Money with a dash of Funny: Sasol

Showing posts with label Sasol. Show all posts

Tuesday, 28 February 2017

Buffett piles into sticky Apple

"... essentially going out and finding out as much as you can about how people feel about the products that they ... it's just asking questions, basically. And Apple strikes me as having quite a sticky product and enormously useful product that people would use, and not that I do."

To market to market to buy a fat pig A mixed bag back home here, stocks slipped in the last two hours of trade, down a little over one-quarter by the close of business. Financials were the biggest laggards, the currency was pretty steady post the budget speech and has found "a level" now. New 12 month highs for Adcock and Clicks, people getting their meds and vitamins? Hair products and deodorant? All good there people? The strong(er) Rand dragged much of the top dual listed stocks with it, Intu, Hammerson sliding with banks. At the other end of the spectrum, in a rather sparsely populated #winners board, there was the likes of Kumba, Steinhoff and South32, as well as Sasol post their results.

MTN was also there, after they released an updated trading statement ahead of results due on Thursday. I tried to answer a few questions for a journalist, this is what I wrote about the rather ugly looking trading statement: "It has been a "very difficult" time for MTN. They are throwing the kitchen sink here at this point, the new chiefs will be inherited a house that is structurally sound, in bad need of a repair. Remember that they (MTN) pay the Nigerian fine in Naira. They don't have to bring the money here, they do have to report it here, get that? I would say, wait for the numbers. I suspect that in six months time (from now), you will get a very clear idea of strategy with the new team be that banking and payments, music and internet, entertainment and streaming, etc. Predictions are too hard to make, best left for other people."

In short, let us wait to see what the results reveal, and then revisit in six months time, to see what the strategy says. The stock added 0.8 percent on the day. Meaning that basically there was nothing new in here that the market was not expecting. Rob Shuter would have had his second day on the job in two weeks from today. There were also results from Hulamin, I passed the CEO in the halls of the JSE, the CNBC producer said I had been rude about their business on the box (I was just before him), which I had not, I was a little unsure of what to say. Play the reel, I should have shouted. Bidvest also had results, as you well know, we prefer the food part of the business, BidFood/Bidcorp. The Bidvest share price was down a bit, over a percent. Both stocks have done "decently" in the run up to the unbundling and beyond.

12 in a Row. "Make that a dozen" is what I hear Mike Haysman say in the background. The Dow Jones continued the winning streak to a dozen sessions in a row, the longest streak since 1987 (The US stock market is on the verge of making history). When Three men and a baby was the highest grossing film. Zero academy award nominations by the way. In 1987 Michael Douglas won best actor for his portrayal of Gordon Gekko in Wall Street. According to Wikipedia, on the 9th of January that year "Police raid English-language newspapers, seizing documents related to an advertisement calling for the legalising of the African National Congress." Do you remember the incident? Govan Mbeki was released from Robben Island prison that year. Do you remember that? It was sure a long time ago.

Spandex, jelly shoes, parachute pants, aerobics, the rise of athletic wear, Doc Martens, punk wear. Yip, that was the last time that the Dow Jones had 12 winning days in a row. Dig out those old photos (they would be physical), have a large laugh at the lot. You are not cool now. At session end the Dow Jones had grabbed another 15 points to the good (0.08 percent higher), the broader market S&P 500 added one-tenth of a percent, whilst the nerds of NASDAQ added 0.28 percent on the session. All record highs for all the major indices. And of course, this all comes ahead of the Trump address to congress. Bloomberg says - Trillions of Dollars Are at Stake When Trump Speaks to Congress. YUGE. Incredible. You're going to love it.

It was Warren time part II on the box yesterday, the 10th year that CNBC (and Becky Quick I think) have interviewed Buffett after his annual letter. It is always in Omaha, it is always in a store of some sort that Berkshire owns or has a stake. That is the way that Warren rolls. He is as sharp as a pointy HB pencil (some people have sharpening skills), he is witty and practical. That is what everyone loves about him, the old man investor. The billionaire next door. Lucky for us, in the age of the internet, there are transcripts, this one is "unofficial".

I do not agree with everything he says. For instance, to say that there was nothing in America 240 years ago, that is wrong. History is written by the victors. Most people will answer 1492 if you ask them "when was America discovered" in the same way that they will answer David Livingstone "discovered" Vic falls. It was there all along and there were many people living in North America before the early settlers arrived. I know what he means though. What was quite interesting to me is how he describes current valuations in stocks. Here is a copy and paste of the whole piece:

"And we are not in a bubble territory or anything of the sort. Now, if interest rates were 7 or 8 percent then these prices would look exceptionally high. But you have to measure, you know, you measure everything against: interest rates, basically, and interest rates act like gravity on valuation. So when interest rates were 15 percent in 1982 they'd pull down the value of any asset. So, what's the sense of buying a farm on a 4 percent yield basis if you can get 15 percent in government's? But measured against interest rates, stocks actually are on the cheap side compared to historic valuations. But the risk always is, is that - that interest rates go up a lot, and that brings stocks down. But I would say this, if the ten-year stays at 230, and they would stay there for ten years, you would regret very much not having bought stocks now."

He is comparing all asset classes here, and referencing them to one another. The risk free rate (230 is the number of basis points that the ten year treasury yields) is low, then stocks are cheap if the yield is right. And Buffett reckons that rates are not moving much higher any time soon, remembering the Fed dots that look like a bunch of flying saucers in formation. The long term rate is below 4 percent. On a relative basis, stocks are cheap is what he is saying regardless of where rates go. He suggested to Becky Quick (my guess is that she is around my age, 40, an internet search reveals she is 44) that in her lifetime, the Dow Jones would approach 100,000 points and "that just requires the American system continuing to function pretty much as it has."

Berkshire has bought around 20 billion Dollars worth of stock since the election, including a rather large stake in Apple Inc. Before the results (and perhaps shortly after), they had bought 133 million shares, Buffett himself 123 million, the balance going to Ted or Todd, the professionals that they have hired. That is around 2.2 percent of the company. When asked why, quite simply he said, "'cause I like it". Buffett continues:

".... going out and finding out as much as you can about how people feel about the products that they ... it's just asking questions, basically. And Apple strikes me as having quite a sticky product and enormously useful product that people would use, and not that I do. Tim Cook's always kidding me about that. But it's a decision-based ... but again, it gets down to the future earning power of Apple when you get right down to it. And I think Tim has done a terrific job, I think he's been very intelligent about capital deployment. And I don't know what goes on inside their research labs or anything of the sort. I do know what goes on in their customers' minds because I spend a lot of time talking to 'em."

Berkshire have doubled the number of shares that they own of Apple since the beginning of the year. My daughters asked at dinner last evening, why so "late"? i.e. Could he not have owned them years ago? The answer is yes, Buffett wasn't convinced yet. It took 50 years of reading IBM annual reports before he a bought a share. He tells a story of taking his great-grandkids to Dairy Queen and they bring their friends along sometimes. As far as I can tell, there are plenty of spots in Omaha to go for an ice cream of this sort. If you want to meet Warren, hang out at the various Dairy Queen outlets over the weekend. He explains, and it is pretty simple:

"They've all got a iPhone and, you know, I ask 'em what they do with it and how ... whether they could live without it, and when they trade it in what they're gonna do with it. And of course, I see when they come to the furniture mart that people have this incredible stickiness of - with the product. I mean, if they bring in an iPhone, they buy a new iPhone. I mean, they're ... it just has that quality. It gets built into their lives. Now, that doesn't mean something can't come along that will disrupt it. But the continuity of the product is huge, and the degree to which their lives center around it is huge. And it's a pretty nice, it's a pretty nice franchise to have with a consumer product."

The long and the short of it all is that even the most successful investor in the world did some of his own low level research before he dipped his head deep into the financials. At the end of the day, a business sells products and services that customers interact with. And if consumers want more of it, and think that the product is amazing, as long as that remains that way, people will want new iPhones and get locked into the ecosystem deeper and deeper with all the new services that you do not yet know about. Great interview as ever. Stocks are going to be fine, politics and markets don't mix, as long as America stays the course, everything is going to be OK. The biggest worry that he (Buffett) has is nuclear war. Really. Read it. Listen to it, it is part of the knowledge accumulation. For the record, Apple traded near the intraday all time high. Own it (Apple). Until something changes. Pay attention.

Linkfest, lap it up

Want to go to the moon, the far side of the moon? It is closer than you think, Elon Musk suggests next year - SpaceX to Fly Passengers On Private Trip Around the Moon in 2018.

You are going to need to store it somewhere. The article talks about the driverless car revolution - The race for autonomous cars is over. Silicon Valley lost. - "Last year in the U.S. market alone Chevrolet collected 4,220 terabytes of data from customer's cars." Stay long Amazon and NVIDIA as winners in the cloud wars?

The difference between IFRS and GAAP? Or how did PWC mix up two different movies? Here - It seems like we now know how the wrong Oscar envelope got into Warren Beatty's hands. Poor Brian Cullinan was simply starstruck. What is more of a mix up, and we were talking about it yesterday, was the difference between the Oscar winning movie gross at the box office, and the best grossing film of the year. Which begs the question, who really won what? Courtesy Statista: Critical Acclaim vs. Commercial Appeal.

Home again, home again, jiggety-jog. Stocks have started about flat to begin with. Stocks across Asia are mixed to higher. US Futures are marginally lower. C'mon, 13 in a row!

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

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Tuesday, 7 June 2016

Sashole

"Whilst results themselves are not expected until August, the market chose to sell first and then ask questions later. An increased project cost in Dollars (to 11 billion Dollars now) coupled with the weakening Rand means that gearing will have to rise more than anticipated, and more importantly for shareholders, there will be a delay, the first product will be delivered in the second half of 2018 as far as I understand it. The plant will be at full operational capacity in early 2019."

To market to market to buy a fat pig A relief sale? That only happens when a store doesn't go out of business, as we all know however, the world is moving increasingly online. More stuff is being bought online, which is shaking up the traditional methodology of mall surfing. Internet surfing, that was the old word, surely it is now just simply broking? The internet is part of our lives, in one way or another.

Talking of which, I noticed that Cell C was advertising call with Wifi from anywhere in the world, now I am no expert on the matter, surely that is the same as calling via the WhatsApp call option? If that is a selling point, I am not too sure that it has been thought through. Wifi connection, I can keep my phone in Airplane mode and make a WhatsApp call. Yes? Staying with online shopping, I did notice that Walmart was testing delivery services with both Uber and Lyft, the drop offs in just Phoenix and Denver. Uber responsible for the Denver drop offs, Lyft for Phoenix. Drop offs to your front door are going to cost around 7 to 10 Dollars. I suppose if Walmart don't want to reinvent the wheel, this sounds like a good stopgap method to deal with the rise of Amazon.

Back to the markets! Locally stocks sold off, perhaps the stronger Rand was part of the problem! 14.91 this morning! Although there shouldn't be too much celebrating, 5 years ago we were around 6.70 to the US Dollar. Who would have thought! The Dollar has strengthened by 122 percent to the Rand over the last five years. So a little perspective is needed. Effectively what that means is that the Rands that you earn today are worth on a global scale less than half of what they were worth half a decade ago. To make you feel a little better, over ten years the Dollar is up by 123 percent to the Rand, essentially the Randelas are as weak over five years to the greenback as they were/are over half a decade.

The all share index dropped half a percent by the close, bouncing off the worst levels of the day and catching an updraft of an improving US market. Financials tried their hardest to pull us ahead, after having sold off earlier in the day. Resources were lower, although on the whole it was a single company that was stinking up the joint, Sasol. The company gave guidance for the full year that ends at the end of this month, the stock by the time the day had ended was nearly 11 percent lower. Holy you know what. Why? The guidance in earnings included another write down of their British Columbia shale gas asset in the Montney shale basin.

It was a 50 percent stake that they had bought from Talisman energy back in 2011 for 2 billion Dollars, Talisman's stake itself was bought by Malaysian company Petronas in 2014 for 1.5 billion Dollars. Already less than Sasol paid. Since Sasol bought the asset, the natural gas price has about halved in that time, they have impaired the asset to the tune of 11 billion Rand. Eish, this often happens when you own these big project assets. The market didn't so much react to the earnings being volatile, rather the project overrun and escalating cost of the ethane cracker being built at Lake Charles in Louisiana was front and centre of the sellers minds.

Whilst results themselves are not expected until August, the market chose to sell first and then ask questions later. An increased project cost in Dollars (to 11 billion Dollars now) coupled with the weakening Rand means that gearing will have to rise more than anticipated, and more importantly for shareholders, there will be a delay, the first product will be delivered in the second half of 2018 as far as I understand it. The plant will be at full operational capacity in early 2019.

There was also a couple of lines in the project update (Preliminary findings of the Lake Charles Chemicals Project review) that may have left a bad taste in the mouth of investors, it follows as: "The expected returns for the project have reduced due to changes in long-term price assumptions and the higher capital estimates, and are now expected to be around Sasol's weighted average cost of capital, compared to returns approximating hurdle rate at the time of Final Investment Decision in October 2014. The increase in the estimated LCCP capital cost and extended schedule will reduce the expected project returns by approximately the same amount as the Company's lower long-term price assumptions."

I think that whilst investors were expecting more (they always do now, don't they?), the project on completion is still a company defining moment. There is a conference call today at 2 in the afternoon local time, in which longer dated investors will have time to reflect on the project specifically, as well as being able to ask further questions from management. Whilst we admire the company, we certainly think that they do a wonderful service for keeping inflation in check in South Africa (we import less petroleum as a result of all the consumed manufactured product here), we think that the talent that works there is world class, we do not own the company for clients. In fact around a year ago we advocated selling the business. Too difficult to call the oil market, very volatile.

Another company that reported numbers that the market thought were fabulous was Telkom. I will be the first to say that I didn't think it was possible to do this well in a more competitive environment. Perhaps the legacy of having the installed network and too many costs have meant that there was (and perhaps still is) a lot of fat to cut off the bone. Telkom have become more efficient. The environment is likely to become a whole lot more competitive, with some exit plans of fibre installers looking to the likes of Vodacom to buy their installed network. Perhaps. For Joe consumer it seems to be moving too slowly. Lastly, if intrenched and installed competitor of over a decade, Cell C have struggled, why would Telkom Mobile (with limited resources) suddenly make a huge go of it? After all the costs are cut and the workforce has been reduced to an absolute minimum, how would profits look then? We continue to avoid the business.

Stocks across the ocean and far away, in New York, New York enjoyed a ripping session by the time the bell rang closing time. In fact, this is the best level for the S&P 500 this year, the Dow Jones is nearly back at 18 thousand points, the nerds of NASDAQ is again nearing 5000 points. They are of course all a little way away from their all time highs, most of this has come against the increasing gloominess for the US economy. All the job data looks OK to me, other than the recent blip on Friday. Perhaps the bearishness is being manifested in part by the lack of quality in the presidential candidates, in my opinion there is only one. The two old men are completely nuts and off the wall, appealing to the further ends of their respective constituencies. Crazy lefties and righties alike. Howard Marks, of which Bright is a big fan, presented a cool video yesterday - Economic reality.

Economic common sense is not so common is what he tries to get across. He seemingly rubbishes Trump there, if you further read the memo Latest memo from Howard Marks: Economic Reality, and also bashes the popularism approach of Bernie Sanders. I love that line there: "Governments and regulations can't produce prosperity." There is this strange human trait that somehow believes that government can make them rich. No, it ain't going to happen, you are master of your own destiny.

Linkfest, lap it up

Learning from others is a great way to avoid making the same mistakes - Four Investing Lessons from Intel's Andy Grove. Number 4. "The Future Favours the Optimist" is something that we embrace in this office.

Forget standing desks and treadmill desks, there is a new and larger desk you can go for - Hamster Wheel Standing Desk. I don't see this idea taking off, can you imagine walking into an office with 30 of these things going?

Having a second home is not cheap by any measurement, is owning a second home in the same city that you currently live worth it then? The trend seems to be on the rise - The Ultimate Staycation? A Second Home in the Same City

Home again, home again, jiggety-jog. The Hong Kong market is up sharply, as is the Japanese market, of course as expected the Shanghai market is completely different, down a smidgen. European markets are being called a little higher, we should open on that basis too.

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

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Tuesday, 8 September 2015

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"

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.

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.

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

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.

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

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Friday, 7 August 2015

Bezos, Jobs and Musk

"The company is slowly changing, and as they point out, in the coming months there will be more than just the car, the battery too. The so called Powerwall. The products are designed to be beautiful, not too dissimilar to another workaholic and neatness freak who pioneered amazing devices with his design team, one Steve Jobs."

To market to market to buy a fat pig. Ready, set and go. Today is the day that we get the "jobs number", that monthly report of the state of the US employment situation. It is still the most watched and highly anticipated number of the month for global market. It helps that the whole week also leads into this number and that it falls on a Friday. The trend has showed a steadily improving US labour market, more strength today will cement the case for an earlier rather than later rate hike in the US.

As we have maintained over and over again, it does not matter in the medium to long term about the prices of the companies that you hold. What matters is that you own companies that make amazing products or offer amazing services, companies that are gaining more traction in the modern economy. Companies that are run by dynamic and in tune people. That is what you can choose. Things you can't choose include your originally given name, your parents and place of birth, interest rates and global sentiment. So focus on the things you have control over, ok?

Resource stocks took a hammering, the recent graph on resources as a collective must look like a saw blade. Up and down. Sadly the longer picture tells of falling commodity prices as a result of slowing demand and a surge in not only supply, equally extraction techniques of hard to reach deposits earlier. Shale deposits and their extraction methodology changed many, many "things" about the oil market. By letting humans, their ingenuity and market forces take care of supply, we are all benefitting from lower energy prices just at a time when they threatened to get the better of us. It is difficult to believe that when the last oil shock happened in the late 70's and early 80's (when tight jeans were really tight and hairstyles were big and weird), that inflation spiralled out of control. Rates globally were so high but people forget, they really do.

Not too dissimilar to when we had a serious inflation shock here around 25 years ago. The Fed funds rate was 19.1 percent in June of 1981. And it is between 0 and 0.25 percent now, in fact it has been that way since December of 2008. Is this a normal cycle? Who knows. I suspect that the high end of the next range will be lower than the past few cycles, check it out from the St. Louis Federal Reserve, US rates since the 1960's:

So. You can see why people who started their careers in the 70's and 80's would focus on interest rates a little more than people who started their careers in the early 90's through to present day, roughly a generation. If you are between 60 and 70, you have seen it all. An industry peer once told me that the best thing about financial markets was that eager to learn and eager to impress youngsters with clean slates and unparalleled energy (who were intrinsically optimistic) were always there to replace older cynics, battle hardened by the losses and years of boom/bust.

Often the people that tell you that financial markets are ending have had poor experiences themselves, I often point out that personal experiences can (by osmosis) leak into investment decisions. They shouldn't, they can and do, however. Elon Musk for one has no place for the word no, or it cannot be done. Adopt that mantra, don't be horrid about it though, equally 100 plus hours of work a week may mean you have no other life for anything. Life is about experiences and personal gratification, saving hard when times are good gives you the flexibility and more importantly ability to enjoy life. If it makes Musk happy working to make the human species interplanetary and he succeeds, then good for him.

Back to local rates here for a second, that ABSA home loans advert of the family trying to hold onto their home with a rope (remember?) whilst it was floating away like a hot air balloon got me thinking the other day, so here is a representation of the REPO rate here locally in South Africa since 1998, courtesy of TradingEconomics. The highest of 23.99 percent, holy smokes those were dark days for interest repayments my friends.

Without knowing the future any better than you, I suspect that the information age, the internet age, has done more for price stability than any other technological jump in humanity. You can sit at home, or even lie in bed with your "phone" and compare prices of products, air tickets, houses, cars, whatever big ticket (or small product) that you want to buy. That sounds like major progress to me. Equally companies can be more productive as a result of technology, enabling them to manufacture their products a whole lot cheaper than at any time in history. If that means a cap on inflation for a while longer than we may anticipate, then that also means a lower rate environment.

Perhaps the French are on to something by trying to factor in happiness to GDP. Or not, it depends who you are and your outlook on the rawness of data. In other words, do you agree with Paul Krugman, Joseph Stiglitz or Milton Friedman, Friedrich Hayek and Irving Fisher. Or Adam Smith. There is a reason that you follow one or the other, it is circumstance and upbringing. If you are born with loads of money, perhaps you will trumpet the free market economy. If you are born with no money, then the idea of sharing all resources is a lot more appealing, I get it. The myth is that capitalists do not want labour to be rich, not true, at least from my side, I want everyone to have the resources to do what they want. It does come with personal responsibilities of self improvement and rising above the competition. There is nothing like standing out and putting your hand up to be recognised.

Lets finish the markets section with the scoreboard, the Dow dropped 120 points (Down six sessions in a row I think) to 17419 points, the broader market S&P 500 lost 0.78 percent, the nerds of NASDAQ was crushed, down 1.6 percent. The big talk of the town was the downturn in the cable companies, Disney was sold off again, Twenty-First Century Fox sold off 6.4 percent, Viacom an astonishing 14.2 percent. All this as ESPN loses customers. Viacom owns MTV, VH1, Nickelodeon and Comedy Central.

Twenty-First Century Fox, well, one of their channels hosted a debate with 10 Republican hopefuls last night. The Republicans will not nominate Trump. If he runs as an independent then Hilary Clinton has an even easier win. What was that one banner in Simpsons (part of the Fox satellite TV bouquet) that read "We are not racists, but we're no. 1 with racists". Quite, Trump ticks all those boxes that equals "loser" in my world, sadly some people find him appealing. Sigh, if nothing else then it should galvanise us harder in nation building and not dividing us. End of that sad subject, it makes for low level comedy, he does it to himself.

Company corner

Tesla shares sank over 8 percent last evening as the company indicated (after the session prior to yesterday) that they would miss their annual target of delivering 55 thousand motor vehicles for the year. Instead, it would be between 50 and 55 thousand. For a share price that is primed for perfection, this is obviously not the best news in the world. Musk has a plan though, as a shareholder there is going to have to be many lengths of patience during which you are going to feel underwhelmed by the present or the short term outlook. Having read the book about Musk, you get a sense that he thinks as long term as Jeff Bezos of Amazon.

He (Musk and Bezos for that matter) will sacrifice short term shareholder returns for excellence and execution on his masterplan, which is quite simply to rid humanity on their reliance on fossil fuels. Both SolarCity and Tesla will enable us to do exactly this. You have to start somewhere. As such, when you buy either company, you will not see positive returns, let alone dividends for years. Both these companies were on their knees a number of years ago, about to go out of business. It makes the business very hard to judge as an outsider, let alone value. To put that into perspective, just the Ford F Pick up truck series has sold 423 thousand units this year so far in the US. The July number was 66 thousand. One pickup truck sells more in one month than Tesla will sell all year. In fairness to Tesla, for the moment it is one car, a specialised and niche car and definitely in the luxury category.

Whilst the company makes progress with all sorts of things like the Gigafactory, the Model X delay (the SUV with the swing doors) it is definitely weighing profits down. Elon Musk is large and in charge, that is part of what you are buying here when you own the company. If you read the shareholder letter, you will see that the Model S is only three years old. They are selling nearly 50 percent more cars than last year, all pre paid. No dealerships. The Roadster before that was quite frankly not the best looking car. The car is growing quickly in both the US and Europe. They continue to roll out the charging network: ".. drivers in California are on average never more than 42 miles away from a Supercharger, while drivers in Germany are on average never more than 33 miles away from a Supercharger."

Quarterly revenues are only one million Dollars for Tesla, GM has annual revenues of 156 billion Dollars. Ferrari in their recent IPO for comparisons sake, are pushing to sell 9000 vehicles a year in a couple of years time, Tesla are going to struggle to get to 55 thousand this year. The company still makes a loss, a narrower one each quarter, they made a net loss of 184 million Dollars. The company is slowly changing, and as they point out, in the coming months there will be more than just the car, the battery too. The so called Powerwall. The products are designed to be beautiful, not too dissimilar to another workaholic and neatness freak who pioneered amazing devices with his design team, one Steve Jobs. It is a company that you have to own, there may be however long leads and lags between the results around share price performance relative to the results. Buy the stock, forget where it trades in the next three years, this is bound to be a long term success, from which point it is hard to say!

We had a trading statement from Sasol this morning, Trading Statement For The Financial Year Ended 30 June 2015. Given the slide in the oil price their HEPS are expected to be down 14% and 19%, with normalised basic earnings expected to be down 26% to 31%. The numbers are better than the market was expecting, the stock is up 4% this morning. The weaker Rand has been a good hedge for the company helping slow the drop in the Rand cost of oil.

The only concern is that for the last financial period the average price of Brent was $73.46 a barrel. The first month and a bit of this financial year has seen the oil price closer to the $50 a barrel mark currently at $49.89 a barrel. Going forward the forecast is for the oil price to stay in this region if not fall further in the short run. What will the average oil price be next year this time? Where will the Rand be? No one knows but if it is at current levels Sasol's earning will be down again. We will have to wait until the 7 September to see the final results. Chat then folks.

Linkfest, lap it up

Which countries are devoting land to organic farming? Here are the top countries - Which countries have the most organic agricultural land?. Australia makes sense to me given their high living standard and relatively rich population. I didn't expect to see Argentina in second place.

The new concern doing the rounds is what will happen to the bond market when interest rates normalise? Cullen Roche shares his views - Why Are People Worried About Bond Market Liquidity?

Home again, home again, jiggety-jog. We are up ahead of the big jobs number! Later today folks, if you think that the Rand has had a bad time recently (16 percent weaker over the last 12 months), then spare a thought for the Brazilians. They have been more than err ... waxed clean. 36 percent lower over 12 months. True story, with all the problems ahead of the Olympics next year, Petrobras scandals and the like. It is worse in Russia, the Rouble is 44 percent weaker over the last 12 months. Be careful where you draw lines and the like and suggest that it may have to do with internal factors. The Indian Rupee (the Indian economy being net importers of commodities) has fared the best, down only 4.15 percent over the last 12 months, the new Reserve Bank governor there seems to have a handle on inflation. We wait and see!

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

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Wednesday, 10 June 2015

Luxury Online

"Gucci is the only brand of Kering SA that is not selling on the platform yet, the company owns brands such as Alexander McQueen, Bottega Veneta, Stella McCartney and strangely Puma too, as well as Volcom and others. I am guessing that the reference to Amazon.com having the size and scale is something that Rupert sees as a threat to their collective businesses. He wants to maintain the quality, the reason why these companies do not cheapen their brands by mass producing affordable items, is to keep the allure."

To market to market to buy a fat pig. Emerging market stocks as a collective have just recorded their longest losing streak in 24 years. This is in terms of days in a row sold off. 24 years is a long, long time ago. Nelson Mandela had only been released for a year from his 27 year jail sentence. Boris Yeltsin was elected as president of Russia back in 1991. The cold war ended that year, some can argue it has kind of restarted. Eden Hazard is at the top of the world, in terms of football, he was born in that year.

Apartheid ended that year, all the rules that kept ourselves from ourselves (incredibly dumb) were repealed. The Oceanos went down near Coffee Bay, remember that ship that sunk, the captain made sure he was off early? Nadine Gordimer won the Nobel prize for Literature. Paul's favourite movie Terminator 2 was the highest grossing film in 1991. One of my favourites, the spoof movie Hot Shots was 9th. The top song on the charts globally that year was Everything I Do, I Do it For You by Canadian Bryan Adams. The S&P 500 ended the year close to 400 points. We have seen a fivefold increase in the index in 24 years, with many trials and tribulations along the way. Google, Yahoo, Facebook, Amazon.com, all those businesses did not exist. Mark Zuckerberg was 7 years old.

That is some context to when last emerging markets had such a long losing streak, in terms of number of days of selling in a row. Percentage wise it is hardly huge, we are down around 8 percent since the recent highs. Not quite what is referred to by the chartists as a "correction". There are all sorts of words for short down and up periods, the Dow Jones is up over 2000 percent in 40 years, what do you call that? A lot, or just average and expected? The NASDAQ over the same time period is up 5900 percent, technology has certainly crushed it over that time, obviously all the innovations for businesses has been very profitable for the companies and by extension their shareholders.

Investing is not for the fainthearted. It is hard and requires traits that many do not want to think about, which is why forced savings in terms of retirement savings, lock ups and restrictions on access to the capital is not necessarily a bad thing for the average salaried employee. I saw a 9Gag cartoon that had the caption "I will save more money for my future" at the top and "Hey look, shoes" at the bottom. Exactly. I see people finance expensive cars over four or five years at thousands of Rands a month to end up with an asset (tool) that is worth 30 percent of what they paid for it after five years, in nominal terms. God forbid they invest that same money in the market, you could lose it, apparently. As I said to my dad in the same conversation, you need consumers to help savers get rich. You cannot force people to save and delay gratification.

Company corner

Johann Rupert, chairman and controlling shareholder of Richemont, wants to team up with his rivals. What gives? And all this is not long after Richemont had injected their Net-a-Porter business in return for an equity stake in Yoox. They have equal equity for now, they do not have control of the business. The Bloomberg story is as follows: Richemont Invites LVMH to Join Website to Compete With Amazon. The plan is to actually use the Yoox Net-a-porter platform, by getting LVMH and Kering SA to have equity in the business, Yoox that is. Johann Rupert was talking at the FT Business of Luxury Summit in the picturesque town of Monaco.

Gucci is the only brand of Kering SA that is not selling on the platform yet, the company owns brands such as Alexander McQueen, Bottega Veneta, Stella McCartney and strangely Puma too, as well as Volcom and others. I am guessing that the reference to Amazon.com having the size and scale is something that Rupert sees as a threat to their collective businesses. He wants to maintain the quality, the reason why these companies do not cheapen their brands by mass producing affordable items, is to keep the allure.

I mean, if money was no object, would you object to a 4100 Dollar Babylone PM LVMH bag? It looks really nice as far as bags go, I have seen with my own eyes and heard how people will "sell their souls" for such items. If you are into shoes, then this one is for you guys, the Framework Richelieu, at a cool 1240 Dollars a pair. The Richemont brands are on the Net-a-porter website, you can get a Chloe Fedora leather shoulder bag for 2245 Dollars. Sorry, that one is actually sold out. Yes, sold out, meaning all of them have been bought.

The question is, would you buy a (the most expensive item) 70 thousand Dollar Olivia Collings 1840s silver, amethyst and diamond bracelet online? It is apparently one of a kind, with a certificate of authentication. I can see items that are not exactly out of reach of rich middle income people, more mainstream stuff being sold online. For your luxury item such as a Van Cleef & Arpels Palmyre necklace, 6 rows, described as "Six rows of round diamonds complement a graceful mounting in white gold for this elegant necklace" is marked on the online store at a cool 360 thousand Euros. That is a little over five million Rand. Is that with or without sales tax? Of course you would want to feel and try the item on before parting with that much money.

What this indicates to me, the move that Rupert is calling on his industry peers to sell on one platform (certified) is that he wants the exclusivity to remain exactly that. No cheapening of the brands, he knows the importance of that.

The Sasol chief David Constable will not be renewing his contract when it expires next year. He will be staying on as a consultant however, ironically closer to his family. The news filtered through two days ago. In an increasingly global world it is possible to commute and that is exactly what he has been doing. He is Canadian, turns (or turned) 54 this year, and has been at the company since his appointment in July of 2011. Prior to working at Sasol, Constable was at Fluor Corporation, the US engineering and construction company, that are specialists in the oil and gas industry, he is a civil engineer by trade.

I suspect what has happened here is that lifestyle choices for even high earners is becoming more important, in a world where people are richer than the prior generation. How much, i.e. what is the number, that one needs in order to retire at the same level? Well, in a local context, if you can generate 35 thousand Rand per 1 million Rand invested in the equities market, per annum, what would you need to live on? That is providing that you do not eat into the capital at all. In the context of a high powered earner (one must not always assume that they have great expenses) perhaps 55 is an age where they can retire and do what they want to do. I am not suggesting that being the CEO of Sasol is not what David Constable wanted to do, all I am saying is that it is hard to commute across the globe to family on a regular basis. The weigh up of lifestyle versus income, versus pressures of the job and being available all of the time takes its toll. You could argue that it is a good problem to have.

Either way, he has quit, and that is not good for shareholders and the business. I think that there is more than enough quality to appoint a local person for the job, hopefully an engineer with enough management experience. It is a very complex business, with complex plans to morph into a more competitive global chemicals business in North America, with an enormous glut of feedstock. That would be a good future for the business.

Fact of the day

The credit card as we know it, a certain size, 85.60 x 53.98 mm or 3 3⁄8 x 2 1⁄8 inches is not that old, historically speaking. Coincidentally that size is used for several things, business cards (yes, those still exist), ID documents (the SA ones are pretty cool) and many other cards that you have no space for in your wallet. Did the card size evolve relative to your pocket size, or wallet size? Surely an early wallet where you kept physical notes superseded a money sack or money bag.

Have you ever wondered why there are all those digits on the card? It is called the PAN, or the primary account number. They are mostly 16 digits long, Visa and MasterCard are the issuers that you know the best, the first issuer to have a general purpose credit card was Diners Club. Back to those embossed numbers. The validation of the card complies with the Luhn algorithm, which was patented by a chap by the name of Hans Peter Luhn, who worked for none other than IBM. The algorithm itself is over 60 years old, you can find the original patent here: Computer for verifying numbers. That allows you to switch, obviously it is a lot more complicated now than way back then.

All the banking systems are built to conform with the past norms and will evolve as such. Technology such as Apple Pay would eliminate the ability for anyone to "see" the card, plus it involves your thumbprint to authorise the transaction from the phone. I am pretty sure that people have invented ways to collect the data. We are evolving quickly away from "real money" to an electronic transfer society, in which there is always a trail of money, as you can imagine, this behaviour will be encouraged by the authorities, it leads to more tax compliance. Goodbye credit card as you know it, being a physical entity and hello electronic payment systems using thumbprints, rather than pin numbers.

Linkfest, lap it up

The drug that most of us can't do without, coffee! Here is sciences approach to the optimal time to drink it - Why the worst time to drink coffee is actually in the morning.

Here is a new use for drones - Drones are the newest weapon in the fight against Chinese exam cheaters.

Given that I hopefully have many decades until I need sustained medical attention, seeing breakthroughs like this makes me smile just a little bit more about old age - Missing link found between brain, immune system; major disease implications. More humans on the planet, with access to better technology and more resources at their disposal are seeing medical breakthroughs happen at an increasing pace.

When looking back into history we don't normally hear much about the African continent - Mansa Musa, one of the wealthiest people who ever lived - Jessica Smith.

Home again German yields have crested 1 percent for the first time since 22 September last year. We seem to be catching a bid, finally! Markets are three quarters of a percent higher, perhaps the rates going higher anxiety crowd have had their moment. For now.

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

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Thursday, 28 June 2012

Google goggles, iPhone turns 5!

"Since the iPhone release, the major competitor at the time, RIM, has seen its share price down 83.85 percent, Nokia down 92.11 percent. Whereas the Apple share price is up 367 percent. The markets have voted with their feet."

Jozi, Jozi. 26^o 12' 16" S, 28^o 2' 44" E. We were slipping gears yesterday as the commodities complex continued to take the pain, heaviest hit were some of the single commodity stocks, Kumba Iron Ore which was down over four percent, and then the gold miners collectively lost two percent. The gold miners are down 21 percent over the last five and a quarter years, whereas the Rand gold price is up 165 percent over the same time frame. There is something sadly very wrong with that for our local gold miners, costs rising and ore bodies a shadow of their former glory days are largely to blame. So, in short there is not so much gold in those hills. Over the last five years, the gold stocks are off two and a half percent, relative to an all share index that has added nearly twenty percent, and dare I say it, the yields on the all share is probably a lot better than on the gold stocks. The platinum stocks are worse, much worse, over a five year period the stocks are down a whopping 51 and a half percent. Perhaps the time is close, but Aquarius have indicated that it is still very tough out there.

Byron's beats has a look at an update from one of our recommended stocks, Sasol.

Here it is

As I said in my piece a few days ago (Sasol, the Rand and the oil price) Sasol earnings are heavily influenced by changes in the rand and the oil price. This release first looks at the macro issues which affect the moves of these prices and then looks at the stuff which Sasol can control, production.

They mention, and this is immediately factored into the share price, that the oil price has improved over the year of operation and that the rand has weakened on average. These variables resulted in a 31% rise in average domestic fuel prices and should boost Sasol's earnings strongly. Other than that concerning macro issues, they talk about issues in Europe and the US, which had a negative impact on the chemicals business.

In terms of production the Synfuels division recovered nicely after some plant incidents which halted production in the first half of the year. They also plan to be 60% self sufficient in terms of electricity generation by next year. That is very exciting and once they become 100% self sufficient it will completely mitigate all electricity hikes that most companies have to deal with. I know I'm stating the obvious but it needs to be repeated.

The Oryx GTL plant continues to break production records as it maintains an 80% utilization rate. This is important to note because the success of this project has big implications for further GTL expansion. On that note the recent shale gas assets they purchased in Canada are under pressure because of low gas prices. This has resulted in a loss for the year to date. At this stage they are just drilling gas but we think the future lies with a GTL plant in that region. In that case cheaper gas is better.

Financially the company is sound. They say it better than I can. "Healthy cash generation for the nine months ended 31 March 2012 reduced group debt after funding significant capital expenditure, allowing the group to maintain a strong balance sheet. Our strong balance sheet supports the funding of our capital growth programme, potential acquisition opportunities as well as our progressive dividend policy whilst providing a buffer against volatility and retaining flexibility in uncertain credit markets where the cost of funding has increased. We continue to focus on strengthening working capital management and monitoring credit exposure and counterparty risks."

All in all things are looking good at Sasol. Last year the company made R33.85 a share. Although there are some losses, with better production and a higher price received in the synfuels division earning will grow. At R345 a share the company looks very cheap and I would expect a very healthy dividend. We will carry on buying into this weakness.

New York, New York. 40^o 43' 0" N, 74^o 0' 0" W. Durable goods order for the month of May beat expectations, I guess that was encouraging and in fact helped the early buying. After two consecutive months of durable goods falling, it was pleasing to see a reversal in the trend, although the commentary that I read suggested that this momentum is likely to be short lived. Darn those haters. I guess the argument that the Chinese are slowing their exports (because the demand side is not completely clear right now) and European growth is nonexistent, then perhaps this will hold true. BUT, of course local manufacturers (in China) tapping a new market in the form of internal consumption might be telling a different story. Jim O'Neill keeps on drumming this into us, whenever he is asked the question about China slowing. His simple response is to say that the shift to internal consumption is happening, and this is a good thing for the rest of the globe.

The other real big driver and economic release for the US markets last evening was the release of pending home sales which blew away expectations, clocking a 5.9 percent increase when expectations were for a one percent increase. And we all know how much emphasis is placed on the US housing markets, this was a good catalyst for stocks. The broader market S&P 500 added 0.9 percent to close at 1331, a gain of nearly 12 points. The Dow added 92 to close at 12627 points, whilst the nerds of NASDAQ added exactly the same percentage wise as blue chips, 0.74 percent to end at 2875.

We have been discussing a stock in the office here, because we believe that if a company can crack the code to obesity, then sales of that specific company are going to fly. And that is exactly what happened last evening after a VERY LONG wait, check out the release directly from the horses mouth: FDA approves Belviq to treat some overweight or obese adults. Arena, a Swiss based business, that is listed in the US, flew up 28.7 percent on the announcement. You must know that the company is still not profitable. And the results, whilst good, are not mind blowing. Hey, this is a good start.

Perhaps the biggest corporate news of the day, no, let me rephrase, the most exciting corporate news of the day was the unveiling of the Nexus 7 tablet by Google. And at the same time two other pieces of hardware designed by Google, which must be making the old hardware producers quake in their boots. There is something called a Nexus Q, which is a home entertainment system of sorts and then perhaps the most out there product, Google Glass, you must have seen the prototype in previous messages. The glasses with an embedded computer display, which enables you to find stuff on the fly, and do all the wonderful things that tech geeks would want. Google added around four fifths of a percent, Mr. Market liked the news clearly.

Check out the reviews, here is a good one: Google Nexus 7. By the same crowd, a less flattering review of Google Nexus Q, but this could be because of the price tag, as the review points out, it is made in the USA. The last one is perhaps the most exciting, I try the Google glasses. Sort of. Awesome applications for people on the move I guess, not so much for the folks who are desk bound. I am not too sure that I would be jumping to get the glasses, but I think that they are an awesome innovation.

I am not too sure that the Google announcement was supposed to coincide with the Apple iPhone celebrating their 5th birthday yesterday. 150 billion Dollars worth of collective sales since 2007 and 250 million of them shipped over that time is nothing short of amazing. The app store will celebrate their fourth birthday next month. The iPhone 4S was released in October last year, and was a resounding success. I have seen various analysts stick a 1000 Dollar plus price on the stock. I see that most analysts still have a conviction buy on the stock, the next quarterly numbers will be a catalyst for the stock to move higher (or lower), it has had a cracking year so far, 41 percent higher, but is lower over the last three months.

The Business Insider had a really nice chart of the selling price of the device over the last five years: One Of The Most Amazing Things About The iPhone's First Five Years. That last point is key, if Apple were losing any share, they would cut their prices. For the time being this is not happening, but I suspect that this is a company that you have to watch more closely than most. Since the iPhone release, the major competitor at the time, RIM, has seen its share price down 83.85 percent, Nokia down 92.11 percent. Whereas the Apple share price is up 367 percent. The markets have voted with their feet.

Currencies and commodities corner. Dr. Copper last traded at 335 US cents per pound, the gold price is lower at 1570 Dollars per fine ounce, whilst the platinum price has also gone lower to 1404 Dollars per fine ounce. The oil price is lower at 79.89 Dollars for WTI Nymex, 92.74 for Brent Crude oil. The Rand is weaker as Mr. Risk off steamrolls Mr. Markets house, 8.42 to the US Dollar, 13.10 to the Pound Sterling and 10.47 to the Euro. We are lower here today at the get go, Euro anxiety makes for a change. Or not.

Parting shot. Today is being touted as the make or break for Europe. The days when after the 19th such meeting in 24 months that they must deliver something more concrete. Not that everyone is hopeful of anything actually happening, because Angela Merkel has thrown down the gauntlet already, by saying that there are to be no Euro Bonds in her lifetime. Politicians obviously make those kind of statements to emphasise a point, Merkel turns 58 this year later, average life expectancy for woman in Germany are per this Wiki table List of countries by life expectancy is 82.1 years. So, on that basis we should see Euro bonds somewhere around late 2036. But the news today that is sending the Euro lower suggests that we will see less than nothing at this summit. So much for the one that was critical and was supposed to change everything. Sigh.

Sasha Naryshkine and Byron Lotter

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Monday, 25 June 2012

Earnings doldrums

"It is coming, just in a very slow and with European bureaucratic precision. Chug, chug, too slow for Mr. Market's liking is all I can say, we like breakneck speed around here, not public servants talking and seemingly dithering. Although there is a realisation that not all Europeans are the same, there are political agendas that are trumping full union integration"

Jozi, Jozi. 26^o 12' 16" S, 28^o 2' 44" E. It was a pretty dire day on Friday, mostly the resource stocks took a caning, and in particular the single commodity stocks. Both the platinum (-3.81 percent) and the gold stocks (-3.76 percent) bore the brunt of the selling. Not too much better with the parent index, the collective resource space, the Resi 10 which sold off 2.8 percent, and that meant it was over for the broader market, down 1.2 percent or 415 points to end the day at 34119. There is a complete lack of company news around at this time of the year, the March fellows are for all intents and purposes done and dusted, although there are two big ones this week, Naspers and SABMiller, two global companies, well represented in emerging markets. And then the whole of next month, July, there is very little to look forward to from hard results, but there will be a whole lot more action as the temperature starts to hot up here. We are over the hump that is the winter solstice (or is it a dip), at least the days start getting longer. At least we have the Alcoa results and the traditional start of US 2nd quarter earnings season in about two weeks today. So, until then all the focus will be on Europe, and locally the ANC policy conference meeting.

That European policy conference that is set to take place this week, from what I can read on the wires is that French President Hollande is going to run head first into German Chancellor Merkel with the idea of Euro bonds, but that is likely to be rebuffed for the time being. Expectations are very low for any solutions from the summit, with the most likely outcome being stronger commentary around the eventual proposal, and maybe even a time horizon on greater fiscal integration. It is coming, just in a very slow and with European bureaucratic precision. Chug, chug, too slow for Mr. Market's liking is all I can say, we like breakneck speed around here, not public servants talking and seemingly dithering. Although there is a realisation that not all Europeans are the same, there are political agendas that are trumping full union integration, but as the European commission website points out:

"The EU budget was around € 140 billion in 2011, which is very small compared to the sum of national budgets of all 27 EU Member states, which amount to more than € 6,300 billion. In other words, total government expenditure by the 27 Member States is almost 50 times bigger than the EU budget!"

But you kind of knew that, the organisation that sits in Brussels is work in progress, the individual member countries still have the largest say over their budgets. And this is the strange part for me, because we were led to believe that austerity was gripping the area: "In 2012, 24 national budgets out of 27 are due to increase according to the latest estimations." Huh? Does that sound like austerity to you? Or is there austerity that exists in some places in Europe, but the vast majority of governments have social obligations, and those are growing. There is no other way, we are going to have to work longer in order to meet our ever expanding obligations. Austerity? Well, context I guess is needed. Just this morning there is the news that Spain has formally requested the funding to recapitalise their banks.

And then this week of course we have the ANC policy conference, running from tomorrow all the way through to Friday. According to the ANC website 3554 delegates are expected to attend. Phew, that sounds like a lot of people to manage and put across their views one way or another. These would be all branch members that are active in their respective areas that would be attending, that is how I understand it. I read Chris Gibbons counter revolutionary thoughts, to borrow a phrase from an ex vocal member of the organisation, and was kind of left deflated by it, check it out: ANC Policy Conference? Why? Good piece, I like Chris, he is of course writing for the Daily Maverick here, but is better known as the presenter of the Midday Report on Talk Radio 702 and 567 Cape Talk.

The actual document up for discussion is a rather lengthy piece titled THE SECOND TRANSITION? Building a national democratic society and the balance of forces in 2012. It has been documented last week that the deputy president was not too fond of the piece, the Mail & Guardian reports that the president himself has lashed back to the comments that Deputy President Motlanthe made. From the same publication: Mangaung Part 1: Motlanthe flexes his muscles.

OK, go back the discussion document, the main points are as follows:

"Part A: Reflections on the last 18 years
Part B: Characterisation of the National Democratic Society
Part C: The balance of forces in 2012 and the motive forces
Part D: The global balance of forces
Part E: Thoughts on the content and form of the Second transition
Part F: The pillars of national democratic revolution in the current phase"

Obviously much of this document contains socialist type jargon, the word revolution appears 19 times, less I will have you know than the word education, which appears 31 times. The word teachers does not appear once. Capitalism appears 22 times, the word nationalisation not a single time. Not once. So anxiety levels should be lower, but until we see a more business friendly landscape, expect the business types to be continually scratching around for excuses, which exist in reality. Ask the poor fellows over at Aquarius Platinum.

Byron's beats has a look at the recent Sasol movements, which of course will interest you as the oil price hits an 18 month low.

this Bloomberg article

Sasol is a tough share to analyze because it is so heavily swayed by the Rand and the oil price. You would probably find that these variables were why the share price dropped at the end of last week. You see, Sasol's sales are dependent on the petrol price which is completely out of their hands. The petrol price is determined by the oil price and the South African Rand. When the Rand weakens South Africa's buying power decreases and the petrol price will have to increase. When the oil price increases inevitably the petrol price will also have to increase.

Therefore when we complain about petrol prices increasing, Sasol shareholders are rewarded. To get a perspective, analysts reckon that a 10% change in the Rand could affect Sasol's earnings by 25%. Historically the oil price has less of an affect but this is growing. A 10% change in the oil price would affect earnings by around 18%. Of late the Rand and the oil price have been positively correlated. When risk is on, the oil price increases and the Rand strengthens. When the world is about to end the Rand weakens and so does the oil price. This is a good thing for Sasol because it mitigates what could be a very volatile situation.

Another variable which impacts earnings is the gas vs oil price. This is not a big part of Sasol's earnings yet but Sasol's future plans are heavily weighted toward Gas to Liquids expansion. In the last few years improved technologies and massive deposit discoveries have caused the gas price to consistently fall. Lack of big discoveries and unrest in many oil producing nations have caused oil prices to increase. This is a very good situation for Sasol as their input price decreases while there finished goods price increases.

Over the last few weeks however gas has increased while the oil price has decreased, a double negative for Sasol. The gap is still huge historically and still very economically sufficient. We continue to like Sasol. The long term global demand as far as energy is concerned will remain strong. Although these moving parts have a big impact, if markets pick up, like we foresee, the natural stabiliser of the Rand strengthening along with the oil price will help mitigate the volatility while Sasol use their unique technology to carry on supplying oil.

Currencies and commodities corner. There is a severe weather system in the Gulf of Mexico, which is sending the oil price higher. I saw on Facebook, my uncle who lives in Florida posted the satellite picture, and it looked pretty hectic. Is it that time of the year already? It certainly seems a little early for that. Well, I must have missed it, because this is the fourth in the cycle already, named Debby. And then I did a little exploring, and according to the authorities, the National Hurricane Centre, Debby was just a tropical storm. And, Hurricane season starts on the first of June and ends on the last day of November, in the Atlantic. So I guess I am late, four down already in 25 days. Debby is currently in the Northern gulf. The oil price is higher, last at 79.90 Dollars per barrel for NYMEX WTI, whilst Brent crude is trading flat at 90.94 Dollars per barrel.

The gold price is slightly higher on the session, last at 1572 Dollars per fine ounce, the platinum price is up a little more in percentage terms, last at 1438 Dollars per fine ounce. Dr. Copper is slightly better at 332 US cents per pound. I could also tell you what lean hogs traded at, but that might not mean too much. Coffee and Cocoa maybe. Cocoa is priced in Dollars per ton, whereas the Coffee contract is priced in US Dollars per pound. OK, you want to know on this pretty chilly morning, so here goes, the Cocoa contract price was last at 21.02 Dollars per ton, the coffee price at 155.9 US cents per pound. The Rand is weaker today, 8.45 to the US Dollar, 13.15 to the Pound Sterling and 10.60 to the Euro. We have started lower here today, but have been marginally higher for some parts during the day.

Sasha Naryshkine and Byron Lotter

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