China grows GDP by $714 Billion

"So, if your base is more than double that of 2009, any growth rate now would represent double the growth from back then? Do you think that people get it? No, for the same reasons that people do not save and appreciate compounding interest, it is the same reason they refer to a "slowing China". Slower growth rates yes, bigger base definitely. And as if you needed more context, 6.9 percent growth on 10.36 trillion Dollars is around 714 billion Dollars. Or, differently put, around one-third of the entire 2006 GDP. Now imagine that headline, China seen adding one-third of total 2006 GDP this year alone."

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To market to market to buy a fat pig. Sorry Province, I got that one wrong! Sorry, Cape Town, you are our guests this weekend. The Boks came through and I am pretty sure all of you were Scotland the Brave yesterday afternoon, cussing a local ref. I am guessing that Craig Joubert is to the Scots, what Bryce Lawrence is to us. And it takes a long time to get over it. Rugby over for a bit, it continues again this weekend, this is the real crunch time, a guaranteed Southern Hemisphere win, with our ten percent of the global population we are pretty good, right?

Markets now, China and their GDP read for the 3rd quarter will capture most of the imagination this morning. The Bloomberg headline reads: China's GDP Growth Beats Forecasts as Stimulus Supports Spending. As everyone has been pointing out all along, the services sector is picking up the slack where the industrial sector slows.

Fixed asset formation is still growing at 10 percent plus (a little more than that), retail sales are now growing at a faster pace than the building. Which is what they need, which is what we all need, their economy to move to more consumption based. I see the naysayers saying things like "they can say whatever they want, it is China". Really? Wrong, life for the average Chinese person is far better now than at any time in history, there may not be complete freedoms, yet more exist than at any other time in their history. Commodity prices have had a muted response this morning as a result of the "mix" of GDP. No hard landing? What now for the naysayers? They will still point and cherry pick negative data, in the same way everyone does in markets. You need that as a long term investor, buyers and sellers meeting in the middle with completely different opinions on exactly the same thing, to provide you with the liquidity that you need.

Having said that, this is the slowest annualised growth since 2009, back then the Chinese economy was not even five trillion Dollars in aggregate. Be careful of just reading the headline number and say, oh, China is slowing. Yes, perhaps in percentage growth terms, look at this bar graph courtesy of trading economics:

So, which one sounds more or less impressive of the two sentences? Chinese GDP growth slows to worst level since 2009. Or, Chinese GDP in aggregate in 2014 more than double that of 2009. So, if your base is more than double that of 2009, any growth rate now would represent double the growth from back then? Do you think that people get it? No, for the same reasons that people do not save and appreciate compounding interest, it is the same reason they refer to a "slowing China". Slower growth rates yes, bigger base definitely. And as if you needed more context, 6.9 percent growth on 10.36 trillion Dollars is around 714 billion Dollars. Or, differently put, around one-third of the entire 2006 GDP. Now imagine that headline, China seen adding one-third of total 2006 GDP this year alone. Not likely to see that.

Over the seas and far away, in New York, New York Friday, stocks rose in the second half in response to perhaps better industrial earnings, both General Electric and Honeywell beating estimates and GE in particular leading the charge, up 3.39 percent by the end of trade, more on that tomorrow. The only stocks on the end of the losers were "materials", the ones that we know as resources. The S&P 500 had ended up 0.46 percent, at 2033, the Dow Jones Industrial Average tacked on 74 points (and some small change) to end at 17215. The nerds of NASDAQ managed to add only one-third of a percent. Walmart is still under pressure, the stock traded at another fresh 52 week low, the broader market has outperformed the stock by over one quarter. Amazing. Amazon on the other hand is 88 percent higher over 12 months.

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Linkfest, lap it up

A technology 30 years in the making, which sounds like many lifetimes in todays fast paced world - The Little Gear That Could Reshape the Jet Engine. This new jet engine will be quieter and more efficient.

Change is never pleasant especially if you are on the wrong end of it. In this case, taxi drivers are fighting for their way of life. It has now been shown though that the current taxi system globally is inefficient, so it is just a matter of time until it no longer exists - Uber wins London legal battle over taxi app

Having a relatively small population and the systems in place to make cashless payments makes it easier to move to a digital currency. The biggest obstacle is getting older generations to trust something that they cannot touch, where the article points out that there are still 7% of the elderly that only use cash - Sweden is on its way to becoming the first cashless society on Earth

When investing you are thinking long term, the problem with long term is you don't know if your strategy is working until you have tested it over the long term and if it doesn't work you have wasted many years of potential returns - How Long Can You Stick With Failing Factor Investing?

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Home again, home again, jiggety-jog. US Futures are lower, Asian markets are lower on the session too, I guess the Chinese GDP read is lukewarm at some level, a number below 7 percent will be perceived as such. Even though as we showed you above, this is not really the case.

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Sent to you by Sasha and Michael on behalf of team Vestact.

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You own companies

"Stocks go up and down, in the end it is only the great companies that drive the levels of the overall market. For instance Aspen once traded at 5 or 6 Rand, I remember, as did Famous Brands, Steinhoff was 20 Rand a share not so long ago. Equally Anglo was under 100 Rand in May of 2003, I remember it well, by June 2008 the share price was around 540 Rand a share, It is now 145 odd Rand a share. In London it is down 14 percent in a decade and a half. The market consists of different companies doing different things, it is not a single beast"

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To market to market to buy a fat pig. The concerns around the relative health of the Chinese economy persists, this time export and import data this morning are not the right flavour for those suggesting that China is just OK. I guess it is, and perspective is badly needed at this time. Paul tweeted yesterday: "China will grow at around 7% for next 5 years, said Finance Minister Lou Jiwei. Pretty good, if you ask me.", with the link: China economy enters 'new normal' eyeing 7% growth rate: G20. Yes, that is pretty good. That is excellent in fact.

Even if the Chinese economy grows at five percent per annum for the next five years, that is still an enormous number added to global GDP, an economy roughly the size of the United Kingdom. I think that people don't realise the size and scale of the present economy and how quick growth rates off an increased base is harder and harder to achieve. If they achieve 7 percent growth over the next five years, then the country would have added an economy of somewhere in-between Japan and Germany, the 4th and 5th biggest economies on the planet.

Are you starting to see the size and scale and the very magnitude of what is happening here? Equally if the whole globe grows at three percent per annum for the next five years, it adds a collective 12.3 trillion Dollars in annual GDP. Bigger than China is currently. If it is 2.5 percent, which I certainly think is achievable, then it is equal to the Chinese economy right now. Nobody would ever turn around and say, gee, we added a whole China over the last five years in economic output.

Anyhow, eye popping numbers aside, let us have a look at the scoreboard in Jozi, Jozi yesterday. It was a bleak day, collectively stocks were down half a percent, the only spot of excitement was the debt reduction plan of Glencore, suspending the dividend for the balance of this year and next year, selling assets, slowing down on current spend and most importantly for the market, a rights issue of 2.5 billion Dollars. That is pretty huge, and as far as my reading leads me to believe, management and Glencore staffers will be involved to the tune of 22 percent, the rest is underwritten by Citigroup and Morgan Stanley.

The WSJ article: Glencore Scraps Dividends, Raises Cash to Cut Debt quotes the CFO Steve Kalmin as saying that this is about making this business bulletproof and robust. The share price rallied on the day, up 7 percent in London. The stock is however, and strap yourself in, still down 35 percent over the last month, that is in Pound Sterling terms. Year to date it looks like a train wreck, down nearly 56 percent in Pound Sterling. I remember when Glencore was supposed to be solid, as a result of their trading business which has no commodity price variance.

Almost in the same way that Kinder Morgan Inc. has, a yield of 6.37 percent in Dollar terms at these levels. Huh? And forward, the dividend is said to be 2 Dollars a share. The company transports gas and CO2, it has storage terminals and other product pipelines. So what is Mr. Market telling you here? Richard Kinder, the cofounder and executive chairman gets paid one Dollar per annum, no stock options and no perks, nothing, check out his Reuters basic compensation. Only his dividend.

He did buy around 3,9 million Dollars worth of shares the other day, in July, at 30 percent higher than where the share price is now. He owns (after that transaction) 234,012,353 shares. If the dividend is two Dollars, as the company suggested, he gets 468 million Dollars before dividend tax. Even at the top end rate, he still gets to keep 60 percent of that free and clear. So do not feel sorry for him. Perhaps this is a case of storms on the horizon, why would Richard Kinder shell out around 4 million Dollars around two months ago? He obviously still believes in his business and thought at the time it was oversold.

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I want to highlight an email conversation that I had with someone yesterday. Remembering two things, one, if you are invested in single stocks that means that you do not own the market or the index and two, the index is made up of companies that dynamically change places in the ALSI 40 as a function of their prospects and market participants pricing that future accordingly. For instance, take some of the single commodity stocks, the companies that mine one specific group of metal, their price action can be very volatile as a result of the underlying price. Over five years Kumba Iron Ore is down 75 percent, the price that is. Production is up sharply, the iron ore price in that time has moved around wildly. At the beginning of 2013 the stock topped out at 611 Rand a share, currently it is 86 Rand, the lowest level since the split of Kumba Resources.

In 2011 the company paid 42 Rand a share in dividends, almost exactly the same in 2012, in 2013 it was nearly 33 Rand a share. In 2009 the total dividends had been over 20 Rand a share, the same in 2010, last year in 2014 it was 34 Rand. Add those all up and you have received 190 odd Rand, back of the matchbox here. Fast forward to the interim results this year, the dividend may be suspended for the time being as the iron ore price has fallen from 190 odd Dollars a ton to below 45 Dollars a ton seen in July of this year, it has since recovered somewhat to nearly 57 Dollars a ton. The single commodity that the company mines has moved so violently and they have now been forced to cutting costs and worrying about conserving cash, like many other miners. Eish.

So Kumba used to be a major company in the ALSI 40, with a market cap of nearly 200 billion Rand. That would make it roughly the same size as Vodacom now. Parent company Anglo American is barely larger than that. Currently Kumba is half the size of the 38th placed Netcare in the index, times change and change very quickly. That is why I had to reply to the email that simply said: "You know I`m a big fan of Vestact and its optimism but one honest question: is there value still value in the SA equity market?"

I replied as follows: "Yes is the short answer. Stocks go up and down, in the end it is only the great companies that drive the levels of the overall market. For instance Aspen once traded at 5 or 6 Rand, I remember, as did Famous Brands, Steinhoff was 20 Rand a share not so long ago. Equally Anglo was under 100 Rand in May of 2003, I remember it well, by June 2008 the share price was around 540 Rand a share, It is now 145 odd Rand a share. In London it is down 14 percent in a decade and a half. The market consists of different companies doing different things, it is not a single beast is the point I am trying to make. Make sure you own the good ones and that you are not looking for a turnaround or hoping the price bounces back 'just because'."

I think the conclusion is that the market is not your portfolio and your portfolio is not the market, they are two very different things. In the same way the economy is not the market, and the market is not the economy, your portfolio is not the market. Nor is it reflective of the weaker Rand, as I pointed out yesterday, Sasol is down 14 percent in 10 years in Dollar terms (the Sasol ADR), the local price is up around 90 percent. All I am trying to say is that one should be careful suggesting that all stocks of a specific company, or indeed sector are all equal. They are not, all companies are different. Each specific holding in your account is completely different from the last and from the next.

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Linkfest, lap it up

The World Economic Forum did some research on how companies perform after raising extra capital. It is not surprising that raising extra capital benefits smaller firms more than larger ones. I found it interesting to note that on average raising extra capital resulted in a significant increase in assets and sales, with the increased growth rates being sustained for a number of years. Given that you have professional managers running companies, it would makes sense that more often than not they allocate capital effectively. - How does issuing equity and bonds affect a company's growth?

This highlights that being wealthy comes from equity in companies and not from your salary. It is great to see employees that have kept their stock over the years. I have chatted to local executives and they find that employees in our market don't want shares and when they do get shares they end up just selling them - Millionaire Grocery Clerks: The Amazing WinCo Foods Story

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Home again, home again, jiggety-jog. Stocks across Asia are mixed, Shanghai is up, whilst a negative GDP read in Japan has sent the Nikkei 225 lower, down two and one quarter of a percent. The huge news is that Kevin Anderson has beaten Andy Murray, you knew that already though. Pretty magical. We can forget the national football team, we don't want to talk about that.

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Sent to you by Sasha and Michael on behalf of team Vestact.

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Invest while others are fearful

"Is the company going to be bigger and more profitable in 2, 5 or 10 years time? Yes? Then how much are you willing to pay for that growth? It is a fools errand to think you can know exactly what the growth/ profit number will be in the future. All you can do is have an assumption of what the future will look like and then pick a management team to get the most of the opportunities coming their way."

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To market to market to buy a fat pig. The news all over my screen this morning is how economists surveyed by Bloomberg are of the opinion that China's GDP 'only' grew by 6.3% in the first quarter as opposed to the official data which indicated growth of 7%. While the growth numbers from China have always been questioned, this is the biggest gap I have seen between the official number and people's view of what it is. While you would like the number to be as accurate as possible, the problem with stats is that there are always assumptions and data collection errors in the final results. The other argument being made at the moment is that GDP is a poor measure of the growth in wealth of an economy. Luckily for us there are numbers further down stream that are easier to capture, like the record sales of iPhones in China or the record volumes of iron ore being exported at the moment.

The point I am trying to make is that even if the Chinese GDP number is wrong, there is nothing you can do about it and it won't matter in a weeks time. Market prices of commodities or equities may change to reflect the new assumptions but with a long time frame to your investments it doesn't matter because there will be many many, many more adjustments to assumptions about the future. Prices will reflect the assumptions, there will be volatility as there is a mass change in assumptions and then a new trajectory will be set for the market.

Remember that the short term share price moves are all based on emotions, where the long term share price moves is based on the fundamentals of the company evolving. If I feel great about a company today, I start buying it and so does the rest of the market, it's share price goes up as a result. I feel even better about the company now because the share price move 'confirms' my views. In two years time, if the company shows poor fundamental data the share price will be based around that as opposed to the warm feeling I got when myself and the rest of the market was buying the shares. Is the company going to be bigger and more profitable in 2, 5 or 10 years time? Yes? Then how much are you willing to pay for that growth? It is a fools errand to think you can know exactly what the growth/ profit number will be in the future. All you can do is have an assumption of what the future will look like and then pick a management team to get the most of the opportunities coming their way. If the future looks very different from what you anticipated it to look like then sell the share because things have fundamentally changed for it.

What to do about the market's emotions? Well nothing, accept that you can not predict the future and that the market is even less predictable. The key is to be adding regularly! There will be times that you buy at inflated prices and there will be times you get a great discount but most of the time you are probably getting fair value. By adding regularly you remove the luck factor which impacts once off lump sum investments, where timing matters to your long term performance. Remember that most of us will probably get to around the 90 mark given the rapid advancement in healthcare, long enough to ride out any market slump but also if you plan to retire at 60, you will need a sizeable asset base to live off of. Get investing and saving - Why Save?

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Company corner

Looking at SENS this morning we had Anglogold Ashanti Limited - Report For The Quarter And Six Months Ended 30 June 2015. The numbers look solid enough given the tough environment for gold and gold producers. The shares are up 7.8% at the moment. The company unfortunately still made a loss given high interest costs but on an adjusted basis made a small profit. The other good news is that they brought their all-in costs down from $/oz 1 155 to $/oz 1021. If all the different costs reported confuses you as much as me, here is how they are calculated - Gold companies' cash costs and all-in sustaining cash costs.

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Linkfest, lap it up

This is a very interesting video from the Business Insider. The book captures the economic environment felt in the US when it was written - Here's the real, forgotten meaning of 'The Wizard Of Oz'

Here is another way technology and apps are helping people to save - Digit automated savings plan adds cash rewards for hanging on to your money. Having small amounts of cash come off your account every few days means most people do not even notice that they are saving. The small amounts add up over time.

This ties in nicely with the savings discussion above, note his NAV at retirement age - How Much Warren Buffet Was Worth At Your Age

Is this proof that we are more 'caveman' than we would like to admit? - Why Do Deep-Voiced Politicians Get More Votes?

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Home again, home again, jiggety-jog. Our market is up 0.5% this morning with Naspers up 1.2% and MTN up 1.6% (just below that phycological R200 mark). The Rand unfortunately is looking a bit battered dropping to R/$ 12.87 with R/$ 13.00 looking more likely. I see that Morgan Stanley has a 'Troubled 10' currency list and the Rand is one of them. The Malaysian Ringgit has had a worse time though, down about 5% to the USD over the last week.

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Sent to you by the Vestacters, Sasha, Michael, Byron and Paul.

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