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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