Money with a dash of Funny: January 2014

Friday 31 January 2014

Google it

"Television still attracts an enormous amount of advertising spend. But that experience is changing already. Think of here locally where you can choose to watch your programs when you want to. Without the adverts, you get to watch your favourite program without the interruptions, the only "bad" thing is that you do not get to watch it in the same time slot. The internet is going in the opposite direction however, more and more people are advertising online."

To market, to market to buy a fat pig. US GDP met expectations, earnings season so far has been OK, for some very good actually, I saw a swaps spread graph indicate that is at a two decade low (see here -> The taper is here to stay), but still, anxiety exists over emerging markets. And in particular the fragile five, of which we are a part, unfortunately. The term was coined by a Morgan Stanley analyst last August.

It does paint what looks like a far worse picture than what meets the eye, but if you need some background, check this NY Times article out: 'Fragile Five' Is the Latest Club of Emerging Nations in Turmoil. Worries about capital inflows slowing (it has already) and as such could suffer from fickle short term money. If foreigners decide that they no longer want to hold these stocks. Because somehow, somewhere, people in emerging markets will somehow stop consuming and working their way through the ranks.

Byron said it like it was, when someone asked him if the rate hike is going to have a big impact on consumer sentiment and shopping habits. He said snarkily that when people in Woolies heard of the rate hike they dropped everything and walked out. Thats it they all said, I am not buying food and clothes again. If you see in the New York Times story, the Jim O’Neill quote in that he still thinks emerging markets (the BRIC countries) are still the best investments. And he says that he gets irritated having to defend his thesis.

I suspect that the emergence of all of these nations will continue to mean that consumers globally long for better "stuff". Better packaged foods, better electronics, better living conditions, better transportation methods. There are examples all around us. So in so much that there are problems with regards to huge holes in our public accounts, living conditions for millions of South Africans are better. And that should lead to quicker economic growth, probably requiring some serious policy rethink. I wonder how many people have actually read the NDP from start to finish? If something is long and complicated, how is it easily implemented? Either way, hold on, keep calm, carry on.

Google reported numbers post the market last evening, these were for the full year and fourth quarter. Cash on hand, and this always amazes me, is 58.72 billion Dollars. As a percentage of their market cap it is around 15 percent. Nowhere near as high as the hardware manufacturers, like Apple and Cisco and the like, but not too dissimilar to Facebook, as you will recall yesterday. Whilst you could classify Google as a software company, they posses an enormous amount of hardware and patents for hardware. When did Google ever fall over and you were not able to search the internet? Never. Or perhaps a long time ago.

Google still focus on their Ten things we know to be true. It is really an awesome bunch of principles and simple enough for many small businesses to adopt. It is true that it is best to do one thing really, really well. Except that Google have many different businesses, but only one business that makes them a lot of money. And that of course is advertising. The future of advertising changed as we know it, whilst the three brains responsible for the formation of the company (Larry Page, Sergey Brin and to a lesser extent Eric Schmidt, more guidance that formation I guess) were intent on changing the access to information.

Before we dive head first into the numbers, Wiki has an astonishing fact about Google:

"Early in 1999, while graduate students, Brin and Page decided that the search engine they had developed was taking up too much time and distracting their academic pursuits. They went to Excite CEO George Bell and offered to sell it to him for $1 million. He rejected the offer and later criticized Vinod Khosla, one of Excite's venture capitalists, after he negotiated Brin and Page down to $750,000."

Ha-ha!!! I am not sure that Excite would have turned the same company into the success that it is today, but still, an interesting little factoid about the company. The company of course next to their main business has many irons on the fire of innovation, the much hyped Google Glass product, with quirky uses and other useful applications is not yet mainstream. The driverless car. Google wallet. The Nexus 7 tablet. Their Google fiber project of high speed broadband. The translate application that threatens to render language schools irrelevant. Recently the company bought Next, remember the piece from Byron a couple of weeks back? -> Google makes a big (little) acquisition.

Google revenues for their entire business, which included the loss making Motorola Mobile segment, grew 19 percent year on year to 59.825 billion Dollars. Net income grew 20 percent to 12.920 billion Dollars. On a share basis, basic EPS registered 38.82 Dollars for the year. Dividends, well, you know well that they do not pay any at all. Google, at a share price indicated at 1182 at the open (that would be a record high) is rated at 30 times earnings. Well, I suppose that may be on the expensive side, but the business is growing at 20 percent per annum. The trick is being able to attract more people from the traditional advertising (let us call it old) platforms to the new ones, the online ones.

Television still attracts an enormous amount of advertising spend. But that experience is changing already. Think of here locally where you can choose to watch your programs when you want to. Without the adverts, you get to watch your favourite program without the interruptions, the only "bad" thing is that you do not get to watch it in the same time slot. The internet is going in the opposite direction however, more and more people are advertising online.

The company has no debt. A big cash pile and the ability to make smaller acquisitions. They continue to keep margins at the same sort of levels whilst growing revenues, doubling roughly every 40 months. You are paying up a lot when you buy this business, but the company is a quality one. No. They are almost like the General Electric of last century, transformative businesses letting their customers determine the future direction. More than quality, iconic really.

Paul made an interesting point though, you must have read many articles of how Apple is finished or Facebook is finished, as absurd as it sounds. But you never read a story of how Google is going out of business, because their core product is synonymous with the internet. YouTube is an extension of that too. My kids for one know only Google and YouTube as a way to lookup "stuff". It is their library. And until that changes, it will very much stay the same. It will continue to grow and with very little competition of size and scale, the company dominates its core product. You do not say Bing it or Yahoo! it. At least not here.

The leadership issues are not cause for concern, those three (Page, Brin and Schmidt) committed to the business until 2024. Their vision still remains and the company has certainly attracted serious talent, who are in a sense given free reign to innovate and operate. This is a growth company printing growth in revenues, but has a multiple to boot. If you are patient with price action, wait for them to settle post this flurry over the next few days and then buy. And then own it. For a long, long time.

Home again, home again, jiggety-jog. Markets are mixed here at the open, but we are marginally higher this morning. I guess that with the emerging market rout it is not surprising that banks (down 10%), retailers (down 11%) and food (down 11.3%) companies are the ones that have borne the brunt of the selling. Industrials too. The overall market is down two percent year to date. The way that everyone has had their knickers in a knot, you would have sworn we were down the proverbial creek with the Victoria Falls roaring downstream. No. We are not there.

Sasha Naryshkine, Byron Lotter and Michael Treherne Email us Follow Sasha, Byron and Michael on Twitter 011 022 5440

Thursday 30 January 2014

Ben sounds off

"The speaker circuit awaits no doubt, as Alan Greenspan found out, it is very lucrative of course. According to a Fox news report that I read, from when Greenspan retired, he could command nearly his entire annual salary for one appearance. Amazing. So there is the reason why he takes the salary cut, the cynic in you would say. I for one am grateful that he managed with seemingly a level head to steer us through this tough period of financial history."

To market, to market to buy a fat pig. Indians do it, Turks do it, even people from Mzansi do it! No, I am not talking about falling in love but rather raising rates in an attempt to ward off further inflationary pressures. Expectations (and we were certainly part of those expectations) were for rates to be kept on hold, but the governor to wave a big stick. I suppose in a global sea the currents and winds are far greater than the ship can sometimes handle. But I am not going to get dramatic about it. The ECB tried to fight the bond vigilantes, who were apparently attacking the sovereign bonds of Ireland, Portugal, Spain and Italy and of course Greece. And did they win? Not really, in the end the giant bazooka they brought out was enough to ward them off, but we do not posses that type of ammunition. We have found this out before.

But before we go into the projections and outlook, let us have a look at one thing specifically, the name Mzansi. Or Mzantsi. Heck, the word Mzansi on Wikipedia forwards to South Africa. uMzantsi is South, there you go. So the people of the South (sorry Dali Tambo) are going to have to expect to pay a lot more for their fuel.

The cost of a barrel of oil in Rand since the lows of 1998 (lows for the oil price) and where we are now is going to hurt you and I, but mostly the poor. In 1998 the nominal price of a barrel of oil was somewhere around 11 Dollars a barrel. Right now, we are around 97.50 Dollars a barrel. The Rand to the US Dollar, for much of 1998 was above 6 Rand to the US Dollar, let us call it around 6.15. So in Rands, the currency that we use each and every day, we would have paid an average of 68 Rand for a barrel of oil. And now? Nearly 1100 Rands for a barrel of oil. A 15 fold increase for consumers over a 16 year period. Wow. Of course we are not alone in this boat.

Everyone has to contend with higher energy prices, you could argue as a result of higher economic growth and the emergence of newer consumers in developing economies. Copper you can recycle. Not easily, but you can. Refined oil turned into petroleum products blast out through your exhaust and disappear forever. The cost for the next barrel naturally has to rise, because there is one less barrel out there. And there is no more extinction of the dinosaurs and jurassic forests happening any time soon. Alternative energy is definitely coming to the fore, and will form a much larger of the mix over the next 15 years.

More on the interest rate decision and the MPC yesterday and I guess the surprise rate hike, read the full statement: STATEMENT OF THE MONETARY POLICY COMMITTEE. I guess what we need to know is that the MPC (not that they know everything) have lowered their economic growth target and upped their inflation outlook. That is like a punch in both the guts and kidneys at the same time. Many mops to flop over the coming months, the petrol price increases will filter through to the broader economy, everything will be more expensive. BUT, in so much that there is an enormous amount of angst now over emerging markets, that can vanish and inflationary pressures could subside in around 18 months. Hopefully.

So. Ben Bernanke deliberated at the head of the Fed (chairman) for the last time, as of the next meeting the diminutive in stature but giant in the world of central banking, Janet Yellen will take the helm of the most powerful central bank in the world. Another 10 billion Dollars have been slashed off the monthly bond purchases, the Fed are committed to this course and I for one am very glad that they are maintaining this downward trajectory. In their view (and they are not always right either) the US economy is making enough headway in all of the key and critical places, employment, inflation and economic activity.

Astonishing to think that Ben Bernanke is gone as Fed chair and that Janet Yellen (7 years Bernanke’s senior in terms of age) will now sit at the helm of the Central Bank. I for one think that the legacy of Ben Bernanke will only be determined over the next three to four years. The ship was steered through one of the worst storms experienced and how it comes out the other side as the clouds seemingly lift will determine whether the extraordinary policy response was warranted. I suspect that there is no better person than Janet Yellen to deal with the unwinding of the huge balance sheet (the FOMC need not do anything immediately) and setting the course for the next round of interest rate hikes that no doubt will coincide with higher levels of growth. Good luck and good bye, but not for ever of course. Heck, Bernanke was named as Time person of the year in 2009. Perhaps that accolade is not the same as it would have been in 1979, when people actually bought magazines.

So what now? Well, according to his Fed profile he is still a member of the FOMC until January 31 2020, that sounds like another six more years at the Fed. Or as Paul said, normal practice is that Fed Chair steps down from the FOMC when they retire. So I guess the Fed website will have to be updated in the next few days if that is indeed the case. The speaker circuit awaits no doubt, as Alan Greenspan found out, it is very lucrative of course. According to a Fox news report that I read, from when Greenspan retired, he could command nearly his entire annual salary for one appearance. Amazing. So there is the reason why he takes the salary cut, the cynic in you would say. I for one am grateful that he managed with seemingly a level head to steer us through this tough period of financial history.

Facebook. I remember that they were not going to be able to monetise mobile. Now it is more than half of their revenue. They were running out of teenage users. Who cares, who pays their bills? Their parents. And some old fellow I remember who covered Facebook made a great point on the box once, he said that his teenage kids see their friends every day, he hardly ever physically sees his mates from college and school, except for Facebook. For all I can, Facebook could have one fifth of the users and double the revenue. But of course they need to monetise their user base. And guess what, they are!! The business turns ten next week. Yes. Only ten, or ten already, depending on which way you look at it.

The Zuck said on the conference call last evening, when talking about the ten years of the company:

But what's ahead of us is even more exciting. Many of the successes of the past ten years have simply been steps on the path to achieving our long term vision of connecting everyone and improving the world through sharing. Over the coming months and years, you'll see us continue focusing on many of the same themes, but now with greater scale, ambition and resources.

OK, so the full year results of Facebook were released after the market closed last evening, you must have gathered that already. Revenue for the year grew to 7.9 billion Dollars, operating profit grew to 2.8 billion Dollars. Daily Facebook users grew by 139 million last year, to 757 million. Total users now stands at 1.23 billion. Wow. That was on average monthly growth of 172 million. In the month of December the number of users that were daily users was 62 percent. Daily mobile users outnumbers desktop users by 200 million. Wow. And ad revenue growth rates are expanding at a breakneck speed. Accelerating!

The stock, which is up like crazy pre the market, at around 60 Dollars a share is still expensive, make no mistake. They have ten billion Dollars worth of cash on hand, a lot less as a percentage when compared to the old tech companies. The market cap is a staggering 130 billion Dollars, closing in on one and a half a trillion Rand today. Yes, as the company opens, at around 60 Dollars, they will be worth that amount.

The main question, as ever, is Facebook still a buy at these levels? Analyst expectations are for the company to make 1 Dollar of earnings this year, you are paying 60 years worth of earnings to buy the company. But there are really quick growth rates, both top and bottom line, so perhaps many will be forgiven for thinking that they are paying too much. But this business could be almost anything, including an online retail platform dream, adverts everywhere selling stuff you actually want. We continue to hold, they are not for the faint hearted, volatility is likely to persist as studies who x or y or z scenario. The company continues to what what they know best, to connect friends and family, and to monetise their platform.

Byron's beats the home improvement streets

As you may know, having access to the New York Stock Exchange gives you the ability to invest in many exciting companies around the world. One of those companies which we have initiated coverage of over the last couple of months is the Italian sunglass manufacturer, Luxottica.

First let's look at what the company does.

"Luxottica produces and distributes sun and prescription eyewear of high technical and stylistic quality to improve the well-being and satisfaction of its customers and at the same time create value for employees and the communities in which the Group operates."

Ok that sounds interesting, but this will blow your mind, here is the list of their brands. (These are just the ones I know)

Arnette, Brooks Brothers, Burberry, BVLGARI, Chanel, Coach, DKNY, Dolce & Gabbana, Donna Karan, Emporio Armani, Giorgio Armani, Oakley, Paul Smith, Polo Ralph Lauren, Prada, Ray-Ban, Tiffany, Versace and Vogue. So basically you think sunglasses, think Luxottica.

That is their branded goods portfolio which they sell through both wholesale and retail (heard of Sunglass hut?). But 50% of this business falls under prescription glasses. So it actually covers two of our favourite themes, Luxury retail and healthcare. There are also lots of synergies where you can mix the luxury brands with the prescription glasses. Even want to look cool.

That prescription business brings a whole new dynamic. They recently did a study on the US market and found the following information. The potential is huge.

The potential on a global basis is even bigger (see below). You can just imagine how many people in developing markets are walking around with terrible eyesight.

There are concerns about eyesight operations and contact lenses creating extra competition but in my opinion these people will still be branded sunglass clients more so than most.

Their financials are strong. In the 3rd quarter of 2013 they managed grow sales by 7.4%. This consisted of 3% growth from the US, 11% from Europe and 20% growth was seen in developing markets. With gross profit margins of 66.7% and net income margins of 9.2% the company made 522 million Euro for the quarter. However with a forward earnings ratio of 23 it is certainly not cheap.

One concern is the ownership structure. 61.35% of the business is still owned by founder and second richest man in Italy, Leonardo Del Vecchio. His family is complicated with 3 wives (not at the same time) and 6 children and that can always pose a risk. His interests and the family's are certainly aligned with shareholders though. Hopefully they will start selling shares in the future.

Having had a long look at this one and weighing the pros and cons, I find it a compelling investment according to the Vestact criteria. Luxury retail, sports apparel and healthcare are all covered here and its position in emerging markets is also very exciting, both for sunglasses and prescription eyewear. Let us know if you would like to add these to your portfolio.

Home again, home again, jiggety-jog. Markets are lower, but seemingly recovering a little. At the front and centre of our screens are the speculators targeting emerging market currencies, so until their agenda changes, we are stuck with this. But I suspect it shall not be too long before growth will trump this, for the time being the Turks are in the headlights and the vigilantes are trying to run the bunnies down.

Sasha Naryshkine, Byron Lotter and Michael Treherne Email us Follow Sasha, Byron and Michael on Twitter 011 022 5440

Monday 27 January 2014

EM's dissed

"Whilst I think this is always cause for concern, when everyone speaks with one voice, I also think that it is an opportunity ticking. It is never *nice* to see the value of ones investments decrease. But what it does do is present opportunities. Opportunities to buy stocks. Opportunities to add to the same investments at lower prices. When I use this strange line (next sentence) on people they normally look at me funny, or you can hear in their voice on the phone that they are bemused. Here goes: If you are adding regularly to your portfolio and have no need to draw down on the capital amount, you should hope for share prices to under perform whilst you are in this mode."

To market, to market to buy a fat pig. OK, Friday was one of those days when the unanimity was that emerging markets were all under pressure as a result of slowing growth and strained fiscal positions. We were the fourth worst currency inside of the majors last week, from a sell off relative to the US Dollar. So I am not too sure that the AMCU strike on the platinum belt of South Africa led to the sell off of the Argentinean Peso, or Turkish Lira or Brazilian Real, but the Rand suffered heavily at the hands of those willing to take that view anyhow. I am not saying that the two are not connected, quite clearly they are, but be careful when making that broad sweeping assumption. See this chart from the BusinessInsider: The Emerging Market Currency Bloodbath. The only thing that the chart points out is that the selling was broad based.

The four reasons given in that article, with the graph, is that Chinese weakness (their PMI number), the Argentinean devaluation (which ironically is better in the long run), Ukrainian violence and the highlighting of their crisis and lastly The Turkish central bank not raising rates, as well as all sorts of allegations against the Prime Minister there. Corruption and the like. The same could be said for Argentina and Ukraine. Struggles of the middle class against their respective politicians, unfortunately you cannot tell people to go to the polls and decide in two years time. And do not forget the violence in Bangkok either, Thailand seems to unfortunately see these protests far too often.

How long does this continue? Who knows really. Is it a good thing that middle class people are demanding more from their politicians? Yes, for sure, the middle class relies on the governments of their respective countries to draw the lines in which they can operate. If the feeding troughs are polluted by the political elites, then the people will no longer take this lying down.

Whilst I think this is always cause for concern, when everyone speaks with one voice, I also think that it is an opportunity ticking. It is never *nice* to see the value of ones investments decrease. But what it does do is present opportunities. Opportunities to buy stocks. Opportunities to add to the same investments at lower prices. When I use this strange line (next sentence) on people they normally look at me funny, or you can hear in their voice on the phone that they are bemused. Here goes: If you are adding regularly to your portfolio and have no need to draw down on the capital amount, you should hope for share prices to under perform whilst you are in this mode.

If you have no need to add and are rather building a nest egg for your retirement, you would hope for prices to be lower for longer. As counterintuitive as that may sound at first, it does make sense. The huge provisor of course is that companies continue to grow their top line and maintain profitability. Ironically you also want the value of your existing holdings to "go up" in order justify allocating further capital to the markets. So there is a fine balance. I cannot tell you how many times that I have fielded calls in which folks want to allocate further funds to stocks that have gone up, and not to stocks that have gone down.

Meanwhile the state controls of Venezuela have led to a 56 percent inflation rate. In yet another example of how state and price controls over business have the opposite effect. More price controls and government interference in the economy often equals inflation and fewer goods produced. Scarcity of products ensues and the whole idea of trying to protect the citizens of a country fails badly. Capital flight is one thing, but arguably the worst part is that hardly ever comes back. Confidence, once dented, takes an age to repair. Check it out: Venezuela grapples with 56% inflation. Why do I care about the Venezuelan inflation rate? Well, for whatever reason the people on the left of centre around here seem to think that their economic model is a good one. Turns out that it has been a disaster for ordinary people. Less equals more.

I think to end this piece I want to use the line that Paul said this morning. He said something along these lines: "I have been sitting in this seat for nearly 20 years, if I had 50 cents for every time that people said that this is the beginning of the end, I would have ten thousand Rand at least." I said to him that he should rather have chosen Pound Sterling over Rand, and kept his level at 50 pence. Over ten years for starters, the Pound has strengthened by 56 percent to the Rand, the Dollar has strengthened by 75 percent over 10 years. All that means is that roughly ten years ago, somewhere in the region of 6.25 ZAR could buy a single Dollar. In the wash out of October 2008 the Rand weakened to these levels that we see currently. In April of 2011, the Rand was back at 6.55 to the US dollar. And now we find ourselves with a local currency at above 11 to the US Dollar again. If nothing, very, very volatile.

I took a ten year graph of the US Dollar performance relative to the BRIC countries, and then ourselves. We are the worst, next there is India, which has seen the Dollar strengthen by 43 percent, then the Russians at 21 percent. And would you believe it, the Brazilians have actually seen their currency strengthen, the Dollar has weakened by 17 percent to the Real over 10 years. Of course you would expect the Chinese currency, the Yuan to have been stronger, and this is the case. The Dollar has weakened (artificially or not) by 27 percent to the Chinese Yuan over that period. Listen to this for weird, over the last ten years, the Dollar is nearly two percent weaker to the Japanese Yen. All the ructions and strength, coupled with a period of relative inflation and marked weakness (of the Yen) has led to basically an unmoved position. But lots of moves in-between.

So what is the long and short of it all? Nothing really. We use Rand notes to buy goods. The purchasing power in Dollars has been crushed. And inflation is of course the scourge of the poor, not the rich. If rich peoples grocery bill rises, they notice, but it is not a matter of urgency. More irritation than worry. We watch this space.

Byron's beats the coffee streets

Last week Starbucks released there Q1 results which saw 12% revenue growth to a record $4.2bn. Margins also impressively expanded to 19.2% while EPS rose 25% to come in at 71c per share. Geographically they have good growth in most regions. Americas and the U.S grew 5%, Europe and the Middle East grew 5% and China/Asia Pacific grew 8%.

The company made some very interesting observations over the festive period, here is what CEO Howard Schultz had to say.

"Holiday 2013 was the first in which many traditional brick and mortar retailers experienced in-store foot traffic give way to online shopping in a major way. As our solid traffic growth and record Q1 results demonstrate, Starbucks unique combination of physical and digital assets positions us as one of the very few consumer brands with a national and global footprint to benefit from the seismic shift underway."

Wow that is very interesting, online retail is really starting to have an effect on the retail sector and how we go about shopping. It is not something I would be worried about as far as Starbucks are concerned. They are an extremely innovative company and also supply in home coffee options. When I was overseas we often popped into a Starbucks just for the free wifi (and aircon) and ended buying an ice coffee. Great concept that.

That sales growth was very impressive as the business still has many areas where people would love a Starbucks to open. I am sure the business would do very well here in SA. So there is still lots of potential to get into new markets, especially in China and India, historically tea drinking nations. They are at the beginning stages of their global expansion.

At 71c for the quarter the company expects to make around $2.67 for 2014. That is up 18% from the $2.26 it made last year. The stock is far from cheap however trading at $75 or 28 times this year's expected earnings. But as you can see it is growing very fast. 18% is what earnings are expected to grow this year and a further 18% is expected for 2015.

It is an extremely profitable business with a great brand. People love coffee and I expect that to grow as more wealthy people can afford this premium brand. But it is not just coffee, they have also made inroads into tea, juices, food and pastries. We continue to add at these levels

Michael's musings: Seeing ~~red~~ opportunities

Things are looking ugly this morning as I am writing this. If you were a trader sitting long and leveraged to your eye balls, then the red that is seen across the market would be a bad thing. For investors like you and me this is a "non-event", because our time frame is a couple of years and when we look back in three years will be talking about the start of 2014? Probably not.

One of my favourite quotes for investing is, "The time to buy is when there's blood in the streets.", which is attributed to Baron Rothschild from the famous banking family; who started in the mid-1700s and used to marry within the family to make sure no outsiders got their hands on the family wealth.

According to Investopedia the original quote is, "Buy when there's blood in the streets, even if the blood is your own." I prefer this version, because normally when there is "blood" on the street your blood is there as well and then the normal reaction is to not buy because of fear that you will bleed some more.

Do I think that there is blood on the street? No, not even close. When markets pull back 30 – 50%, then I would say that there is blood on the street, and there are not many that come along in a life time, so when the next one comes along take the opportunity with both hands (definitely easier said than done!). There is a saying in trading circles that the bull takes the stairs and the bear takes the window. The selling in the markets is probably mostly done, and my guess is that it will drift sideways for a while and then continue slowing ticking up.

As Sasha said above, when markets pull back it presents an opportunity to buy, so I will be doing just that; I am glad that payday was on Friday and not Thursday because I might have already been in the market.

Home again, home again, jiggety-jog. You know where markets are, we told you that. A lot. I did not win a grammy, nor was I nominated. Next time when I sing in the shower, I will be sure to wear a motorbike helmet.

Sasha Naryshkine, Byron Lotter and Michael Treherne

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Wednesday 22 January 2014

Slippery slimy Platinum landscape

"The question to ask, is the worst past us, or does a lot hinge on the line being drawn in the sand now? You can argue that this is an accounting entry, but shareholders still take it on the chin, the fact that the company is worth less than you supposed. I am not too sure that there is going to be a moment to own these in the coming year, a lot hinges on many unknown issues. How the government will react to realities of violence (I really hope not) and potential job losses on a larger scale. And of course real demand, how that picks up, that side looks better."

To market, to market to buy a fat pig. Mr Market was a mixed bag yesterday, there is always much on the go, but the headlines are going to be dominated by Davos get togethers over the next few days. I was wondering and we put the question to everyone around here, if you got a ticket and full expenses paid, would you go to Davos? I would not say no immediately, I would think about it. It could be a great opportunity to meet an enormous amount of people that ordinarily would not gather in one place.

But. I have seen some soft research that suggested that the importance of Davos, in terms of the media attention that it attracted and subsequent web traffic, peaked in 2009. I think inside of us humans exists a belief that powerful people can solve the problems of the world quicker and with one sweep of the magic wand, when in reality powerful people are still people. They might have many instruments and resources to help them with time management, but they only have 24 hours in a day. And lastly (and I say this almost every year), if the WEF was held in Mogadishu, how many people would go? With all dues respect to Mogadishu of course, the Somali civil war is an ongoing event.

If the organisation protests to want to solve problems of the rest of the world, then have the meeting in a third world country. Perhaps a peaceful one, that is very poor. Malawi springs to mind. But that country is so poor, our president knows that, there is not enough money to build an infrastructure. Enough of that, this is good, people meeting, perhaps this year they can discuss Skype and how to use that. Or FaceTime, those people are rich, they have the best products. Talking Apple, the company releases their numbers on Monday, expectations are for them to have sold around 55 million iPhones last quarter. We will see.

And other "market" related news, Mohamed A. El-Erian at the age of 55 has quit at PIMCO. Bill Gross, the cofounder of the business back in 1971 at the ripe age of 69 has said that he is looking forward to another 40 years of business. Currently the company manages around 2 trillion Dollars worth of bonds, and whilst they are fabulously wealthy as a result of a transaction done with Allianz in 1999/2000 (they bought 70 percent of PIMCO for 3.3 billion), both Gross and El-Erian. Although Gross is the one with real money.

So where to for Gross? He is staying and continues to manage the Total Return Fund, assets under management are around 244 billion Dollars. Wow. Although, as far as I understand it, that very fund saw outflows last year. It was the worst year for the fund (down 1.9 percent) since 1994, according to the FT -> Pimco's Bill Gross suffers tough 2013.

Ahhhh, shame, as we say around here. Even worse is that the fund saw outflows of over 40 billion Dollars, as you can see, according to that story. The great rotation and so on, out of fixed income and the safety of treasuries in particular and into riskier assets, including equities of course. Equities had a fabulous year, bonds had a very bad year. New normal, the term PIMCO coined a while back, now Gross refers to the bond wars. It is where some of the smartest people in our industry end up, in fixed income. Good luck to that team and their reading of the interest rate cycle!

It is worth taking a look when the phrase was coined back then: On the "Course" to a New Normal. September 2009:

"As of now, PIMCO observes that the highest probabilities favor the following strategic conclusions:

Global policy rates will remain low for extended periods of time.
The extent and duration of quantitative easing, term financing and fiscal stimulation efforts are keys to future investment returns across a multitude of asset categories, both domestically and globally.
Investors should continue to anticipate and, if necessary, shake hands with government policies, utilizing leverage and/or guarantees to their benefit.
Asia and Asian-connected economies (Australia, Brazil) will dominate future global growth.
The dollar is vulnerable on a long-term basis."

The last one actually, because of European woes, turned out to be wrong. The fourth one, people are now anxious about the so called BRIC economies. The first one continues to be spot on. The second and third, yes, maybe, let us side with yes. Three out of five is not bad, not so? That was the New Normal. Now is the era post the new normal I guess, much the same as the old normal, that is what the new(ish) normal looks like.

Ah forget it, it is more fun to entertain the idea of the most rich and powerful people on the planet washing down foie gras with Dom Perignon in the Swiss Alps discussing income inequality. Much more fun. As luck would have it, with a bit of research, Mohamed A. El-Erian once wrote an article titled Davos at a distance. And for the record, Warren Buffett has never found the need to go. Ever. So whilst this might be very important, perhaps for us it is not really that important.

Now this is pretty interesting. Whilst Anglo American Platinum have released a trading update this morning for the full year and it looks mixed, the executives of Lonmin (Ben Magara), Implats (Terrence Goodlace) and the aforementioned Amplats (Chris Griffith) have released a joint statement regarding the pending strikes.

First things first, the Amplats trading statement. HEPS are expected to be between 480 and 590 cents (wide range) from a loss of 562 cents the year prior. Thanks in large part to a weaker currency and higher physical volumes. But Basic earnings per share (EPS) is expected to be minus 495 to 605 cents. This is as a direct result of a "write down (R2,814 million pre tax) in the carrying value of various projects and other assets as a result of the implementation of the restructuring plans; and the loss on the acquisition of properties amounting to R833 million related to the Atlatsa Resources Corporation (Atlatsa) refinancing transaction."

Yowsers. The question to ask, is the worst past us, or does a lot hinge on the line being drawn in the sand now? You can argue that this is an accounting entry, but shareholders still take it on the chin, the fact that the company is worth less than you supposed. I am not too sure that there is going to be a moment to own these in the coming year, a lot hinges on many unknown issues. How the government will react to realities of violence (I really hope not) and potential job losses on a larger scale. And of course real demand, how that picks up, that side looks better.

OK, now the joint release, it is worth a read where the CEO's have suggested that the industry cannot afford a strike, and the wage demands that AMCU are making are unrealistic. This is the second part of the statement:

"AMCU's current wage increases are unaffordable and unrealistic. It is of great concern to the platinum companies that employees are being made promises by AMCU that cannot be delivered upon. Strike action will not only hurt the platinum industry but will be to the detriment of employees and their families, to communities, and to the country as a whole.

In 2012 and 2013, our companies lost a combined 879,400 ounces of production as a result of strike action. This translates into revenue losses of around R12.54 billion. We estimate that employees were forced to forego wages of around R1.18 billion, excluding bonuses and other benefits which they were then not able to earn. Furthermore the platinum price has plunged by 19% over the past three years, while costs continue to rise.

Unfortunately these factors led to a reduction in the combined industry workforce from more than 145,000 to less than 134,000 in the two years from December 2011 to December 2013. This is a time when the industry can ill afford further losses of production and jobs due to strike action. We remain committed to further engagement and are resolute in our efforts to find a solution that will secure the sustainability of the industry as a whole and preserve jobs as far as possible. Importantly, we do not believe that a strike will benefit workers.

The platinum industry's imperative is to ensure that peace, order and stability is maintained at all times."

The realities are that the platinum industry is a part of who sets the price, from a supply point of view. I think that the statement is a little naughty in this release when suggested that the price is down 19 percent, in Dollar terms yes, not in Rand terms. Perhaps the company should then go on to quantify the costs part too, and not just the lost revenue. We know that the precious metals run up was in part fuelled by a massive jump in investment demand (the fund flows to the physical metal ETF's) and has fallen off in recent times.

The main question is for us here (and Paul did this on his Hot Stoxx show last evening, you must watch it), is why is the platinum price not trading at 2400 Dollars an ounce? If everyone knows of these problems that exist and they are that severe, why hasn't the spot market reacted? Not too sure really. Either we are overstating the issues that exist here and are internally focused, or the platinum market is not expecting the worst, or both. But this week is going to test the real resolve of all stakeholders here. It seems that shareholders have drawn a line in the sand. Or let me rephrase that, it seems that management perhaps on the instigation of their shareholders, have drawn a line in the sand. It will not be long until we have to wait to see the outcomes of these statement. Thursday. But stay tuned, the chamber of mines is trying to declare the AMCU strike as illegal, that would be a huge stepping stone for shareholders, the people who fund the business.

Byron beats the streets on JNJ's results

Yesterday we received 4th quarter and full year results from Johnson and Johnson. Before we delve into the numbers let's see what the share price has done. In the last year the share is up 28%, in the last 2 years it is up 54%. It has been a good performer to say the least, especially when you consider the size of the business and the risk you would be taking when buying this stock. I'd say the reward has far exceeded the risk.

The pie graph below explains the company's business perfectly. As you can see it is broken up into three main divisions which as a collective managed grow sales by 7.7%. With some negative currency impacts revenue only grew by 6.1%. The Pharma business is still the most profitable and is certainly the gem of the company. In fact many analysts are calling for a company split so they can just invest in the Pharma side.

Medical devices have struggled slightly in terms of margins but that is because they are investing heavily in this division both organically and through acquisitions. The consumer business is still solid and even though the margins are tight, it is an important part of the business especially when targeting growth in developing markets.

Net earnings for the year came in at $13.8bn or $4.81 per share. Without the special items the earnings came in at $5.52 per share. Expectations for next year are around $5.85 which puts the stock on 16 times next year's earnings. For a massive company like this, growing earnings at a solid 6% a year, I'd say this reasonable.

I also saw some interesting comments in a WSJ article which looked at the effects on Medical companies from the US health care overhaul. Chief Executive Alex Gorsky said that this should push up the demand for their products as more people subscribe to the state medical insurance. The exact impact is not yet known yet though. On the other side of the spectrum however these big Pharma companies are expected to contribute to the insurance coverage. JNJ paid as much as $1bn to the fund last year. Here is the article titled Johnson & Johnson's Profit Jumps 37%.

Is still feel JNJ offers great exposure to one of our favourite themes, healthcare. You get instant diversification both by product and geographically. As developed nations get older demand for their products will increase. As developing nations get richer the same will apply. We are happy to add at these levels.

Michael's musings: China's Special Zones

At the end of September 2013 China launched a Free Trade Zone (FTZ) in Shanghai, which is 29 square kilometres where there are less regulations than in the rest of China. The reasoning behind launching the zone is for them to run pilot programs that they intend to introduce to the rest of the country in coming years/decades. If you live or have an office in the FTZ there will be less restrictions on trade and on capital flows, and if you have dealings with the rest of China, those transactions will be considered cross border transactions.

An interesting stat is that since the FTZ has been announces, the property prices in the area has gone up by 20% and the amount of property transactions is up by 280%.

China in the 1980's launched a similar concept with Special Economic Zones (SEZ), where strategic towns where transformed into economic hubs. The first of these was in a city called Shenzhen, who was little more than a fishing village, but due to its proximity to Hong Kong was chosen. What has happened to Shenzhen since 1980? A line that I found on Wikipedia talking about the construction happening, "one high rise a day and one boulevard every three days".

How has the wealth of the population changed? From 2001 to 2011 the GDP per Capita increased by 2.6 times, and Shenzhen became the first mainland Chinese city to surpass the $10 000 GDP per capita mark to be considered a developed region according to the World Bank. Then the last interesting fact about Shenzhen is that 20% of China's PhDs live in the city.

There are two points that I want to make, the first is how much development and growth can take place in 20 – 30 years. This picture which was tweeted by Google pics of Dubai (don't forget to follow us for financial and interesting info) embodies the phrase, "a picture is worth a thousand words”.

The next point is how less restrictions spurs growth. This is hard to argue when the rest of main land China has been growing at 7-10%, but I think that it can be done. In my opinion Governments main job is infrastructure development, which is what the Chinese are doing, but in order to have long term sustained development there needs to be free movement of goods and capital. Shenzhen would never be as successful and wealthy if it had been regulated like the rest of China. People understand that the FTZ in Shanghai has greater growth potential than the surrounding areas and that is why property prices are soaring. Introducing this zone says to me that as China develops their economy will become more open, which can only be a good thing for growth, and Chinese society.

Home again, home again, jiggety-jog. Markets are lower here today, oh check that out, they have turned positive! There was an SABMiller trading update we missed yesterday and a better than anticipated BHP Billiton production update this morning, that looks positive.

Sasha Naryshkine, Byron Lotter and Michael Treherne

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Wednesday 15 January 2014

Google setting up their Nest

"There are concerns that Google are seriously sacrificing margins by shifting their business into more capital intensive strategies. But I truly believe this is the way of the future and as a technology company, if you don't constantly stay ahead of the curve you will find yourself in huge trouble. I think it is best to embrace it as both a consumer and an investor. At the end of the day, if the product makes your life easier it will have customers because in our fast paced lives, time has become one of the most important commodities."

To market, to market to buy a fat pig. Whilst one is always searching for a reason for why markets go up and down on a daily basis, and I can promise you that it is not my favourite thing, I do often feel sorry for people who have to find a reason why markets go up and down. More on High frequency trading and the machines a little later in the message, and how that has had a positive impact on liquidity. Because all we are looking for is the correct price. How you get to that price of a security or debt instrument is part of the day to day machinations in markets, ideally we would like that to happen overnight. Equally a rerating of a stock is something that can give you, as an investor a massive uplift. That is what we have seen in this market over the last few years, stocks have simply rerated to a level that does not reflect either a US double dip, or a Euro zone falling apart. And some people have become less relevant, they will have their day in the sun soon.

There was another point that I was trying to make yesterday, and that is the market is not a strange and mythical beast of any sort. The question that many are asked in financial media is, where will the market go next? As if a) there is a path and a map and b) the market takes on a form that we can associate with. The market, to use the term loosely, is a collective of company share prices weighted according to their market capitalisations. Most indices are weighted like this, with the exceptions being that liquidity is also factored in. To make provisions for the importance of a security in the index. So the market is essentially someone else's calculation, based on factors that are relevant.

The market does not take on a life of its own, nor can it feed on itself in any way. To be clear, the overall market, or a specific index (the Dow Jones is very closely followed) is quite simply a collective of companies. Companies have share prices attached to them and those are afforded to the businesses from market participants (investors and traders) and as such trade at a premium or discount to their peer grouping and the rest of the market. So obviously you want to be owning the sector that shows the most potential in terms of increasing their overall sales and profits, but inside of that sector you want to own the company that is perceived to be the best. So it is people making investment/trading decisions daily and by the second (lots of different people) who determine the level of the index.

There is of course robot trading, algorithms on the fastest computers that are designed to look for something specific and then trade the market all day long. But both the algorithms and the computers were invented by people and have significantly improved the liquidity of stock prices. I can promise you that nothing is more irritating than not being able to execute a trade on what you perceive as a big ticket stock. A big company by market cap that has limited tradability is an irritation. But at the same time, you know how I get mad when talking about how the entire market cap of Apple turns over in less than a year.

It is this high frequency trading that affords people like us, who are not plugged into the Matrix, the liquidity, but for them it has become a really tough old business. See here, an old article (middle of last year), but well worth the read: How the Robots Lost: High-Frequency Trading's Rise and Fall. It is not as easy as it once was to trade the market with your supercomputer and your trading rules, written by someone with a math doctorate.

To think that the person trading on a machine in their garage (or study) has a chance spotting an irregularity (and then monetising it) in a huge and liquid market is supposing that the under nine leftback would dribble past Manchester City's back four and pip Joe Hart. Be it Kompany, Richards, Zabaleta, Lescott, Kolarov or Clichy, they have you covered. It is hard to compete against the machines, perhaps that is why smaller scale traders are lured to penny stocks, more chance of a pricing miss match there. In a smaller and less liquid market such as our own, the same applies, we have our own algorithms trading in the market. Providing liquidity of course, but every now and again, such as with the flash crash, things can go wrong.

The 2010 flash crash, that lasted all of a few minutes was a sight to behold. I thought that an atomic bomb had gone off somewhere, such was the fierceness of the selling, with the Dow Jones down nearly 1000 points at the worst. Nine odd percent. According to Wikipedia, the SEC report spoke of a hot potato effect:

"The combined selling pressure from the sell algorithm, HFTs, and other traders drove the price of the E-Mini S&P 500 down approximately 3% in just four minutes from the beginning of 2:41 pm through the end of 2:44 pm. During this same time cross-market arbitrageurs who did buy the E-Mini S&P 500, simultaneously sold equivalent amounts in the equities markets, driving the price of SPY (an exchange-traded fund which represents the S&P 500 index) also down approximately 3%.

Still lacking sufficient demand from fundamental buyers or cross-market arbitrageurs, HFTs began to quickly buy and then resell contracts to each other - generating a "hot-potato" volume effect as the same positions were rapidly passed back and forth. Between 2:45:13 and 2:45:27, HFTs traded over 27,000 contracts, which accounted for about 49 percent of the total trading volume, while buying only about 200 additional contracts net."

Wow. All it took was 14 seconds for the machines, made by humans and the algorithms, designed by humans, to send the market spiralling. Humans. By 3 in the afternoon, less than one quarter of an hour later, stocks had stabilised again back to their levels from less than half an hour prior. If the date were 1910 and not 2010 then the horse and wagon would not have even been attached to send the messenger out. Or some such thing.

And in concluding this piece I would like to point to a couple of Eddy Elfenbein tweets about the US Dollar and how that supremacy still remains. So think Bitcoin and all the hype around the new currency, currency in inverted commas, and all the airtime that it has been getting. Check this:

A 5.3 trillion Dollar market is the daily Forex trade, of which 87 percent is US dollars. And as Eddy points out, the other trades are converting currencies into Dollars and then back to another currency. I always say this, but until it is not the Dollar, it will be the Dollar. The end for now! More again tomorrow!

Byron beats the streets and speaks about one of the most innovative companies in the world, Google.

Over the past couple of years Google has become our 6th biggest position in New York. This has been the result of constant additions as well as a fast appreciating share price. The stock was up over 50% last year. The businesses initial focus is on advertising revenue through people using their search site. That makes sense as a very profitable business model. But the company has bucket loads of cash ($57bn at the end of last year) and a very ambitious and innovative management team.

This has resulted in Google dipping their fingers into all sorts of businesses with big focus on hardware. They paid $12.5bn for Motorola a few years back and yesterday announced a $3.2bn acquisition of a company called Nest. Basically Nest manufactures smart thermostats and smoke detectors. The thermostat is programmed to keep your home at the right temperature at all times. It even learns what time you wake up, have a shower, go to work and then come home. This obviously has great benefits when it comes to energy saving.

According to the WSJ estimates are that the company is selling 100 000 thermostats a month. At $250 a pop that means annual revenue of around $300 million. Paying over 10 times revenue sounds expensive but as you can imagine there is a lot more to it. With the company comes founder and CEO Tony Fadell who was integral in the design of the iPod when he was at Apple. I am sure his expertise afford a bit of a premium.

There are also so many potential synergies with Google products. Last year they released a product called Comcast which allows you to control all your electronics in the house wirelessly. This includes streaming anything from the internet through your TV or playing music through your speakers from your phone without any connection needed. Basically through Nest technology you could control every single device in your house through your phone. Change the temperature of your fridge, turn on the sprinklers, who knows maybe even tell your robot to wash your dishes one day.

There are concerns that Google are seriously sacrificing margins by shifting their business into more capital intensive strategies. But I truly believe this is the way of the future and as a technology company, if you don't constantly stay ahead of the curve you will find yourself in huge trouble. I think it is best to embrace it as both a consumer and an investor. At the end of the day, if the product makes your life easier it will have customers because in our fast paced lives, time has become one of the most important commodities.

Home again, home again, jiggety-jog. Stocks are up today and down yesterday. Europe is all together, in fact you will recall that Latvia was added to the Eurozone at the beginning of the year. So despite all those folks that were convinced that the Eurozone would be falling apart, the Eurozone is actually expanding. So much for that.

Sasha Naryshkine and Byron Lotter

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Tuesday 14 January 2014

Eggs and spoons

"I think the big difference is that in financial markets, everyone has the same objective (to make more money and be rewarded for their risks), but almost everyone has a completely different method and time frame. And as such it is like an egg and spoon race where people compete over a marathon type distance is many different methods. With the same outcome expected, to finish and not to drop the egg. Ever. You can of course start over, but in investing that is the worst possible outcome. Some people want to finish the race in two years, for others it is decades and in truth you never really finish."

To market, to market to buy a fat pig. Back in the seat. Feels familiar and it is always good to sleep in your own bed, home is where the heart is, they say. I have also been in Johannesburg for the better part of 15 years now, by far the longest I have ever been in one place, if not one house. Hey, I went to 6 different primary schools as my parents moved around, one high school I am happy to say. And I cannot say that it ever felt interrupted.

We went to the Eastern Cape, crossed the Kei river on a ferry, a bit of a novelty for us. The roads were rubbish, the people were friendly, the life of the locals was one million miles away from the speed up here. South Africa certainly is a land of many different contrasts. So perhaps on reflection, the president should have said that Johannesburg is not Lilongwe, rather than this is not Malawi. Because some of the rural roads I drove on were not that great.

Being away and the start of a new calendar year is always a time for reflection, on what is good and bad, what remains unfinished and what is to be accomplished. I love my job, we are certainly lucky around here to do what we love. Because as it is said, do what you love and you will never work a day in your life. But back to that reflections part. You always need a scoreboard, you are judged on the performance that starts 1 January and that ends 31 December, otherwise there would be no measurement on your performance. And I do not have a problem with that at all. What I do have a problem with however is the expectations for a new year. I do not know what is going to happen this year. What I do know is that consumers are going to want more of the same. No, scrap that, more things than before and better things than before. That is what people want, their lives to be made easier by technology. And that differs by where you are and what you can afford. Technology and consumerism will continue to be huge themes that roll forward in emerging markets.

The international energy agency (the IEA) say this on their website:

Modern energy services are crucial to human well-being and to a country's economic development; and yet globally over 1.3 billion people are without access to electricity and 2.6 billion people are without clean cooking facilities. More than 95% of these people are either in sub-Saharan African or developing Asia and 84% are in rural areas.

18.5 percent of the population do not have electricity. That is simply mind-blowing. I am willing to bet that there are very few people reading this that have lived without electricity. But yet there are 2 out of every eleven people on the planet who do not know electricity. And all of those people are basically closer to us here in Sub Saharan Africa than anywhere else. Rural electrification (skipping the grid) is going to be a massive investment theme, which according to the IEA will require around 1 trillion Dollars worth of investments by 2030. Watch closely I guess.

The other point that I wanted to make is that when you are away, you are not sucked into thinking that every single economic release and earnings release is a matter of make or break. The jobs number was poor last week Friday, really poor, but life still went on. I could not find anybody who actually knew what it was, let alone what it meant. People make the world go around, and financial markets are most certainly part of that. I think the big difference is that in financial markets, everyone has the same objective (to make more money and be rewarded for their risks), but almost everyone has a completely different method and time frame. And as such it is like an egg and spoon race where people compete over a marathon type distance is many different methods. With the same outcome expected, to finish and not to drop the egg. Ever. You can of course start over, but in investing that is the worst possible outcome. Some people want to finish the race in two years, for others it is decades and in truth you never really finish. It is one of the few races that I suspect that if you do it right, you look far healthier as the time goes on.

I have been chatting to a lot of people about investments over the years, often people want to distance themselves from their hard earned money and retirement savings, our approach has always been to try and keep our clients on the straight and narrow. That does not change from one calendar year to another, and neither do consumer habits. Sure, some people want to be healthier and as such eat differently from 1 January (OK, the 2nd) until the middle of February, and then buy the clothes for their newly found passion. So those are consumer changes. But the peanut butter you buy on the 31st of December and 1st of January, that is the same. Tastes the same. That is the simple point I am trying to make is that much of companies performances depend on the consumers around them, and that does not really change from year to year. Also, if you keep making adjustments all the time, to suit from year to year, that sounds like chasing your own tail. That said, the energy you can feel from the beginning of the year should be bottled, for use slowly over the next few months.

Home again, home again, jiggety-jog. Markets are lower this morning, after a spectacular day yesterday. The jobs report anxiety, a day late. There will always be anxiety. There will always be people waiting for a pullback. And when it comes (it always does) they will say that they told you so. That could be 30 percent on from when they told you they were waiting for a pullback. But hey, like I said, there are lots of different ways to win the egg and spoon race.

Sasha Naryshkine

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