Politically Democratic

"Democracy is a relatively new thing for most of humanity. 100 years ago my wife and daughters would not have a say. In this country, 25 years ago, it literally depended on what you looked like in order to vote, crazy. In fact there are many, many countries that do not enjoy the benefits of true democracy at all."

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To market to market to buy a fat pig Ouch! Retailers were crushed yesterday, as a collective they were down 6%. Mr Price was down much more though, down 16% at the close yesterday and TFG down 7.8% in sympathy. The trading statement showed that the company went backwards over the 18 week period they are reporting on, sales were up 1% but comparable sales were down 2.4% and product inflation was 11.2%, so in real terms they went backwards by 10%! The reason for the poor performance was due to winter not really arriving this year. Most other retailers have said the same thing, Woolies implemented their winter sales in the middle of winter to clear stock. MR Price said in their statement that they should have started their winter sales earlier. Here is the trading statement - Mr Price Group Limited - Trading Update

The ALSI ended the day down 1.3%, resources also had a poor showing, down 3.2% for the day. Our currency was under pressure due to weaker trade data than expected, our trade surplus was lower than analysts had forecast. Given that over the last 5 years we have been more in a state of trade deficit than trade surplus, having a smaller surplus than expected is not too bad. Economics 101, a trade surplus means that we are exporting more than we import, which means on balance more people are buying our currency to pay for the exports than people are selling our currency to pay for imports. So the inverse, where you have a current account deficit, puts pressure on the currency (more sellers than buyers).

US Markets ended in the red yesterday, The Dow down 0.3%, The S&P500 was down 0.2% and the Nasdaq was down 0.2%. The result is that both The Dow and The S&P 500 were very marginally down for the month of August (down around 0.1%), which means they have broken their streak of positive months. Don't fret, markets can't go up all the time, going sideways or even down means that you have more time to buy these stocks at lower prices.

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There are certain topics in which you are never going to please all of the people, all of the time. It is of course in opinion pieces not your intention to please all of the people, all of the time, rather the objective is to be exactly that, objective. My mother always said, no religion, no politics with strangers. Indeed that may extend to beyond strangers too. Somehow we are unable to be objective when it comes to these things. Perhaps added to that mix must be football, I am reminded that two Central American countries went to war over what was just a simple match at face value. It was a qualifying match between Honduras and El Salvador and whilst the root of the war wasn't the actual football, the match saw the tensions escalate to violence.

Democracy is a relatively new thing for most of humanity. 100 years ago my wife and daughters would not have a say. In this country, 25 years ago, it literally depended on what you looked like in order to vote, crazy. In fact there are many, many countries that do not enjoy the benefits of true democracy at all. Democracy lets the people decide and then you get to deal with the consequences. The weighty matter of deciding budgets and allocating spending then rests with government officials and bureaucrats, their job is to deliver. Like we have recently found out (that pesky mark still sits on my left thumb, no matter how many showers), the accountability can be a powerful citizen tool.

Democracy allows everyone to decide what they should and shouldn't do, that counts economically too. We forget (and should never) that just over a generation ago in South Africa most of the population had (for a long time) no access to services of any quality and could not change that at the ballot box either. You cannot fix the impact of multiple generations of oppression in a single one. Unfortunately, not everybody wants to hear that. The resources pot that government has is not that deep, and that counts for most governments. There are a few exceptions, let us just say that we are not all Nordic looking (large oil reserves small populations).

There is a direct link between allowing your citizens the benefits of an open economy (and making sure that there are no impediments) and actual improvement in living standards. Think of the opposite. The best example sadly is the two Koreas. The people of a certain generation in the North are shorter and look different as a result of malnourishment during their respective childhoods during times of great famine. When the state controls the resources, people are just numbers. When people can decide and choose what they want to do, the outcomes look like the South and not the North in Korea. Freedom to decide what haircut you want.

Don't fret about democracy, rather be happy that you are having the conversation and are not witnessing acts of barbarity in the town square. Human progress is made, won and then maintained. We are in the maintenance part right now. Look at what happened in Brazil overnight. Labour and their global support bases might not like it, the wheel does however turn, make no mistake, not everyone is happy that Dilma Rousseff needs a new place to stay. She may well find an uncomfortable small room in her golden years I am afraid, I am sure that some politically would welcome that.

Citizens look for accountability, those who control the vast purse strings must do so as if it was their last cent, there are of course many a government that has run out of money. Even in one of the oldest democracies, Greece. Although the root of the problems that they have may well be linked to a lack of democracy. If you are on the wrong side of change, it may not make you feel comfortable, most especially when you are engaged in a session of musical chairs, the fewer, the stiffer the competition. The recent outcome of the local government elections will see reflection of all sorts.

Lastly, the money and to follow that is important. Capital is always binary as I say, the starting point is to always look for the best and only outcome acceptable, to make money. If capital and in this case Futuregrowth doesn't lend as it feels the risks are too much, then that is the outcome of not having kept your ducks in a row. The pot runs dry and real decisions are then made. Futuregrowth has obligations to the people who invest money with them, those are the people that they answer to, at the end of the day. Don't run around like headless chicken as a result of someone else's actions.

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Linkfest, lap it up

It will be interesting to see the results from this test, will workers be more productive comparatively and will less work pressure result in more creativity/creative solutions to problems? - Amazon Tests 30-Hour Work Week. Remember that Amazon has a slight image problem regarding treatment of workers and working hours.

Stock piling oil or when that stock piling slows it will probably have a marked effect on demand and supply dynamics and then the price of oil - Mystery of Oil Held on Chinese Islands Puzzles Crude Markets. My favourite line in the article was this though: "Nobody replied to a fax sent to the press office of the National Energy Administration", very 20th century of them.

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Home again, home again, jiggety-jog. Our market is in the green this morning, Mr Price is tanking again this morning currently down around 7.5%. The Rand is holding steady this morning around the $/R 14.70s. Significant data out today is vehicle sales in our local market and then initial jobless claims in the US.

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

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Some Green on the Screen

"Over the seas and far away (from here), stocks rose sharply in New York, New York. The S&P tacked on 1.62 percent, the nerds of NASDAQ flew sharply higher, adding nearly one and four-fifths of a percent. Yowsers, that is a monster day. The Dow Jones lagged a little, that index was up "only" 1.42 percent."

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To market to market to buy a fat pig. A down day locally here, most of it was catch up to a worse end on Wall Street in the prior session. The gold price was plumbing five year lows, I guess with inflationary pressures not forthcoming and with the rate hike cycle set to begin in December in the US, these is very little to be excited about for bullion. For me at the end of the day, the fundamentals for the metal price must be driven by a function of supply and demand. With a global population becoming richer as we go on, I would say that the outlook for global jewellery markets and by extension gold and platinum, are positive on a multi decade basis. We would however rather own Richemont, who manufacture and create beautiful watches and jewellery. And their margins are much higher.

Most of the big diversified resource stocks enjoyed a good day, South32 was an anomaly. Woolies had a great time of it, that stock was up 3.36 percent after a strong 20 week trading update. Right at the bottom (or top, which ever way you look at it) of the list of losers was Mr. Price, down five and a half percent on the day. They released results mid afternoon which were, as you can no doubt tell from the share price having swooned, poorly received. This comes hot on the heels of the trading statement five days ago, on Friday. That was well received, the share price popped to 222 Rand, the results themselves saw the price flop by the close yesterday to 202 Rand. See below in company corner for a short review of the results.

PPC released results yesterday, this was for their full year to end September. This is one of the oldest listed companies in South Africa, and the business itself has been around for nearly 125 years (in 2017 it will!). Cement is a vital part of any economy, you need enough of it, cheaply supplied to the building industry in order to make progress on local infrastructure. The company have committed themselves to becoming a continental powerhouse, building plants in Rwanda, the DRC and Ethiopia, as well as Zimbabwe. As such the old PPC you knew, hugely cash generative and a big dividend payer, is changing into a growth business. Even after the five percent gain yesterday the stock is still down 40 percent over a year, over five years the stock is down 51 percent.

Whilst the company is changing and morphing into something that obviously has a higher risk and by extension reward profile, it does not fit our investment profile. If you must own something in the construction space, and you can afford to ride through what are deep cycles, then PPC is definitely for you. The metrics are definitely improving after the management ructions over the last year or so. This is as a result of focussing heavily on cost reduction, those are starting to pay off. The DRC (55 percent complete on 1 million tons per annum plant) is potentially a huge win for them, that country desperately needs all sorts of infrastructure. Cement production across the continent, perhaps the best early investment into the continent.

Over the seas and far away (from here), stocks rose sharply in New York, New York. The S&P tacked on 1.62 percent, the nerds of NASDAQ flew sharply higher, adding nearly one and four-fifths of a percent. Yowsers, that is a monster day. The Dow Jones lagged a little, that index was up "only" 1.42 percent. There were a few noticeable losers, Target slid over four percent after recording sales growth lower than anticipated, one of the bigger stories however was equipment and chip maker Qualcomm, falling nearly ten percent during the session to a five year low. There is a fight going on in South Korea around the licensing practices of the business in that territory and whether they are anticompetitive or not, and more importantly whether they violate law in that country. Tough out there.

There was also the not so small matter of the release of the Fed minutes from the prior meeting. These are part of the clues of the anxious many as to when the Fed will raise interest rates. If only the same people spent their energy trying to figure out the creditworthiness of the companies whose bonds they invest in, or the prospects of that said company, that would be more useful than getting anxious about something beyond our control. Which is actually why people are a lot more anxious about flying than driving, even though they know that flying is a whole deal safer statistically than driving. The control thing, sitting in a car seat I am in control. Sitting at the back of an airplane in coach, you are not in control. Anyhow, most of the committee members are in agreement, barring for an external shock, that December is the right time to raise rates in the US. I recall that the talk in 2010 and 2011 was similar in nature, the rate hikes never materialised then, we are this close.

Less Fed anxiety over the global economy, not an unanimous decision, those are reasons given for the sharp rally in stocks overnight. That has also flowed through to Asian markets, Japanese stocks up nearly one and a third percent as we write this, stocks in Hong Kong are also up sharply, nearly a percent and one-fifth. Aussie up over two percent, thanks in part to commentary from the AGM over in Perth, I saw chairman Jac Nasser taking questions earlier. Very stylish and distinguished chap that Jac.

Andrew MacKenzie the CEO was again very apologetic about the recent Samarco Dam burst, the fine from the Brazilian government could be as much as 2.5 billion Dollars. In Nigeria, the events of yesterday and the day before are simply shocking, dealing and fighting terrorism is a global issue. Not much by way of cameras there, hence the lower coverage, the same suffering for humanity. I feel for all of the people impacted by global terrorism, be they in Beirut, Paris, Kano or Yola.

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Company corner

Mr. Price stock as discussed earlier fell sharply on their 6 month results release. Obviously with the half year results there is more information, basic EPS rose 15 percent to 426.2 cents per share, the dividend increased 17.3 percent to 248 cents. There is a pretty hefty 58 percent dividend payout policy. Mr Price revenues grew 9.2 percent to 9 billion Rand, cash sales growing faster than credit sales. Remembering that cash sales represent 81.4 percent of their total sales. If it means cash, it means that the customer pays for it, not necessarily cash, remember. i.e. You can use your bank credit card, that counts as a cash sale for Mr. Price, they get the money in the till.

Loads of regulatory activity in Nigeria impacting on many businesses and no doubt consumers too, Mr Price: "Trading in Nigeria was initially strong, but slowed appreciably in the last two months due to recently imposed restrictions on imported merchandise. Although these are expected to be temporary, the Company's interactions with regulators are focused on urgently re-enabling supply." How NOT to fix your economy, place restrictions on the only people investing in it, SMH.

CEO of Mr. Price, Stuart Bird, had rather more sobering news about the local lay of the land: "The economy is not in good shape and consumer confidence is understandably low, but our resilient fashion value model is built to withstand these conditions". Whilst Mr. Market was obviously looking for an Oliver Twist print (we want more), the results looked good to me. However, when your stock trades on a 25 multiple, the market expects more.

Expectations are for the company to deliver in excess of 10 Rand in earnings for the full year to March, and growth rates in revenues are expected to be in the 12-14 percent range. Earnings are expected to grow by the high teens, percentage wise. As such the current rating looks a little cheap. Whilst we like the company, and the prospects look good (the share price equally looks good at current levels), the truth is with Woolworths and Brait in our portfolios, you cannot own everything. If you are looking for extra retail exposure, this is more than a "decent" company, which we are comfortable to own as supplementary exposure.

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Linkfest, lap it up

Being happy at work goes a long way to giving better customer service and increased productivity. Starbucks lands at the top of the retailer list this year and Apple stores, lands at number 4 - The 10 Happiest Retailers To Work For This Year. Great to see two of our core holdings making the list!

This link has a 2 minute video on the history of Tesla. Give it a watch, it is very interesting. I did not know that Musk was not the founder but a very early on investor - Tesla in Talks With Germany Over Possible Battery Factory.

The consumer is always looking for value for money, with the result being that more people are shopping at discount stores. The trend going forward will be small niche stores where you pay a premium for the service and quality of clothes and then large discount warehouses. The companies stuck in the middle are going to struggle as new ways of doing things and increased competition for customers spend, drives prices down - Americans have been developing a new shopping habit for years - and now it's hurting Nordstrom, Macy's, and JC Penney

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Home again, home again, jiggety-jog. Inflation numbers were lower here yesterday, which is good news. We should start a whole lot better as a result of the strong rally last evening on Wall Street, some green on the screen!

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

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