important question is, what do you get when you own CFR stock? The company trades at a fairly significant premium to the rest of the that Chilean market. 1.3328 times, suggests the Bloomberg page. The last annual report of CFR suggests that the Weinstein family owns 73.2 percent of the company. So what liquidity will there be for shareholders here? More importantly, how many shares in issue that side, and potentially this side? Lots. The company has annual revenues of 571 million Dollars last year, roughly 6 billion Rand, when compared to 5.445 billion Rand of Adcock. 2012 CFR profits were 80 million Dollars, around 850 million Rand, Adcock had a poor year and registered income of 587 million Rand. You are quickly starting to see why CFR cannot pull out a massive check-book and pay for all of Adcock. They cannot.

Bidvest, well they may be able to do that, their market cap of 82.454 billion Rand, profits of 4.772 billion Rand make the fund raising and the buying much easier. So why the lower stake from Bidvest? I still think that the Bidvest option is better, you get cash and not equity of an entity that is tightly held (little liquidity) and more expensive scrip than you would like. Cross border, cross cultural relationships, a local board that seemingly is not well regarded by the market, nothing really changes that much. Perhaps the Bidvest option with a newer and fresher board and management team would be a far better for shareholders. The tension is building here.

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Byron beats the streets. He is back and is giving his views on the Americas!

Yesterday I got back from a 3 month trip to Central and South America. When asked how the trip was I have three possible answers. The 2 second version, 'Amazing!' The three minute version which goes through the Itinerary and the 5 hour version which touches on some (just some) of the details. Luckily for you I will just explain the itinerary and because this is a financial piece and not a travel blog, I will give you my opinion about the future of that side of the world.

Itinerary

We started with 4 days in New York which was an incredible experience and a great testimony to what man can achieve with a bit of team work. And what brings these people together? Dare I say it but incentives created by capitalism. Then we flew down to Mexico where we spent a week on the Caribbean. From there we bussed through Central America starting in Belize to Honduras to Nicaragua and lastly Costa Rica. Jungles, mountains, volcanoes and of course beaches were our playgrounds for the month.

From there we took a very expensive flight to Columbia which is not as dangerous as everyone says and a must see destination. From Columbia we entered Peru through the Amazon jungle, headed through Peru via Machu Picchu and bussed it into Bolivia. Bolivia is all about mountains and harsh landscapes. After a week exploring we went through the salt flats into the Chilean desert and flew down to Santiago. It was great to be back in a first world city.

After a few days in Santiago we bussed across the Andes to Mendoza in Argentina where we drank wine and ate steak for breakfast, lunch and supper. We cut across the country on a bus where we spent a week in Buenos Aires and then went across on a ferry to Uruguay. After a few days in a little surfing village we headed to Southern Brazil where we caught another very expensive flight to Rio de Janeiro, our final destination before coming home.

Of course all of the 13 countries we visited have their own separate issues but generally there were a couple of common trends which I picked up. Firstly, there is still very much a market place type retail environment. Foods were sold in a very informal manner, unrefrigerated and not always fresh. As you can imagine, their fresh food supply was in abundance with plenty of rain in the region but I can imagine a lot goes to waste. When we did find a shopping mall or a supermarket they were absolutely packed and the queues were almost unbearable, especially in the supermarkets. We are very lucky here in South Africa with our first class retailers, you have no idea what a difference it makes and we certainly take it for granted. Clothes were also very expensive. It was either handmade stuff in the markets or really expensive branded goods. No cheap, value for money options like Mr Price.

The buses were decent and always in good supply. That was our main source of transport. South Africa defiantly needs to up their game with public transport. I believe that the Rea Vaya here in Joburg is finally starting to function, we'll have to wait and see about that.

Other than Brazil, everything was done with cash. If you pay with a card they can charge you up to 10% extra which they blame on Visa. Of course this is not true and they are trying to avoid taxes. I suppose it does benefit both the retailer and the consumer because the consumer avoids paying VAT. The government and indirectly the collective lose out on huge revenues of course. I would suspect this will change as governments improve tax collection and retailers actually realise that having a card service is beneficial. We couldn't buy many an item because we didn't have the cash on us. Later on that turned out to be a blessing. In the big cities cards were generally accepted. I'm sure that trend is fairly new.

Politically the locals have exactly the same complaints that we have here. Corrupt governments, dirty police, not enough support from the state and bad services. As with South Africa there are also huge expectations from the government and everyone feels entitled. Many times I felt like telling people to get off their bums and do it themselves. Especially when it came to complaining first world travellers. Often I did. The age of entitlement is a global issue. A big one.

All in all it certainly made me realise that we have a very good thing going on here in South Africa. The world class private companies (retailers, banks, communication) make our lives so much easier. We take that for granted. Other than Bolivia every other country was more expensive than South Africa. The services were so bad in Bolivia, I can see why it is cheap. In fact not even McDonalds could survive in Bolivia (the only one that opened there lost money and was closed).

Our roads are good, our flights are cheap and our tourism options are just as good if not better. Yes we have issues but so does everyone else including Europeans and Americans. It's all relative I guess. What I do know though is that the grass is certainly not greener on the other side. It's good to be home.

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Home again, home again, jiggety-jog. Nice to all have everyone back in one place. Byron has a wild beard. Hopefully we can get a picture tomorrow. For now markets are higher. Gold stocks are trading at levels I have not seen in years, more than a decade actually. How sad.

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Sasha Naryshkine, Byron Lotter and Michael Treherne

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Joffe batting hard, not in pink

"In an interview on CNBC Africa with Alec Hogg, at lunchtime, Brian Joffe explained how the deal of Bidvest was far better than the CFR deal, because remember that their offer (the Chileans) is far higher than this. Or WAS higher, but because it is part shares and the CFR shares are trading lower, this deal is better. But because CFR is small, they are levering up here. Shareholders existing in Adcock could be benefitting more, said Joffe. Believe it or not, Bidvest and the PIC have not chatted yet, but will probably vote in the same direction."

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To market, to market to buy a fat pig. Stocks sank in late trade in New York Monday after having flirted with all time highs earlier in the session. I am starting to see the debate that a better number on Friday, in terms of non-farm payrolls could actually be negative for market sentiment. Big number = Fed taper early, if you wanted the very simple version of how/why it all ties together. Do you need to worry about the Fed taper? I think that we have covered this many times and the short answer is no, that you must not do anything with regards to the Fed making a decisions around their bond buying program.

If the Fed decide to wind in their necks it is because they view the economy as better, and not in need of assistance and support of having ultra-low interest rates and mortgage rates. A better economy should translate into higher corporate profitability, most of the serious cost cutting has already been done. Even the US Postal service went from a 5.2 billion Dollar loss last year for the same quarter to an only 740 million dollar loss for Q3. Post? Really, we will deal with the idea of the local postal services with regards to the tolls on our local byways. So I think that the Santa Claus rally does in large part depend on this, but it is not everything. Next year is only four weeks and a few hours away. But we will see.

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Why would Bidvest want to buy Adcock? Or even a portion thereof? The company segments their business into four distinct operations, South Africa, Namibia, Foodservice and Bidvest corporate. The last one is where I presume the Adcock stake would appear and we discussed briefly in this office that perhaps there is a change of direction here. The business of automobiles, cables and associated services, banking and insurance, freight and storage services, manufacturing and trading businesses, office furniture and equipment, hospitality industry services and equipment, outsourced corporate services, travel management and the big foodservice businesses all tie up into a large diversified business that is centrally managed.

We feel close to this company, so much so that we can see their fire exit from where we sit. Michael saw Brian Joffe getting dropped off outside here in his squash (or tennis) kit, he was thinking hard and exercising at the same time when wanting to make the decision of steering his fellow shareholders in this direction. And in terms of the offer made to Adcock shareholders, they are alongside Community Investment Holdings (CIH) when making this offer to acquire 34.5 percent of the Adcock shares in issue, outside of the treasury shares. CIH themselves have various healthcare investments, ranging from Public-private partnerships with government hospitals and pharma investments, which include Sonke pharmaceuticals, which is a JV between Ranbaxy South Africa and CIH.

And Ranbaxy, if you needed reminding, is a 191 billion Indian Rupee business, 31.55 billion Rand is the market cap of Ranbaxy. So there is an angle of sorts here, a bigger foot print for Ranbaxy here in South Africa with CIH being the same shareholder in both. So I can see something here, but I am not even sure how big Africa is to Ranbaxy for the time being, their annual report suggests that this remains a key market for them. Them being Ranbaxy. Sales in South Africa in 2012 for Ranbaxy was 50 million Dollars, half a billion Rand. Not really a huge participant, but there and there abouts.

But in an interview on CNBC Africa with Alec Hogg, at lunchtime, Brian Joffe explained how the deal of Bidvest was far better than the CFR deal, because remember that their offer (the Chileans) is far higher than this. Or WAS higher, but because it is part shares and the CFR shares are trading lower, this deal is better. But because CFR is small, they are leveraging up here. Shareholders existing in Adcock could be benefitting more, said Joffe. Believe it or not, Bidvest and the PIC have not chatted yet, but will probably vote in the same direction. This is interesting, not because we are Adcock shareholders on behalf of our clients, but because we are Bidvest shareholders. Obviously shelling out a lot of cash (4 billion Rand) for an under performing asset that clearly needs a management shakeup.

Joffe points to the successes of Aspen and the underperformance of Adcock, relative. Over five years Adcock (with this deal related activity) has doubled in price, Aspen is up 690 percent. The real divergence comes in August 2011, until then the two prices tracked each other on a relative basis, from the Adcock unbundling by Tiger Brands. Perhaps the comparison is too simple, Aspen is not Adcock, and Adcock is not Aspen. Borrowing of course a line from Spanish PM Mariano Rajoy who said, Spain is not Uganda. I wonder if this has lit a fire under the Adcock shareholders bottoms, the PIC can vote around 18 percent, Bidvest have been buyers and have added yesterday to own around 5 percent. A little shakeup is needed, to awake a slumbering (almost) giant.

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I spoke to a lawyer friend of mine yesterday and he had some powerful observations about the etoll/SANRAL systems and how they are going to work, should people NOT pay. I tried to check some of the information that he gave me, not all is able to be verified, I did call the editor of a South African business news magazine to fact check and he seemed to think from his own checking and our numbers pretty much matched each other. Firstly, let me tell you what prompted this. I bought my etag on the 13th of January 2012, yes, that long ago. I believe in the pay per use principal, why should someone else subsidise my trip? And if you want world class infrastructure you have to pay for it. I do believe that. I also pay traffic fines, I personally have only been responsible for one in my life. I am very, very boring in that regard, if the speed limit is x, then normally I am a needle below that. Boring. True. And my friends (yes, I have some) used to call me Miss Daisy.

But back to a few observations that I made this morning, personally. I leave early and get here at sparrows *bleep out* in order to get ahead. The early bird catches the worm. I am not a late night owl, in a previous life I must have been a farmer. But Howard, our driver/admin assistant was with me and I asked him to count the number of vehicles between Rivonia and the Buccleuch Interchange (where there is a gantry going up the hill). And the number he came to? 2. Yes, two. Out of 75 to 100 vehicles around us, that included trucks and delivery vans, we counted a whole two. I mean Howie counted two, my eyes were on the road. So if you think about it, all those people without etags will need to settle their accounts when they get a registered letter in the post.

Aha, so you need to get a registered letter in the post. How much does that cost, and who pays for that? First important question. I was told (by my lawyer friend) that the cost of a registered letter, to send a notification of travel under the gantry is ten Rand. Do the math quickly and the number balloons, sending thousands, if not hundreds of thousands of registered mails each and every day. It is going to be a very costly exercise. And again, who pays? SANRAL? It seems like a huge cost for a 3 to 7 ZAR gantry, what is the point of sending someone a 10 ZAR registered letter (if indeed that is the cost). Perhaps someone could find out what the cost is, the post office has it here it their business customers segment.

I then went to the Toll calc website segment and came up with this calculation, for my trip:

Total toll before discount: R 9.98
min e-tag Discount: R4.82 (48.28 %)

Total toll after discounts: R5.16

So if the cost of sending a letter to me for each and every pass is about the same as the actual trip (without the discount applied) then surely it is a waste of effort on all parts, from the post office all the way through to your desk. And my editor friend told me that not only are the post office very upset with this, but so are the JMPD with regards to administering the system. So much so that I am told that SANRAL might even have their own private cops with regards to enforcement. How are they going to know whether you paid, or did not pay? Or is it as simple as checking the windscreen of your motor vehicle? If my observations are right, then SANRAL will need thousands of vehicles on the road, and that will be a crazy cost.

My lawyer friend tells me that the court in Randburg can only handle 70 civil cases a day, if even 1 percent of the population decide to ignore the bills and have to go to court, it is 30 thousand odd people. 428 court days. Wow. And that is for one percent. The real clincher is that my lawyer friend told me that the payment rate for traffic fines is only 6 percent, perhaps you can verify that, a whole 94 percent of people file it in drawer number 13. The bin. If the culture exists of NOT paying fines, why would that suddenly change for people paying SANRAL bills?

So whilst I am getting another etag today (I apologise to you in advance) and remain compliant, wanting a cheaper rate for travel, I am convinced that many more people are not compliant and will not, as per my simple observations, buy an etag. I shall see my first piece of mail from SANRAL in the post and let you know when I have it. It would have been far easier to slap some cents or even tens of cents on the petrol price in Gauteng to collect the money to pay for the roads. I thought that was supposed to happen anyhow. I am neither for or against the tolls, believing that the people choose the folks to be in charge and those in charge set in motion economic decisions. That is the way that life and democracy works. But surely the collection at source, where you CANNOT ask the petrol attendant to not charge the 10 cents or so a litre for the local freeway upgrades and upkeep, that sounds easier.

The sinister part of me (not a big part, I can assure you) niggles with something that I don't want to think, someone somewhere has something to lose if this is not implemented in this way. It would be far better for our credit ratings of government agencies and by extension the rest of the country, inflation rates and purchasing power if our debts were settled timeously. The next time that creditors are approached for funding infrastructure projects of this scale they are going to demand more because the risks have risen. Surely the easiest way to collect is at the pump, there is no skirting around that, and the culture of road users can remain to be changed for another day, seeing as we can't get that part right either! Let me know what you think.

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Michael's musings. FOMO

Do you suffer from FOMO when investing? Fomo stands for the Fear Of Missing Out, and is being increasingly used in our modern always moving, always connected society. When it comes to investing FOMO can lead to over trading and holding stocks that deep down you know you shouldn't own. FOMO in investing is where you own a stock because everyone else owns it, because you are sure that next year this time the stock price will be higher than today or because it is the next big "thing".

There are many assets being created on a daily basis and as such there is always going to be opportunities, so if you miss the current opportunity there will be another one down the line. Having said that, not all opportunities are equal, I don't think that we will see another buying opportunity like the last 4 years in a hurry.

Here are some cool stats of the current assets around the world, if you didn't FOMO before you will definitely have FOMO now. According to the World Federation of Exchanges, who have 57 members, their members as of the end of October had a total of $62.6 trillion dollars in market cap, where there are 45 452 companies in total listed on those exchanges. According to Wikipedia there are 142 exchanges in the world, so there are even more equity assets around the world than the 45 452 listed companies on the member exchanges. The JSE is ranked 18th in the world according to market cap, with the NYSE having a total market cap of $14 trillion and second is the Nasdaq with a total market cap of $4.5 trillion. The JSE with a market cap of about $900 billion pales in comparison to the US exchanges, where just 2 of their 12 exchanges have a total market cap of 16 times ours.

Where I am going with all these facts is that there are always opportunities that you will be missing out on, because over and above all of the listed equities there are also OTC shares, SSF, ETF, CFD's, property, gold, silver, oil, pork bellies, classic cars, wine and many more possible places to put your money to grow. In the grand scheme of things, I think picking an asset class that you understand and then sticking with to it, is the way to get the best and most consistent returns. For equity investing, that would translate to owning quality, and not worrying about other shares that will also be going up with the market. As the saying goes, "A rising market, floats all the boats".

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Home again, home again, jiggety-jog. Markets have sold off locally, we had a horrible current account deficit read, 6.8 percent of GDP. Yech. That has sent stocks of a local flavour down, the selling is serious here today! This is also very backward looking data, for the third quarter of this current financial year. This is when the value of the goods and services that you IMPORT is far greater than the goods and services that you EXPORT. It is bad for inflation and equally very bad for the current rate cycle, rates will have to probably tick up sooner than anticipated. We will see. Perhaps the current quarter will be far better than the prior two quarters.

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Sasha Naryshkine and Michael Treherne

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