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
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