Money with a dash of Funny: January 2018

Wednesday 31 January 2018

The Crown for Content

To market to market to buy a fat pig. "Them who must not be named", A.K.A. Viceroy, were the centre of attention again yesterday. We now know that they weren't writing a report about Aspen or the Resilient group of companies but on the darling of the JSE, Capitec. If you haven't already seen the report, you can find it here: Capitec: A wolf in sheep's clothing

It is amazing how quickly this report circulated, and its immediate impact on the Capitec and PSG share price. Capitec plummeted, sending it into a volatility auction, it then recovered to be briefly in the green for the day, followed by a slide to R700 a share (it opened at R939). When the day came to an end, they were 'only' down 3%. The investment company PSG, who have more than 50% of their NAV in Capitec, also got walloped. They closed down 8% for the day.

At the other end of the spectrum was Aspen, closing up 6%. It seems that some people were still holding off buying the company due to the very remote chance that Viceroy were in fact writing about Aspen. I think it is worth showing Byron's tweet from the midst of the Aspen storm.

The same logic applies now to Capitec, the advantage this time is that you can actually read the report and make up your own mind. We don't own Capitec for clients, making us neutral onlookers. As neutral onlookers, I was very impressed with how Capitec's management has responded. They released three SENS announcements, one being a detailed reply to the Viceroy concerns, and had an investor call which you can listen to here - investor relations. Naspers management could take a few notes?

Organisations write positive and negative reports about companies all the time. Thanks to Steinhoff, Viceroy has this allure of having a 'Midas touch' or more aptly the touch of death. Steinhoff is what made their name, yet we are still not sure if the Viceroy version of events is accurate. Only time will tell how much is fact and how much is fiction, where fortunes will be made and lost in the bull and bear camps.

Market Scorecard. I woke up this morning to my phone telling me that the US market had its worst day yesterday since May last year. The Dow was down 1.37%, the S&P 500 was down 1.09%, the Nasdaq was down 0.86%, and the All-share was down 2.07%. Whatever the reason for a down day, remember that markets dropping 1% or 2% is normal.

Company Corner

Byron's Beats

Since Netflix released their Q4 results on the 22nd of January the share is up nearly 30%. Wow. And that is off a share price that was up 70% last year. The market cap of the business now sits at $120bn, a similar size to Naspers.

Streaming revenue grew by 36% (in other news they still rent DVDs) for the full year. They added a whopping 24 million new memberships in 2017 to bring the total close to 118 million subscribers. How many people out there could be potential Netflix subscribers? They need access to good internet and be able to afford $11 per month (I suppose those two come hand in hand). I would say at least 1 billion today and growing.

Guidance for this year was again positive. They expect to add another 6.35 million subscribers this quarter. At that rate you would expect at least 30 million new subscribers for 2018. 150 million subscribers paying $11 a month would bring in close to $20bn in revenues. For 2017, revenues came in at $11bn. You can see how quickly this can grow. Another growth avenue would be price increases (which they did do in 2017). Paul thinks the product is far too cheap. I tend to agree. Compare that to DSTV who charge up to R1 000 per month for the premium service.

Content is king!

My favourite show at the moment is The Crown, a show that follows the life of Queen Elizabeth. Like most great companies, clients are their best salesmen. People talking about "must watch series" will convince others to sign up. And it really is so easy. Most TV's these days link to the internet, all you need is to add your Credit Card details on the easy to navigate website.

The hard part for Netflix is creating world-class content. They plan on spending $8bn on content in 2018. This is a great outcome for that industry! As long as they keep churning out great series and movies, they will continue to do well.

The industry is very competitive. The potential Disney Fox tie-up could create another streaming behemoth. Amazon Prime is gaining traction with quality content, and Apple is also jumping on board. But if you signed up for all these services at the same time, you would still pay less than the old school satellite and cable providers. In the future you will have 3-4 streaming services which will also cover sport. That is my prediction.

This is a high flyer and can be volatile. We like it as a small allocation amongst a diversified portfolio.

Linkfest, lap it up

One thing, from Paul

One of the world's richest persons just died. Ingvar Kamprad was the founder of Swedish DIY furniture giant IKEA.. He checked out with a personal fortune of $59 billion, according to the Bloomberg Billionaires Index, but was known for buying his clothes from flea markets.

This tidy Quartz article has a list of nine intriguing facts about him. My favourite is that IKEA consumes 1% of the world's wood supply - Nine intriguing facts about Ingvar Kamprad and his IKEA empire

Michael's Musings

I found this very interesting article on the Vanderbalts and preserving generational wealth - The Best Way to Lose $5 Billion Dollars. There are many articles about how much wealth the top 1% have, and how that gap is growing. What isn't pointed out though is the high turnover of people and families in that category. So don't worry too much about the gap, generations two and three will use their inherited wealth to stimulate the local economy.

What makes the below information more amazing, is that 100 years before the family reunion they were worth more than the US Treasury.

"When 120 of the Commodore's descendants gathered at Vanderbilt University in 1973 for the first family reunion, there was not a millionaire among them."

Bright's Banter

This is such a great infographic as it shows where game developers are focusing all their energy to building new games. The graph is also quite relevant to us here at Vestact because Tencent (one of our indirect investments through Naspers) dominates both PC Gaming and Mobile Gaming in Asia. For example, their game Honour of Kings is still the top game in Asia and League of Legends attracts an eye-popping 24% of all the gaming audience in the world. Much wow! It's good to see that PC is still by far the favoured platform by developers and mobile isn't far behind.

You will find more statistics at Statista

Vestact in the Media

Paul chatted to 702 about Capitec and the Viceroy report - Vestact fund manager Paul Theron says Viceroy's Capitec report is irresponsible.

Home again, home again, jiggety-jog. The EU had GDP growth of 2.5% for 2017, best in a decade, and then later today they release their inflation number and unemployment figures. Moving across the pond, Janet Yellen announces if the fed is raising rates or not, at around 21:00 our time.

Sent to you by Team Vestact.

Email us

Follow Michael, Byron, Bright and Paul on Twitter

078 533 1063

Tuesday 30 January 2018

A Dimon is for 5 more years

To market to market to buy a fat pig. Today ~~Granny~~ Janet Yellen chairs her last FOMC meeting. Leading into the meeting, the US 10-year yield broke 2.73% for the first time since 2014 as investors start to contemplate a few rate raises for the year. Despite the spike in bond yields, market participants don't expected a rate raise tomorrow night. The key focus will be on the tone the Fed uses.

The impact on stocks is two fold. Firstly, higher interest rates means it costs more for companies to borrow for future expansion. Secondly, a higher interest rate means a bigger discount is applied to future company profits, resulting in generally lower share prices. The key here though is the speed of interest rate changes. With slow changes, which is expected, the market can take in its stride, with limited noticeable impact on share prices.

Market Scorecard. Markets globally yesterday spent the day in the red, I've heard the words 'Profit taking' mentioned. In truth, on an average day there are many reasons for market moves. We like to come up with simple reasons for daily moves because it gives us a greater feeling of control. Does it matter if our after the fact reason for the market move is correct or not? The Dow was down 0.67%, the S&P 500 was down 0.67%, the Nasdaq was down 0.52%, and the All-share was down 1.28%. Locally, banks and life insurers were crushed, being down 4.5% and 3.3% respectively.

Company Corner

Yesterday, Aspen released a SENS announcement saying that an unsolicited offer for their Nutritionals division, has prompted them to do a strategic review of the business (Aspen - Strategic Review). One of the options being explored is the "introduction of a strategic partner that could unlock appropriate value".

What that probably means is that they are thinking of selling part of the business to a company that can positively contribute to growing the nutritional business. It would also mean a nice upfront cash boost for Aspen, which they can put toward reducing the debt pile everyone was talking about earlier this month. We will probably get some more information at the company's interim results on the 8th March.

Linkfest, lap it up

One thing, from Paul

How important is a superstar CEO? Can one make a case for owning a company just because it has a hero at the helm? Should we blindly back entrepreneurs who start, build and then run great companies?

In my experience, when a company does really well, the media puts the chief on a pedestal. When a company falls on hard times, the converse happens. The boss guy must be an idiot!

Here at Vestact we are inclined to pick great businesses operating in promising parts of the economy, and to assume that they will be run by good people over time.

Highly visible CEOs who are fully engaged are great, but there is always a risk of them retiring or falling ill and leaving abruptly? Jeff Bezos, Elon Musk, Johann Rupert, Stephen Saad and Adrian Gore are amazing, but without them at the helm what will happen? Warren Buffett has done an amazing job at Berkshire Hathaway, but he is 87 years old and will be winding down soon.

Losing an inspirational leader can be tough and dent a company's rating, but usually shareholders should just be patient and wait for new management to come to the fore. Apple has been a good case in point. When Steve Jobs died, the naysayers moaned that the company "was no longer able to innovate". Since then its gone from strength to strength under Tim Cook.

I was thinking about this topic overnight, because one of our recommended companies JP Morgan, announced that its CEO Jamie Dimon would stay on for another five years.

Dimon is one of the most respected corporate CEOs in the world of business. Extending his contract is like Leo Messi announcing that he's going to stay on at FC Barcelona for the next five seasons!

He has been CEO since 2005. He's charismatic and opinionated, and is sometimes mentioned as a possible US presidential candidate. He's a pro-business centrist who once described himself as "barely a Democrat".

The succession plan at JP Morgan was clarified yesterday too. Daniel Pinto and Gordon Smith, currently the heads of the corporate and investment bank and its consumer bank have been elevated to the role of co-chief operating officers.

Byron's Beats

I know I harp on a bit about Nvidia but the avenues for this business are so wide and exciting that I have to share them. This TechCrunch article talks about how the oil and gas industry can benefit from AI (Artificial Intelligence). Anticipating new drill spots, dealing with seismic activity and avoiding malfunctions from wear and tear are all potential value adds.

I suppose anything and everything that requires image processing could essentially use a GPU chip (which is what NVIDIA make). In simple terms, it gives smart devices eyes. And that is a pretty powerful tool!

Nvidia and GE's Baker Hughes team on AI for oil and gas.

Michael's Musings

When thinking of years gone by and history, 2007 doesn't feel that far away. Since then however, countries like China have tripled in size, Australia has almost doubled in size, and closer to home, Ethiopia has also tripled in size - Visualizing a Global Shift in Wealth Over 10 Years.

Like many things in life, the more you pay for something, the better it is? - 'Expensive' placebos work better than 'cheap' ones, study finds

Vestact in the Media

Byron chatted to Business Day about Aspen's nutritionals division - Aspen Pharmacare seeks new formula for its global nutritionals business.

Home again, home again, jiggety-jog. It is another red start to our trading day. The only significant data out today is from the EU, at mid-day our time they release their latest GDP read, lets hope it doesn't disappoint like the US last week. Then on the company front, Stryker reports their 4Q and FY numbers this evening. Then lets not forget the US SONA tonight, I'm sure social media is going to love it! It is going to be yuuuuuge!

Sent to you by Team Vestact.

Email us

Follow Michael, Byron, Bright and Paul on Twitter

078 533 1063

Monday 29 January 2018

China gets a Caffeine Boost

To market to market to buy a fat pig. It was another record-breaking day for US markets. Our broker in the US, sent us a mail over the weekend pointing out that it appears many of the more cautious money managers, who have been caught on the sidelines of this amazing bull run, are now wading in. Our view is to always be fully invested. As Paul said in his message on Friday, "To paraphrase Peter Lynch: 'always be fully invested. It's great to be caught with your pants up.' "

Market Scorecard. Locally, due to Naspers our market was red. The Dow was up 0.85%, the S&P 500 was up 1.18%, the Nasdaq was up 1.28%, and the All-share was down 0.14%.

Company Corner

Michael's Musings

Last week Starbucks released its First Quarter numbers. Below, Paul goes into our thinking around owning them, so I will focus on the numbers. This was the first time that they had over $6 billion in revenue for a quarter, that is a monster number for a company that sells coffee! For comparison purposes, Woolworths' current market cap is R70 billion, Starbucks sold more in three months than the entire value of Woolworths.

Since this time last year, they opened 700 new stores (almost two new stores a day) globally bringing their footprint to 28 039 stores across 76 countries. Of those 700 new stores, 300 of them were in the China/Asia Pacific region.

The below table gives the best snapshot of where the company currently stands. The drop in margin is due to them selling more food; it is a more 'commodity' type product where margins are lower than coffee.

The key figure in the numbers for us was the 30% growth for China, specifically. As it stands, of the $6 billion in revenue, China is less than $1 billion, showing the amount of growth potential going forward.

Linkfest, lap it up

One thing, from Paul

This week on Blunders: Trumped in Davos, Chinese bank is in the Pudong, airport baggage handlers are evil, and things work differently in Saudi Arabia: Blunders - Episode 85

At any given moment, there are usually a few of Vestact's favoured stocks that are going through a tough time. That's how it goes. The tricky part of managing money is knowing when to sell out and run away, and when to hold on and be patient. A solid company in a good part of the economy will usually come right in time, so mostly we don't chicken out.

As an example, Starbucks has been trailing the field in US portfolios recently. The stock fell around 5% last night after quarterly earnings that showed less robust sales growth in the US than Wall Street had been anticipating. In general, coffee and food sales in the US have been a little sluggish. Not slowing, but not growing that fast either. Low single figures.

Kevin Johnson, the new CEO, said that holiday season drinks and merchandise did not resonate with our customers as planned. I'm not that surprised, having spent the festive season in the USA and seen the offers for Eggnog Lattes and Chestnut Praline Chai Teas. Er, no thanks!

In our view, the market is missing the real story here: China. Same-store sales in that mega-region rose 6%, and customers there mostly use mobile payment systems. Last month Starbucks launched its first overseas "Reserve Roastery", a flagship store combining gourmet coffees and a bakery in Shanghai. They plan to have 10,000 outlets in China within a decade, as many as there are in the US now. In that country, Starbucks is definitely seen as a premium, global, aspirational brand. I have visited some of the stores around Beijing, and noted that the stores were very well run, by young, energetic staff.

Here is an interview with Howard Schultz (former CEO, now Chairman and Reserve Roastery project leader) with more about the Chinese rollout: China brews bubbly future for Starbucks

Byron's Beats

Remember when Elon Musk tweeted that he would be able to solve Southern Australia's volatile energy issues within 100 days? Tesla ended up doing it in 60 days and gained some great PR.

But does that business model make money? This article explains how it does indeed make solid income. To simplify, the battery gathers energy at low prices when supply is flush. It then sells energy when supply is low at a much higher price. Sounds like a great business model. The utility side of the Tesla business is another reason to be excited.

Tesla Mega battery made about 650 000 euros in two days.

Bright's Banter

Nicholas N. Taleb has one simple message about Bitcoin. "It may fail but we now know how to do it". NNT makes some interesting points on why this cryptocurrency makes sense to someone who doesn't like to be part of "the system". "It fulfils the needs of the complex system, not because it is a cryptocurrency, but precisely because it has no owner, no authority that can decide on its fate. It is owned by the crowd, its users. And it has now a track record of several years, enough for it to be an animal in its own right."

Just because I like the guy and his writing doesn't mean I have to agree with him.

Bitcoin by Nicholas Nassim Taleb

I love Google analytics because you can see what people in your country are searching for at different times and you can even search by your region to see what kind of stuff people are searching for. Try it out, it's mighty fun!

Wikipedia has their own version of analytics and they just announced their most visited pages last year. The usual suspects, Bitcoin, Game of Thrones, Trump and Death feature on this list. What still amazes me is that Trump came out second with almost 30 million visits on his Wiki page and he was only second on the list after Death for 2017.

You will find more statistics at Statista

Home again, home again, jiggety-jog. We have a huge week ahead for the US market. The fed meet on Tuesday and Wednesday, and then all the tech titans report. Facebook on Wednesday, and on Thursday there is Visa, Google, Apple and Amazon. Are you as excited as we are? This morning, locally the index is flat, fluctuating between slight gains and small loses.

Sent to you by Team Vestact.

Email us

Follow Michael, Byron, Bright and Paul on Twitter

078 533 1063

Friday 26 January 2018

Paul's Annual Message

Hello and welcome back, this is 2018!

This is my 15th annual Vestact client message. I left it late this year, to be sure that all of you would be concentrating properly by the time this hits your mailbox.

We keep doing things the same way here at Vestact. We manage long-term "family" money for individuals. We only invest in equity markets. We try to select and hold the best quality companies in the most favourable sectors (currently technology, healthcare and consumer). Every client portfolio is customised and personalised. Our fees are low and we try to keep portfolio turnover low. We offer this service for accounts in Rands here in Johannesburg, and in US Dollars in New York.

All in all, 2017 was a good year for investment returns

Our Rand-denominated Johannesburg model portfolio was up 9.6% for 2017 after all costs, compared to the JSE Alsi-40 which was up 19.7% for the year. Since we started managing money in 2003, our average annual (compound) gains, after all costs, are 18.2% per annum. That is better than the Alsi-40 which rose by 14.9% each year over the same 15 year period. Take a look at the chart below, the part in green reflects that outperformance.

Strong portfolio performers this year were Naspers, Discovery and MTN. The laggards were Steinhoff, Brait, Mediclinic and Woolworths.

Vestact's assets under management here in Johannesburg are now R1,265 billion.

New: AdvTech was added to the list of recommended stocks. State run education in South Africa is not improving, but that is an opportunity for private providers.

Our US Dollar-denominated New York model portfolio was up 31.6% for 2017 after all costs compared to the S&P500 which was up 19.4% for the year.

Our returns for clients in US portfolios have been excellent for quite a while. Since inception in 2005 we are up on average, and after all costs, by 10.4% per annum. in US Dollars. We are easily outpacing the S&P 500 index, which is up only 6.3% per annum. See the picture below. Again, the part in green shows how we are pulling ahead.

Our preferred shares all did well this year. The best of the lot were Amazon, Visa, Facebook, Nike and Amgen. To paraphrase Peter Lynch: "always be fully invested. Its great to be caught with your pants up."

New: JP Morgan, Priceline and Nvidia were added to the model portfolio.

Vestact's assets under management in New York are now over $150 million.

We buy and hold, but do sell stocks sometimes. We sold out of General Electric in 2016, and we switched out of Wells Fargo into JP Morgan during 2017. In hindsight, we would have done better if we had sold some under-performing local stocks. Like Steinhoff. Ugh, what a mess!

We are very proud to have delivered long-term index beating returns (this is rather rare in the investment industry). I think that our superior returns are due to a sound investment process and low costs. We charge low advice fees of 1 percent of your account value per year, plus Vat, with no performance charges. This is cheap by the standards of our industry. As I mentioned in previous emails like this one, asset management is a product where offering it for a lower price makes it much, much better.

Global outlook remains positive

We are optimistic about equities. The global economy is doing well. Big companies are getting bigger. South Africa looks a bit messy, as usual, but Cyril Ramaphosa is a good guy!

What you need to do now

Save more. This is more important than returns in determining how much money you have when you retire. Send your free cash to Vestact.

If you can, use your discretionary allowance to take out up to R1 million per adult, and invest it offshore in US Dollars with us in New York. Email or call us to get the ball rolling.

Vestact is a small "family office" asset manager. We are not a big institution. We know who you are. We would like to serve you and your family for decades, and over many generations to come. We work hard to maintain high service levels. We look forward to hearing from you.

Best wishes

Paul Theron
CEO, Vestact

Email us

078 533 1063

Thursday 18 January 2018

JP Morgan in a Sweet Spot

To market to market to buy a fat pig. Wow! Do you remember the frenzy around Black Friday last year? How you couldn't go near anything that resembled a shop and how all the online retailers made you queue!? Yesterday, Stats SA released their Retail trade sales report for November. Retail sales were up 8.2% thanks to the Black Friday (24 November) boost. The last time retail sales were up over 8% was in 2012.

Here is a table from the report showing where the growth came from:

You may be thinking, what is 'All other retailers'? Well, here is the definition from Stats SA:

In the numerous trading updates from retailers, none of them have mentioned Black Friday. Maybe they will when they release their half-year numbers? For many South Africans (and the global population in general) we don't have spare cash saved specifically for these sales. A steep increase in sales is probably coupled with an increase in credit card debt; not good for retailers long-term.

Consumers may have used the specials at the end of November to buy Christmas gifts a month early? Given how full the shops were on the 24th December, I doubt many people thought that far ahead. Time will tell if there are any long-term negative impacts on the retailers. For now though, trading updates are positive and business confidence is on the rise.

Market Scorecard. Potential government shutdown, what potential government shutdown! US Stocks surged last night with both The Dow and S&P 500, closing above 26 000 and 2 800 respectively, for the first time. The Dow was up 1.25%, the S&P 500 was up 0.94%, the Nasdaq was up 1.03%, and the All-share was up 0.45%.

Company Corner

Byron's Beats

Last week Friday we received fourth quarter and end of year results from JP Morgan. This is the first results release since we put JP Morgan on our buy list. US companies usually disclose more details on the quarterly movements. I will therefore give a summary of the annual results and then focus more on the quarterly numbers in detail.

For the financial year 2017, revenues came in at a whopping $103.6bn; $51.4bn of that was net interest income and $52.2bn was non-interest income. After all costs, net income for us common shareholders equated to $22.6bn. That equates to R278bn in profits, bigger than the entire market cap of MTN (R252bn)!

Per-share this equated to $6.87 excluding once offs. Trading at $112 a share the company affords a historic PE of 16.3. This is lower than the general market but historically high for a bank. The price is factoring in the higher interest rates as well as the tax cuts. Earnings for next year are expected to be substantially higher (up 25%) at $8.60. Putting the stock on a forward multiple of 13.

Another important measure for banks, is their return on equity (ROE). For the quarter, JP Morgan reported an ROE of 13%, well above the average of around 10%.

Segmental analysis for the quarter.

I have plugged the numbers from the report into a spreadsheet to make things simpler (I hope).

As you can see, the business is very well diversified across everything and anything a bank can make money from. It is not too reliant on Investment Banking, but it still makes a big chunk of cash from that division. Investment Banking can be volatile; those profits should be taken as an added bonus. They even mention a $143m loss within their Equity Markets division from a single client margin loan, AKA Christo Wiese.

The cream of this business for us is the retail banking division (consumer banking). This division equates to 47% of revenues and 40% of net income. It stands to benefit from three major factors.

1) A growing US economy
2) Slowly rising interest rates
3) The ability to cut costs through new technologies.

The tax reform is also an added bonus.

We are strong buyers at these levels because we believe that these three factors are underestimated by the market, especially factor three.

I will leave you with what CEO Jamie Dimon had to say about 2017.

Linkfest, lap it up

One thing, from Paul

Vestact has held Apple shares for clients in New York portfolios since November 2008. That was before they introduced the iPhone! At that time they traded on a (split adjusted) price of $13.70. Now they trade at $179.10 per share. That's a lovely "tenbagger" for those early investors.

Over this period, the company has grown into the giant that they are today, the world's most valuable corporation. Apple only started to pay dividends in August 2012. Interestingly, they mostly paid those each quarter from the proceeds of debt raised in US capital markets, and retained a giant pile of cash offshore. Of course that offshore cash came from selling iPhones, MacBooks and Apple Music subscriptions to people like you and me, outside of America. Here's how that capital structure looks in a cute graph:

If you want to dive into the details, check it all out on Asymco:

The Apple Cash FAQ

Last night's news was that Apple will now repatriate the bulk of those non-US cash savings, an amount of over $250 billion. This is because within the Republican tax package passed in December was a special provision to reduce the tax rate on repatriation transfers to a flat 15.5%. Apple is expecting to cough up about $38 billion to the US Treasury in the process.

It looks like Apple is bringing back home nearly all of its $250 billion in foreign cash

Michael's Musings

It is not new news that in developed countries, population pyramids are starting to invert. I didn't realise how quickly was happening though - Over the Next Year, Germany Will Hit a Scary Demographic Milestone. The key problem here is that the older the people get, the more they cost the state. If these people have retired, they aren't paying income tax.

Vestact in the Media

Byron chats to Business Day about South Africa's great retail sales update - Black Friday boosts November retails sales to 8.2% - surprising economists

Home again, home again, jiggety-jog. Asian markets all started off much higher but during the course of trading have slipped. We have also just received Chinese GDP data, which showed growth of 6.8%, slightly better than expectations. Then later today, the MPC tells us if our bond repayments have changed.

Sent to you by Team Vestact.

Email us

Follow Michael, Byron, Bright and Paul on Twitter

078 533 1063

Tuesday 16 January 2018

Winning Formula

To market to market to buy a fat pig. Reading Eddy Elfenbein's Crossing Wall Street this morning, he talks about the bull market of the late 1940's. The Dow tripled in seven years, which is on par with the move of the market since the lows of 2009. Here is the graph:

The bull market starts during a recession, given that markets are forward-looking, this start is not surprising. Note that the US then goes into another recession during 1953. How does the market react? Well, there is a slight pullback, and sideways movement leading into the recession. Then still in the early phases of the recession, the market puts 'pedal to the metal' and zooms up the page, doubling in less than two years. The move shows how markets dance to a different tune versus the economy. Eddy's closing paragraph is also noteworthy:

"But here's the important question: why isn't this bull market better known? My guess is because it never came to a crashing end. There's no way anyone can moralize about greedy bubbles when it never popped. The 1950s stock market continued to climb for several more years. We really didn't experience a major crisis until the 1970s."

Forecasting is a fools' errand, and saying that the market will correct soon just based on nine years of gains is a huge assumption! Here is the full blog post - The Forgotten Bull Market 1949-1955.

Market Scorecard. Nothing to report for the US due to their markets being closed. That leaves the All-share, which was up 0.26% I noticed this morning that during the December break Capitec now trades above R1 000 a share! As a Capitec customer, I can testify to their quality product. I can understand why they are growing so quickly. At the current share price, R100 000 invested in them during 2008 would be worth around R3.4 million today.

Company Corner

Yesterday Aspen announced that they received approval in China for their Alula brand of infant milk formula. The company indicated in their last set of results that they were on track to get the approval, it is still a huge step for the company. You may remember the 2008 Chinese milk scandal, where babies in China died and thousands were hospitalised due to poorly manufactured infant formula. The result of the scandal is that brands matter in China. You would rather pay up for a well know international brand than an unknown local brand.

In years gone by, Aspen's baby formula was purchased in Australia by tourists and then sold in China. Due to regulation changes in China, that changed and resulted in nutritional sales dropping by 8% during the last financial year for Aspen. Having a presence directly in China is an important stepping stone to future growth coming out of the country.

Byron's Beats

At the beginning of the year we always get trading updates from the retailers which tell us how well these businesses have done over the festive season. The years of 2016 and 2017 have been tough for our economy; expectations are certainly lower than previous years.

Yesterday Woolworths released their 26 weeks sales number for the period ending 24 December. Most people had done their Christmas shopping by then surely?

Group sales increased by a meagre 2.5%. In SA - fashion, beauty and home declined by 0.2%. Comparable store sales were down 3.4%. Food in SA increased by 9.4%, inflation contributed 4.4% to that growth though.

In Australia, David Jones increased 0.6% for the period. Country Road increased by 5.2%. Net retail space declined by 2.2% for David Jones as they continue to restructure their stores.

Due to lower sales and probably a drop in operating margins, Headline Earnings will drop 12.5%-17.5%.

All in all these numbers look stagnant. There is no point trying to put a shine on the tough environment in SA and the hard turn around in Australia. Food is doing well, the clothing is struggling. Ian Moir's strength is clothing; I'm sure he is working very hard at staying on top of that fast-moving sector. Let's remain patient.

More details when the full numbers come out.

Linkfest, lap it up

Michael's Musings

Lego and Tencent are teaming up! - Lego Plans Video Games, Social Network for Chinese Children

Michael Jordaan (FNB's ex-CEO) announced this morning that he is launching a new bank - Bank Zero. Having more competition and hopefully lower prices in the banking space is welcome!

Vestact in the Media

Bright chatted to PowerFM yesterday - Bright Khumalo - Who is Viceroy.

Byron chatted to Business Day about Aspen yesterday - Aspen wants trades audited.

Home again, home again, jiggety-jog. Our market is off to a green start this morning. The Rand is much stronger, suddenly strengthening by over 10c to $/R12.22. Later today, we have a UK CPI read and then a local mining production number.

Sent to you by Team Vestact.

Email us

Follow Michael, Byron, Bright and Paul on Twitter

078 533 1063

Monday 15 January 2018

Luxurious Profits

To market to market to buy a fat pig. Another day, another record for US stocks. For new investors, the current low volatility and record high moves are probably creating the wrong expectations about the risks involved in equity investing. As we wrote about last week, if you are in the equity market long enough, there will be a period where stocks go down instead of up. Despite those down periods, owning equity is still one of the best long-term investments you can make. Definitely less admin than having to check up on a tenant the whole time.

Market Scorecard. US markets were on the up thanks to strong earnings from US banks on Friday. Strong earnings point to a strong underlying economy. The Dow is up 0.89%, the S&P 500 was up 0.67%, the Nasdaq was up 0.68% and the All-share was up 0.80%.

Bright's Banter

Scott Galloway was asked how the cult of Apple developed. This is what he had to say:

So if we have our religion, Steve Jobs is our god. We no longer worship at the altar of kindness or character, but we worship the altar of innovation and shareholder value. This is the individual who's vision and genius created more shareholder value than any company in history. Which is effectively how we decide who our Jesus Christ is in a capitalist society.

The iPhone has become the new object of power. They shouldn't call it the iPhone X they should call it the iPhone Cross. It has a special place in our lives because we deem it holier than any other object in the world at this point. We take it everywhere we go. When it flashes we jump frantically to see what is going on.

Apple is a company that decided "we no longer wanna be the best house in the worst neighbourhood. Computer hardware appeals to a rational organ which is the brain; when the brain is a terrible competitor and startles all the margins. We wanna appeal to the reproductive organs which are irrational decision making organs." And as a result people will decide they wanna look cool, they wanna communicate success and innovation, and that they have good genes to mate. You end up with a business with margins somewhere between Hermes and Ferrari!

Today, the iPhone accounts for just under 20% of all the smartphones shipped globally, but it accounts for approximately 92% of the smartphone industry's profits. I am sure you're asking yourself how is this kind of dominance is possible.

Apple has pulled off the impossible in business, through a focus on appealing to our desire to be attractive to others and becoming a luxury brand. They are the first technology company to become a luxury brand that is a low-cost producer, the most popular phone in the world, outstanding supply chain since they can secure their components at the lowest price, and at the same time sell a premium priced product. No company has been able to pull this off in history. The motor vehicle equivalent would be a motor vehicle company with the margins of Ferrari and production volume of Toyota.

As a result, this quarter Apple has made double the profits that Amazon has made in its entire history. Apple will make more than the profits of the other three competitors namely Samsung, Xiomi, and Huawei combined. You'd need to get Toyota, Daimler, Unilever and P&G wrapped up in the mix before we begin talking about the profits of Apple. We really do not have the sense of the scale of what an unbelievable profit machine Apple is.

The components of a luxury brands company, is literally play for play what Apple has done. The board sat down in some room at some point and said we are a luxury brand. What do luxury brands have in common? They have an iconic founder, we have that. They have a sharp focus on artisanship and design, and we have that. They have a focus on vertical retail. Apple is much more like a Louis Vuitton store than it is a Best Buy.

And here is the genius move, the crazy irrational decision of forward integrating the stores which I think is the one decision that created more shareholder value than any other decision in the history of the business. Can you imagine Steve Jobs going to his board in the early 2000s and saying "you know I have an idea…we are doing ok but not great…I have an idea... STORES!!!" This is a time when stores were beginning their march downwards. Fast forward to today, Apple spends around $5 Billion to $6 Billion in leases on stores per annum.

Why Samsung is always behind Apple when it comes to brand equity and as a result, not generated as much in shareholder value? It is not because of their technology. Samsung has more engineers than Microsoft. Fanatics would argue that the Samsung galaxy is a better phone. It's because they do not have vertical distribution! Apple has decided to control the full experience and become a luxury brand like a Vuitton, a Bottega Veneta, or Gucci; you have to control the moment of contact with distribution.

During their product launch, Apple puts super models on stage, they put Christy Turlington! It's not a product launch, its a fashion show. They buy pages in Vogue magazine, they have literally stolen the luxury playbook and it has been the most enormously value creating decision in history. Low cost producer, premium priced product, no other business in the history of business has been able to pull this off.

Linkfest, lap it up

Byron's Beats You may have noticed that Facebook fell 4.5% on Friday. This was because Mark Zuckerberg released a post stating that Facebook would go back to basics and prioritise original posts from your friends and family as opposed to paid for content. This is probably his reaction/solution to all the fake news being created which seems to have influenced certain political outcomes.

The market's initial reaction was negative because paid for content is Facebook's bread and butter. But over the long-term, I think this is a good result. The long-term sustainability of the Facebook model is based on the user experience. Getting fed too much paid for content dilutes that.

Mark Zuckerberg Post

Michael's Musings

Are you qualified to be a 'Time Ninja' or a 'Distilled Spirits Guru'? How about a 'Security Princess' or a 'Galactic Viceroy of Research Excellence'? - Weird Job Titles: The Year in Review

If you are having a bad Monday here is something to cheer you up - LG's Built-In Voice Assistant Repeatedly Refuses To Work During Excruciating CES Demo

Steinhoff saga extends further than our shores, JPMorgan's Equity Traders Took a $143 Million Loss on a Single Client, we don't have exact details but JP Morgan confirmed the loss was tied to Steinhoff.

Home again, home again, jiggety-jog. It will probably be a slow day with US markets closed for Martin Luther King Jr day. The MPC meets this week to decide if your bond repayments will change, probably a bit soon to hope for a rate drop after rates looked to be going higher last year. Yes, the Rand has strengthened but the oil price has also increased.

Sent to you by Team Vestact.

Email us

Follow Michael, Byron, Bright and Paul on Twitter

078 533 1063

Friday 12 January 2018

Cryptoreturns

To market to market to buy a fat pig. Wow, what a week! Aspen started on the back foot thanks to the Viceroy rumours, which then spread to the rest of the market. Basically, any stock that has been down over the last two days has been caught up in the Viceroy rumour mill. It seems like a surefire way to tank a stock price is to mention that company's name and Viceroy in the same sentence. Maybe we should start referring to Viceroy as, 'Them who must not be named'?

If you want proof that the market is not efficient all the time and that it is driven by emotion, this week's movements will be exhibit one. Thanks to the Steinhoff saga, the pain of a stock dropping by 90% is still fresh in most people's mind. Making the Aspen share price move understandable. It highlights why knowing your investment time horizon is essential. Being a long-term investor, you have time on your side. Time to sift through all the rumours to find the facts. Once you have the facts then you can decide if these new facts change the long-term outlook for your investment and act accordingly.

If Aspen highlighted the power of fear, Kodak highlights the power of greed over a share price. Kodak announced on Tuesday that they are getting into cryptocurrencies, pushing their share up from around $3 to about $12 in a day and a half of trading! They have created their own cryptocurrency which photographers can get paid in when their work is featured. Seems like a good idea. So groundbreaking to justify the stock price rising fourfold? Probably not!

Kodak also launched a new interesting product. No, it is not a new type of film or camera, it is a bitcoin mining rig. This $3,400 bitcoin-mining machine is a cornerstone of Kodak's crypto pivot, here it is below.

So there you have it folks, two short-term moves based on emotion. Time will tell if underlying fundamentals come to match the current expectations.

Market Scorecard. More record highs for US markets yesterday. With a lower tax rate, companies are instantly worth more, the market is in the process of deciding just how much more. The Dow was up by 0.81%, the S&P 500 was up 0.70%, the Nasdaq was up 0.81%, and the All-share was down 0.62%. Aspen rocketed higher by 10.7% yesterday, to be back at the level it was before 'Them who must not be named' were rumoured to be targeting them.

Linkfest, lap it up

Byron's Beats

I have always found that legendary investors have a great knack for explaining things that are complex. Making things that are complex seem simple. It is a fundamental trait as an investor because it keeps your clients informed and in touch. It also allows yourself, as the decision maker, to see a clearer picture of what is actually going on.

Names that come to mind include Warren Buffett and Howard Marks. A younger generation of investors/bloggers have also been very good at getting their message across. Josh Brown, Morgan Housel and Eddy Elfenbein are great guys to follow if you are interested in markets.

The tax cuts taking place in the US are fairly complex. But as a foreign investor in the US stock market, the most important issue to look at for us is the corporate tax rate. In his weekly summary, Eddy Elfenbein gives a very good explanation of how it impacts these companies and their shareholders.

"I do, however, want to make a few comments about the change in corporate taxes and how it impacts investors. The tax law lowers the corporate rate from 35% to 21%. Effectively, what that means is that the U.S. government is a silent partner in every American business.

Previously, they had an odd relationship with the partners, because the government owned no part of the business, yet they were entitled to 35% of the final cash flow. All the other shareholders got the other 65%.

With this new law, the shareholders' stake rises from 65% to 79%. They get an extra 14% at no cost. Imagine if you had a silent partner who said to you, "here, take my 14% and you don't owe me anything." Of course, that's not literally what's happened. But effectively, it's pretty darn close.

This is a huge benefit for shareholders. It's almost like, overnight, you got 20% more shares of all your stocks. This is especially good for many of our Buy List stocks because they're very profitable. That's why they pay a lot of taxes."

Give that explanation around the braai tomorrow and look like a genius.

Michael's Musings

Ever wonder how long it would take a sport super star to make your annual salary? Well now you can find out - Sports Superstars Salary Calculator. The time it takes for them to have a good night's sleep, is all that is needed for them to make what most people make.

This is probably not only an American problem. If a procedure is covered by medical aid and there is a chance that the procedure will benefit the patient, then why not do it? - Why American doctors keep doing expensive procedures that don't work.

Vestact in the Media

Both Byron and Michael get a mention in this Business Report article - Aspen share price knocked by rumours of investigation target.

Byron chats to Fin24 about Steinhoff and their subsidiaries - 4 questions Steinhoff must answer.

Home again, home again, jiggety-jog. Good to see our All-share up on the open today. Later in the day, JP Morgan releases their FY numbers, and there is the release of US, retail and CPI numbers. Good luck to the Protea's this weekend!

Sent to you by Team Vestact.

Email us

Follow Michael, Byron, Bright and Paul on Twitter

078 533 1063