Giant pile of scrambled egg falls on Jamie Dimon

"If you judge the fellow by what he is wearing and that is how he views investors, well then, don't own the stock. If people thought that about Steve Jobs or even Bill Gates (who kind of dressed up) opinion of shareholders is what they wore, then that is you conforming with a opinion of your own. Once, the Zuck actually gave investors a presentation in his pyjamas in the early days."

Jozi, Jozi. 26^o 12' 16" S, 28^o 2' 44" E. We were flying, markets around the world were recovering after a week of selling, heck, even Prince Charles was presenting the weather for Scotland on BBC. I am pretty sure that I could have done the Scotland weather without checking too hard. Cold, windy, chance of snow here and there. That line about Scotland from Trainspotting could have been used to describe the weather. Watch both of those things if you have not already. Factory output in South Africa unexpectedly fell (Read Cees Bruggemans piece: SA mining bounces as manufacturing crashes), most economists were expecting a gain. The same thing has happened in India this morning, not good. I guess the Euro austerity is starting to impact on all of us, somehow the Germans are just fine with the weaker Euro. Those Germans are workaholics, I suppose there is no sun to sit in, you might as well be indoors and working.

Resources stocks bounced hard, up two and a quarter percent, sending the Jozi all share index to 33869 points, a gain of 435 points or 1.3 percent. Banks added a percent and two thirds, gold stocks ramped up nearly three and a half percent, industrials underperformed, but still gained nearly three quarters of a percent. There were a whole host of results, from paper maker Sappi, gold producer AngloGold Ashanti, as well as ArcelorMittal and a host of smaller companies including Afrimat. But the management statement from Old Mutual was received with a great deal of enthusiasm by shareholders, the stock added 4.84 percent on the day. Nampak said afterhours that HEPS for the six months were expected to be between 10 to 20 percent higher than the 93.5 cents recorded at the last interim results.

Byron's beats takes a look at a company that is in a sector that we really like. Healthcare. This time it is Life Healthcare, who listed in 2010. But it was Afrox Healthcare beforehand, a separately listed business and a private equity buyout. It has expanded significantly from that time!

This morning we had another good set of numbers for the six month period ended 31 March 2012 from hospital group Life Healthcare. Group revenue increased by 11.7% to R5.5bn while operating profit increased 22.4% to R1.2bn. Normalised earnings per share increased 21.9% to 62.3c. The share price has done fantastically well. Since listing in June 2010 at 1350c it's been a one way ticket up, now trading at 2655c, nearly a 100% return if you had got involved in the IPO. Sasha in fact pointed out that they are now the biggest hospital group in the country by market cap. At R27.5bn they have overtaken both Mediclinic (R24.9bn) and Netcare (R20.9bn). Both of these competitors have massive debts on their balance sheets which may have something to do with their lag.

So how do the valuations look? At 62.3c per share for 6 months, analysts expect 140c per share for the full year. That puts the stock at a forward valuation of 19. Which seems expensive but for a company growing this fast I wouldn't be deterred. Let's look at the commentary.

"Life Healthcare continued to grow during the period under review and is in a healthy financial position to deliver on its strategic objectives of growth, efficiency and sustainability. Activities as measured by hospital paid patient days (PPDs), increased by 6,0% as a result of an increased demand for hospital services due to high incidence of disease together with a growing and aging medical aid population and preferred network arrangements."

That last part is important. Life Healthcare are well positioned to benefit from our aging higher income group while disease incidence remains high. They have also taken advantage of the gap left by the public sector with regards to healthcare. Our very advanced medical aid system also benefits the hospital groups, thanks Adrian Gore.

Are there social issues about a company like this providing an essential service at such high margins and making so much money? I guess that is why the government want to roll out those national healthcare plans. It does pose a concern. I also think competition will increase which should benefit the (sick) consumer. Life Healthcare are rolling out their capacity aggressively and so are the other two groups, the market is there to be grown into.

The fundamentals still remain strong for this sector and you would have to back the management to maintain this efficient growth as they increase beds. We prefer Aspen in this sector because of their alliance with the regulators (cheaper medicines) and international exposure but I do rate Life Healthcare a good investment for the future.

A few Greek facts that I managed to piece together yesterday in preparation for an interview. Greek youth unemployment has doubled since February 2007, with the overall unemployment rate sitting at a pretty lofty 21.7 percent. Youth unemployment is 53.8 percent. Greek industrial output, the figures released yesterday showed a drop of 8.7 percent year on year. According to a CNBC interview I saw, around 1000 businesses close every week, and after the elections, hotel bookings on the first two days of the working week fell 50 percent relative to the norm. There have been huge tax increases and massive spending cuts, needed, because the civil service was completely bloated. GDP is down 20 percent from the recent highs. BNP actually stuck out a note on what a Greek exit (being termed a Grexit) might mean for the country in the short term. GDP would contract another 20 percent overnight. Inflation could spike to 50 percent and debt to GDP would climb to comfortably over 200 percent.

The banking system would implode. The country, as the far left have said already would stop making debt payments. And as such would quickly run out of money. And the civil service (bloated civil service) would not have any money to get paid, because Drachmas would quickly become worthless. There is a whole lot more merit to keeping the Euro, but tell that to the people who are now buying bags of potatoes for cash off the back of a truck, the supermarkets are being bypassed. It is sad, but perhaps the ordinary Greek people lived comfortably above their means relative to their productivity and economic output of their northern neighbours. A sad state of affairs all around. Although as I often say, these are rich people problems, the average GDP per capita for Greece is more than Portugal, just a little less than New Zealand. Double Venezuela or Bulgaria. Four times that of an Albanian citizen. MUCH bigger than a South African, around two and a half times more. Ten times the economic output of a Pakistani. So in a very crude kind of way, these are still rich people problems.

Beijing central. 39^o 54' 50" N, 116^o 23' 30" E I smell policy response in China after the data this morning saw some key metrics miss expectations. Although at face value the numbers themselves still look good, Chinese fixed asset investment year on year increased 20.2 percent, Mr. Market was expecting 20.5 percent. Retail sales missed, clocking 14.1 percent, the expectations were a whole percentage point higher. But at face value those numbers look not fine to me, but rather very good. I would prefer it to see that retail sales numbers rising more sharply, but hey a 14 percent rise is still significant. Why I think policy makers might be poised to do something is that inflation eased back to 3.4 percent.

New York, New York. 40^o 43' 0" N, 74^o 0' 0" W. It was quite the opposite of what has been happening recently, with the last weeks sessions characterized by deep falling markets at the start and then in the last half finding some buying support. This time we were out the blocks in a flash, and slid in the second half of the session to just close in the green. The Dow Jones just eked out a gain, there was something interesting which caught my eye, check it out: With Apple in, Dow would have set record long ago. See that, see why we should get more excited about the S&P rather than the level of the Dow Jones.

Yuck. JPMorgan Chase reported a trading loss of 2 billion Dollars on credit derivatives trading that clearly went against them. And of course everyone is seeing this as a sign that the regulators should only push harder to see prop trading banned for banks of this nature. The culprit, a trader who has the nickname, "the London whale". Well, let us just say that his trade looks more like the Twitter whale. From what I read, the trades, which were related to corporate debt, went bad quickly when markets started to move against the positions, around a month ago.

As the news leaked, JPMorgan arranged a conference call and Jamie Dimon took responsibility. That is what I like to see, accountability for wrong doing, it means that you are human and make mistakes. Nothing like saying sorry for a saga to end, but I am thinking that this trading loss (Dimon said that the company remains profitable) gives regulators everything they need to say, see, told you so. Because of course JP Morgan is the US' largest bank by assets, who wants derivatives bets messing with client deposits and borrowings? Nobody. Another reason why we don't invest in big banks where there is stuff under the hood that is impossible to understand. The stock afterhours is down six and three quarters of a percent. Not nice. This is like a giant omelette falling on Jamie Dimon as he crosses the curb from his Lincoln Town car that stops outside of 270 Park Avenue, Manhattan.

Currencies and commodities corner. Dr. Copper is last at 367 US cents per pound, the gold price is lower at 1576 Dollars per fine ounce, whilst the platinum price is also lower at 1469 Dollars per fine ounce. The oil price is also lower, 95.80 Dollars per barrel for NYMEX WTI, whilst Brent is trading at 111.10 Dollars per barrel. The Rand is weaker at 8.10 to the US Dollar, 13.03 to the Pound Sterling and 10.51 to the Euro. We are weaker here today at the start as risk off visits us again.

Parting shot. Does it matter? I mean, does it matter what you wear in order to give your investors a presentation? Steve Jobs used to wear the same thing, the turtleneck and the jeans. I wear jeans all the time, does it impact on my performance whether I wear a suit or not? Where am I going with this? Well, Wedbush securities, actually an analyst who works there by the name of Michael Pachter, who actually have a buy on Facebook and a price target of somewhere around 44 Dollars if memory serves me right (remember that the IPO range is 28 to 35 Dollars) had this to say about the Zuck's attire: "Mark and his signature hoodie: He's actually showing investors he doesn't care that much; he's going to be him. I think that's a mark of immaturity. I think that he has to realize he's bringing investors in as a new constituency right now, and I think he's got to show them the respect that they deserve because he's asking them for their money."

All I have to say is, if you judge the fellow by what he is wearing on how he takes investors, well then, don't own the stock. If people thought that about Steve Jobs or even Bill Gates (who kind of dressed up) opinion of shareholders is what they wore, then that is you conforming with a opinion of your own. Once, the Zuck actually gave investors a presentation in his pyjamas in the early days. Once, the Zuck actually gave investors a presentation in his pyjamas in the early days. To me it doesn't matter, as long as he was appealing to the investors in question, and gave them all his attention. And I do not even own a hoodie. A week today could see the listing of Facebook, what matters I guess are the valuations and the future of the business, and where the market price settles ultimately.

Sasha Naryshkine and Byron Lotter

Email us

Follow Sasha and Byron on Twitter

011 022 5440

The disco ball falls on Cisco

"More data is being consumed than ever before. The iPhone 4S consumes 3 times more data than the average smart phone thanks to Siri and its ability to use data so efficiently. Over 35 million of these were sold by Apple last quarter. AT&T and Verizon are spending millions to keep up with this demand. Then you have companies like Netflix which stream movies and the Xbox which allows gamers to play on the web, all of this requires Cisco's products."

Jozi, Jozi. 26^o 12' 16" S, 28^o 2' 44" E. What a difference a week can make. At the beginning of last week we were talking about 4 year highs for the Dow Jones and all time highs for the Jozi all share index. But then disappointing jobs numbers and uneasy feeling markets about the political outcome in European elections over the weekend came along and did almost everything to trash the rally that has been largely earnings led. Also, the markets have been improving against the backdrop of largely improving economic data for most of this year, although that same data has been looking a touch weaker over the last five weeks or so. We have had two US employment numbers that have pointed stronger, but it was a case of only the first Oliver Twist bowl of porridge, we were left asking for more please sir.

So the open debate of the Greek elections has captured every watcher and participant this week, the Greek stock market has plunged to the worst levels in 20 odd years, probably a whole lot worse on an inflation adjusted basis. Perhaps my review of the situation was a little alarmist yesterday, but there are many that share my view, being a member of the Euro club is far better than being out, check out this Economist piece: The euro crisis - No way out. You see that analysis, the second paragraph? Yip, whilst being out might be a good idea at the time, being in is better.

Spain was also feeling a whole lot of heat yesterday, the equities market was off heavily, around three and a half percent, the bond yields had spiked through six percent and there were serious worries about the new plan to inject liquidity into Spanish banks. Excuse me for thinking this is a slow motion repeat of the part nationalisation of the American banks European style. They are a bit slower and a whole lot more bureaucratic, but eventually the job gets done. Spain is in the process of organising a program to inject new capital into their banks. Last evening basically the state through a fund named Frob (what kind of a name is that) took a 45 percent stake in the nations third largest bank, Bankia. By basically converted state funding to equity, this is not the first (the 8th as far as I understand it), but the biggest, ten percent of bank deposits in Spain. The Spanish stock market is at its worst level since the end of 2003. Sigh. At the same time German bund yields dropped to their lowest level ever, signalling that Europeans trust the Germans, and nobody else. No wonder the Germans continue to drive this line, but I am sure that they will start to share the view of the new French president, austerity is not everything.

As a result on this side of the world (Paul told us the other day that only ten percent of the global population live in the Southern Hemisphere, I feel lonely) we saw equity markets sell off, we had started well enough, but quickly slid. The Jozi all share index closed at 33434, down 113 points or 0.34 percent on the day. Banks sank three quarters of a percent, industrials lost around the same amount, resources, perhaps thanks to a weakening Rand added just over half a percent. Gold miners added a whopping two and a half percent.

Staying with gold miners, Harmony Gold released numbers yesterday morning. These are third quarter numbers, the company is a June year end. Production for Q3 was 18 percent lower than Q2 and cash costs were up by as much, an 18 percent hike sports lovers. On a nine month basis however production is only down 2 percent, cash costs are also up 21 percent. But I am not going to go into the reasons I would not want to own it, you know what those are already. I do not want to own gold as a physical asset, and therefore do not want to own a company that mines gold. David McKay had a great story yesterday, which basically explains that Harmony have decided which asset is the future of this company, and it is not a South African mine. Briggs nails colours to "this animal Wafi-Golpu".

Interesting, not chasing production at all costs, but rather focusing on being a more profitable company. Sadly for shareholders the stock has done very, very little for a very, very long time. There are periods of weakness and periods where the stock sank sharply. Over five years, the stock is down 34 percent. Amplats are down 60 percent over the last five years. Yech, so, in short the Harmony shareholders have beaten the Amplats shareholders over that time frame, and by quite some margin. Both stocks are closing at 52 week lows.

Remember we were talking about Swedish finance minister and his amazing handling of their economy through the crisis. A staunch free market type that I follow gave the thumbs up to a Mark J Perry post (that must have been where I read it) about Sweden's amazing supply-side, tax-cut experiment. Read it. Because for a socialist country to promote what are seen as a pro business policies, that would be considered a huge turning moment for James Pethokoukis. Because he does not like the Democrats and their policies, that is Pethokoukis, so obviously this would be exciting for him.

New York, New York. 40^o 43' 0" N, 74^o 0' 0" W. Phew. Markets again fell hard at the beginning but managed to recoup half of those losses again, the same old issues impacting us here weighed on markets there. The nerds of NASDAQ again, after having been down over a percent and a half, managing by the time markets closed to end less than four tenths of a percent lower. The Dow Jones industrial average lost nearly 100 points, down nearly three and one third of a percent over the last week.

Byron's beats looks at Cisco's results from last evening, which were released after the market.

It's amazing to see how investors interpret results releases. Especially when it comes to management commentary. You get the feeling that the traders sus out the general consensus as quick as possible and then everyone follows like sheep, trying to eke out those tiny basis point gains. Seeing that more than 50% of the US market is traded by machines, once the traders push a stock down the momentum gathers and the stock stands no chance. This can happen both ways, pushing the stock up or crushing it. Unfortunately Cisco has experienced the latter after they released quarterly results which actually looked pretty good. The stock is down 8.8% post the market.

It wasn't the numbers that disappointed but the forward looking commentary. This is not the first time management have been cautious and the stock has been hit. Sales and Earnings actually came in above consensus, sales of $11.59bn and earnings of 48c per share versus consensus of $11.57bn sales and 47c per share earnings. This is up 20% compared to this quarter last year. Analysts expect earnings this year to come in around $1.84 and $1.93 for 2013. The share trades at $17.15 (following yesterdays fall) putting them on a very attractive forward valuation of 8.9 for 2013 estimates.

So why the low rating? Let's look at the commentary and the fundamentals supporting this $100bn company. CEO John Chambers projected revenue growth of 5%-7% for the next quarter citing significant uncertainty in the global economy as a big risk. Europe and the US public sector has shown some demand weakness, as you would expect.

But the fundamentals are still there. More data is being consumed than ever before. The iPhone 4S consumes 3 times more data than the average smart phone thanks to Siri and its ability to use data so efficiently. Over 35 million of these were sold by Apple last quarter. AT&T and Verizon are spending millions to keep up with this demand. Then you have companies like Netflix which stream movies and the Xbox which allows gamers to play on the web, all of this requires Cisco's products. As technologies improve (the rolling out of 4G as an example) data consumption will only increase and Cisco should benefit.

There are some issues over management which pose a concern for us at Vestact. Last year Cisco scaled back on efforts to expand into more than 30 businesses, rather focusing on a few core businesses. The market liked this (as did we) and the stock started rerating. John Chambers has a controversial self invented management style based on 5 pillars to drive collaboration. The CEO who has been at the company since 1991 has done great things but we feel that maybe a change is needed. Valuations look attractive and the fundamentals look exciting. We remain buyers of this stock but we follow potential reshuffles closely.

Currencies and commodities corner. Dr. Copper is last at 370 US cents per pound, the gold price has recovered somewhat to 1591 Dollars per fine ounce, the platinum price better to 1497 Dollars per fine ounce. Quite a lot of talk about the platinum market recently. And not all good. The oil price, NYMEX WTI is trading at 96.41 Dollars per barrel, Brent crude oil is last at 112.42 Dollars per barrel. The Rand is firming a little, as risk on seems to be back, 8 exactly to the US Dollar, 12.90 to the Pound Sterling and 10.37 to the Euro. We have started better this morning, around two thirds to the good.

Parting shot. China has reported a larger than anticipated surplus, with both exports and imports increasing at a much slower pace than last year. All pointing of course to a slowing in the Chinese economy, because this means that less is being imported by their major trading partners. As the FT points out of course, this slowing in exports is being felt by both Taiwan and South Korea. Slowing investment in China and not quite the pickup in internal consumption that everyone is looking for might well get Beijing central to act faster than anyone else. And there are those that suggest that the Fed at their next meeting might well be more accommodative. I would not really welcome QE3, because I concur with the Fed, perhaps it is a case of waiting a little.

Sasha Naryshkine and Byron Lotter

Email us

Follow Sasha and Byron on Twitter

011 022 5440

Slippery Greece. Again and again.

"The idea of leaving the club (the Euro Zone) and going it alone (Greece) might have a certain romance to it, but the reality is that almost everything that you hold dear will be crushed almost immediately. Think about pension savings that would halve or more at worst, the trade benefits of the current arrangement, the fact that Greece has no natural resources of their own. It would almost be a sure recipe for anarchy."

Jozi, Jozi. 26^o 12' 16" S, 28^o 2' 44" E. It seemed that the major issue was still the European elections from the weekend, but it almost seems like a foregone conclusion that the Greeks are going to have another election coming soon. Well, they better hurry. According to the last agreement, Greece had to vote through further austerity measures by the end of this month, in order to receive their next round of funding. Otherwise they are going to default. And how did their markets take to this? Well, down to the worst levels in 20 years. Whilst people might well be spooked by the fact that the anti austerity and anti Europe types got quite a large portion of the popular vote, not enough to form a government. And the Pasok party which was dragged through the brambles and nettles at the polls does not really have much of a chance of forming a government of any kind. So the Greeks, who invented democracy, will get another chance to go back to the polls. According to a Bloomberg article which I read on the serious problem of a more than a simple hung vote, more than two thirds of Greeks polled want to stay inside of the Euro zone. They are just tired of all the austerity measures.

Ironically, Gideon Rachman of the Financial Mail has weighed in saying that the Greek dilly dallying is actually a "good" thing for Angela Merkel and the German austerity push, because it leaves new French president Francois Hollande with very few options really. He might talk up some emotive issues, but really in the end the conclusion is clear. The French, faced with the choices of supporting Greece or supporting Germany inside of the Euro project are going to go with the Germans. I urge you to read it (even if you sign up for a free thirty day trial, just for this one), you must check it out: The Greek crisis will fast expose Hollande. Like I said to Paul yesterday, the idea of leaving the club (the Euro Zone) and going it alone (Greece) might have a certain romance to it, but the reality is that almost everything that you hold dear will be crushed almost immediately. Think about pension savings that would halve or more at worst, the trade benefits of the current arrangement, the fact that Greece has no natural resources of their own. It would almost be a sure recipe for anarchy.

At the same time would you believe, at the core of the Euro in Germany, the country reported a much stronger than expected industrial production number with the suggestion from the IMF that a domestic demand recovery is underway. Yeah. See that? This Euro exercise is very good for Germany. A monster construction number inside of the release (March number), but in part the suggestion was that February was terribly cold and this was a rebound plus pent up demand drove the overall number. The beer drinkers might well be suggesting, crisis? What crisis? At the same time I read a fascinating article of Sweden's colourful finance minister Anders Borg of how he led Sweden through this crisis by NOT following the mainstream. And lowering taxes for the wealthy (wildly unpopular), cutting entitlements (also unpopular) but all working in the favour of the average Swede. To such a point where Sweden has looked much better than their peers. And to such a point that he is probably the coolest finance minister in the world. Although with a good haircut (lose the pony tail) he might actually be cooler, sometimes trying to be cool can come off as way nerdy.

Briefly, the markets sank heavily in the last quarter of trade, the Jozi all share index closed at 33547 points, down 408 points for the day, resources being a big drag, down 1.52 percent. Telkom rallied to see the fixed line index up (it is only them in that index), but phew, it was just because KT Corp. was taking a stake, or that was the intention at least. Platinum miners got thrashed, down nearly three percent. Eish, not looking very good, but at some stage these miners might be attractive. Or as we often say, perhaps we are watching the same story as the gold miners from a decade ago in slow motion. The fundamentals for the metal that they mine as still great, but owning the companies sadly has not worked out well for shareholders. Sis.

Byron's beats gives us feedback on his investor day yesterday.

Yesterday I went to Massmart's annual store visit which I must say was very interesting. They took us on four store visits as well as a look at their central distribution centre for Gauteng and the rest of Africa. We started off at the Makro in Woodmead which is their second biggest revenue spinner. The store has revenues of over R1,1bn a year and the second biggest butchery in the country. It's all about size and scale and allows the customer to get almost anything he/she needs or wants within one shop. The liquor store is also massive.

The next store we visited was the Dion Wired in Boksburg. This is one of my favourite shops and one that falls well within that aspirational consumerism theme we like so much. From iPads to affordable flat screen TV's to Nespresso machines. They have it all and although the electronics industry is highly competitive I am confident these stores will do well considering our economy.

Then we went to one of their Cambridge stores in Vosloorus, a township in the South East of Johannesburg. I was very impressed with the size and scale of this grocery super market offering very cheap goods to low end consumers. It has the feel of a massive African styled kiosk with everything from fresh meats to an array of African healing muti selections. Although it was still early, the queues were growing by the minute. There is competition for this market but I believe there is still such a high demand for such stores which is still a fairly new concept in this country.

After that, we went to their distribution centre which was back in Boksburg, nice and close to the N3 highway coming in from Durban. The warehouse was massive as we sat with an aerial view from the meeting room. As the operations manger explained how the systems worked you realised how well organised the warehousing process was. It has to be. Everything is processed electronically with a maximum of 48hrs in the warehouse before being trucked off to the relevant Game and Dion Wired stores.

South African retailers are not reinventing the wheel here, it's all been done before and on an even larger scale. That is why it is so important to have Wal-Mart guiding these guys in the right direction and avoiding mistakes they have already made and learnt from whilst building the biggest retail system the world has ever seen. Seeing the warehouse made me really appreciate the behind the scenes hard work it takes to get quality products to consumers at good prices.

Our last visit was to the Game and Foodco at Greenstone mall. Everyone knows about Game but Foodco is a fairly new concept. Basically they have taken 20% of the Game store and turned it into a grocery section. It has a very similar feel to a really nice Pick n Pay targeting the upper middleclass consumer. I was impressed and think that a lot of Game customers will be pleasantly surprised. I do feel however that they need to roll out a big marketing campaign to get the brand out there. The sector is very competitive.

All in all it was an interesting visit and I remain happy to have this company as our favoured retailer. The fact that Wal-Mart is guiding an already very highly regarded management team through the challenges of being a mass retailer in an undersupplied economy makes me believe that even though it looks expensive, as a long term hold, shareholders will be handsomely rewarded.

New York, New York. 40^o 43' 0" N, 74^o 0' 0" W. The worst point of the session was reached around 11 in the morning, around the time that Europe was signing off, but markets actually rallied from that point to trim the losses. The nerds of NASDAQ was off nearly two percent at one stage, but closed off 0.39 percent in the red, a heroic recovery I guess. Some of the tech heavyweights have had a bad time over the last few weeks, Cisco is down 11 and a half percent since the beginning of April, Apple is down five and a quarter percent over the same time period, whilst the Microsoft share price is down five and a half percent since the beginning of April. Google has fared the best, down "only" 4.44 percent. But seriously, I can't wait for the Facebook listing in just under two weeks. Around then.

McDonald's released same store sales that really flunked, they were not bad, but for Mr. Market all he/she wants to see is that it beats expectations. And this it did not. We wondered for a little bit whether or not the stories about people starting to "eat up" in value was partly to blame for these numbers coming in with a weaker showing. Here is a quick screen grab from their press release -> McDonald's Global Comparable Sales Rise 3.3% In April.

I think that whilst analysts may have underestimated the impact of the stronger US Dollar on these sales, the constant currency sales number was quite important when trying to develop a trend view of how their sales are panning out. Looks just fine to me, but the equity participants voted with their feet, sending McDonald's over two percent lower to 93.55 Dollars. I like these prices, this is the same price as you are getting in November last year. The stock forward with estimates of 6.30 Dollars worth of earnings for the next fiscal year is trading at less than 15 times earnings. Which is a whole lot cheaper than Famous Brands, see Byron's piece from two days ago: Famous Brands trading update, still looking good. And let me be clear, I would rather own McDonald's AND Famous Brands, but if faced with only the choice of one, I would side with McDonald's. After all, McDonald's has increased their dividend EVERY year since implementing one for the first time back in 1976. Healthy sign, which is ironically the direction that their food is moving.

Currencies and commodities corner. Dr. Copper last clocked 366 US cents per pound, across the commodities complex prices are lower, the gold price is last at 1594 Dollars per fine ounce. The platinum price is also lower at 1506 Dollars per fine ounce. The oil price is lower at 96.7 Dollars per barrel for NYMEX WTI, whilst Brent is also lower at 112.42 Dollars per barrel. The Rand is weaker, most currencies that are not the Dollar and Yen are lower relative to those two, last at 7.90 to the US Dollar, 12.75 to the Pound Sterling and 10.26 to the Euro. You know how many times we say Dollar in this segment normally? 6 times, if we include the US cents as referring to Dollars. So, until commodities are priced in another currency, the Dollar will continue to be king. You could probably ask a European what the oil or gold price is, and they will quote the Dollar price. Locally the same. We are going to start higher here, but not by too much.

Sasha Naryshkine and Byron Lotter

Email us

Follow Sasha and Byron on Twitter

011 022 5440

KT Corp. Telkom. Touching each other tomorrow.

"The guys who managed to rack up second place in the polls, the Coalition of the Radical Left are only eight years old and their ideology is basically against capitalism, against globalisation, against all things that I would think is sensible for moving a countries economy forward. They now have 16.8 percent of the electorate."

Jozi, Jozi. 26^o 12' 16" S, 28^o 2' 44" E. Our market clawed back at least half of the losses in the second half of the session, to sink half a percent after all was said and done. But, across the board there was not too much in the green. Banks lost 0.81 percent on the day, resources sank a little more by 0.85 percent whilst gold miners squeaked into the green as there started to be more excitement for the yellow metal. Because of course there were heightened concerns about the European "situation" which became less clear with a change of power in the form of a new president elect in France and a shambles (hung, drawn and quartered) of an election in Greece, if you are looking for a majority government. That is probably in need of more urgent action from the central powers in Europe than the French hop to the left, the first socialist president in a while. That is a not a problem. Greece, well they have deadlines and votes looming in weeks to implement further austerity measures.

And this vote by the Greek people was a definite vote against austerity, because there certainly were some radical decision making on behalf of the electorate. The guys who managed to rack up second place in the polls, the Coalition of the Radical Left are only eight years old and their ideology is basically against capitalism, against globalisation, against all things that I would think is sensible for moving a countries economy forward. They now have 16.8 percent of the electorate. And a firebrand youth at the helm. Yuck, I suspect that for the very first time, the fellows over in Berlin and Paris are probably not that fazed about a Greek exit. Although our line over here is that nobody wants to be out of the circle. And I maintain (write this down) that there will be more members in the circle than out of the circle. Because one exit means that it becomes easier for others to exit. But the tribe has spoken. PASOK were crushed, losing 30.7 percent from the prior period and falling to third place. At the same time Vladimir Putin becomes Russian president for a third term. Yech.

Massmart with a whole lot of announcements this morning, firstly a trading update, this is for 44 weeks to end 29 April, so literally ten days or so ago. Total sales for the group at this stage clocked 51.7 billion Rand (FY 2011 sales were 52.950 billion ZAR and FY 2010 sales were 47.451 billion ZAR), which is an increase of 14.7 percent over a prior period, 44 weeks. Kind of a strange sales update, but I guess the nature of retailers is that the work never really ends, you can pretty much in the urban areas of Gauteng shop at any retailer on any day of the week. Even public holidays. There are very few days of the year where shops are shuttered for business, especially up here in Joburg, I pretty much think that shoppers expect that. And I guess in a way it stimulates our economy, meaning that there are more working hours in which economic activity takes place.

And cheaper too. You have heard me say this a number of times too, where I quote Warren Buffett's right hand man, Charlie Munger say that he thinks Costco has done more for society by keeping prices low and by function inflation low, than any other philanthropic cause he knows. And he is right you know, the consumer is always right.

Straight into a divisional sales update, Massdiscounters clocked total sales increase of 10.6 percent (3.8 percent comparable) with inflation of negative 3.8 percent. Price deflation? Prices of a similar item going down is not altogether a good thing for the retailer, but this is certainly good news for the consumer. Margin management is far easier when prices are going up Paul weighed in, this is very true. But you can't charge people more for that bag of rice when the underlying soft commodity price is trending in the other direction. And with regards to some electronic goods, which tend to get cheaper and not more expensive, the big black box discounters struggle there. Think Best Buy.

Masswarehouse saw amazing growth with total sales growth up 19.3 percent, comparable growth sales up 11.2 percent and price inflation a modest 1.8 percent. Across at the Massbuild division, encouraging signs that the building activity and home improvement activity is on the mend (just try and get a parking at a Builders Warehouse on a Saturday morning) with total sales 11.9 percent better, comparable sales 8.2 percent stronger and inflation a very modest 1 percent. At the other division, Masscash saw sales increase by 15.6 percent, comparable sales increased 11 percent with inflation in that division up by 6 percent. Interesting that the food, liquor and groceries warehousing divisions experienced the highest inflation, but that would make sense.

So, on balance I am pleased with the sales update at this point. The market however is not as happy as I am. The stock is down over two percent, which is more than the rest of the market. So, I guess you have to be with Mr. Market on this one. Then next there is a management shuffle at Massmart, not so much a shuffle rather than a strengthening of the team. The current CFO, Guy Hayward will become Chief Operating Officer (a newly created role) and report top Grant Pattison, the current CEO. Pattison is set to (as per the release) "focus on Massmart-Walmart's strategic growth priorities for South Africa and Africa, including the implementation of the Group's Retail Food strategy." So, are we going to see more Game Foodco's and Cambridge Foods? Yes, I am guessing yes. And not just here, elsewhere in Africa too. Lastly the Chief Financial Officer role will be assumed by Ilan Zwarenstein, who has been Group Finance Executive at Massmart since 2006. Experience all around. They are bolstering the board here in anticipation of growth. And that probably means more people are going to be hired. Anyone listening out there? Byron is listening, he is checking out Massmart today and will return with some good investigating in due course. I look forward to it.

Telkom. Have they finally touched tomorrow? Phew, I spent 40 minutes on a call to their call centre yesterday, a complete waste of time. This morning there is an announcement that KT Corp 20 percent stake is actually going to happen, but at a much lower price, 25.60 ZAR, which is a premium to where the market trades now. Phew, much lower than the initial price, and still at a premium to a rough looking price. Why would you ever want to pay a premium for Telkom shares? There are four pre conditions, which include support from strategic shareholders such as the PIC and Allan Gray as well as the South African government. Those three shareholders have to agree that this is a good idea for Telkom. Then, the fellows from KT Corp are closely watching the competitions authorities and the outcome there, the number that I have heard being bandied about is 100 million ZAR fine. Which is a lot less than the billions, but still too much.

And then something that is completely vague (to me anyhow) and could mean anything, the first of the conditions: "finalisation of the transaction agreements. The transaction agreements comprise a subscription and relationship agreement and a co-source management services agreement;" Sounds like a whole lot more talking about the previous talking. I think that the Koreans are either brave and going to shake things up here, or have delusions that they can actually do that. I said to Paul, well, Naspers should buy Telkom. Naspers has a market cap of 193 billion Rands, whilst Telkom only has a market cap of just over 12 billion Rands. I am pretty sure that they (Naspers) could sweat that asset a whole lot better and provide South Africans with the network that really made business work. But it is not going to happen, not whilst the South African government has that stake in Telkom. Here are the major shareholders from the 2011 Annual Report:

At least the Government and the Government Employees Pension Fund have control at this shareholding levels, a twenty percent dilution would see that diminish. What do you think out there fellows? Do you think that the government are going to give up control of this, well, titan of yesteryear. Sarcasm alert, I preferred the Post and Telecommunication Corporation that made things possible! Telkom, their own worst enemy. If you don't believe me, phone up their call centre and see what lightening service you get. Anyone who does NOT value their client as number one is in serious trouble.

Currencies and commodities corner. Dr. Copper last changed hands at a lower price than yesterday, down at 372 US cents per pound, the gold price is lower at 1626 Dollars per fine ounce, whilst the platinum price is also lower at 1519 Dollars per fine ounce. The oil price is also lower, NYMEX WTI is at 96.87 Dollars per barrel, Brent is 112.96 Dollars per barrel. The Rand is taking a bit of a drubbing as risk off visits our screens again today, last at 7.86 to the US Dollar, 12.70 to the Pound Sterling and 10.24 to the Euro. We have started lower here today. And unemployment statistics don't look that good either.

Sasha Naryshkine and Byron Lotter

Email us

Follow Sasha and Byron on Twitter

011 022 5440

MTN, finally bigger than Nigeria

"Labor Force Participation Rate = Labor Force/Population
If population increases relative to the labor force due to increased life expectancy, then the LFPR would decrease."

Jozi, Jozi. 26^o 12' 16" S, 28^o 2' 44" E. We slipped a number of gears after the nonfarm payrolls number came in lower than anticipated. Session end the Jozi all share index had slipped 0.72 percent, or 248 points to 34127 points. Banks made some modest gains and were comfortably better than the rest of the markets. Resource stocks as a whole were trounced, down 2.2 percent after the dust had settled. Industrials were slightly lower, but benefitted I guess from a weaker currency.

MTN produced subscriber numbers on Friday, and finally there was good news for only I guess the second time this year for the stock, or so it seems anyhow. These are numbers for the first quarter to end March. And the number is, (drum roll), 170 573 000. That is right, 170 and a half million people, which is now more than the population of Nigeria. Only just, because the Wiki listed population of Nigeria is 170,123,740 folks, which is the worlds seventh most populous country. Nigeria in fact, in these numbers, is 25.1 percent of the overall MTN subscriber base. So, without thinking too hard, one in four Nigerians are on the MTN network, 42.899 million folks. The next biggest market for them is Iran (where MTN has a 49 percent stake in Irancell), which has 36.831 million subscribers. Next is South Africa, 22.735 million subscribers. Together, these three markets make up 60 percent of the overall MTN subscriber base. The only other country with more than 10 million subscribers is Ghana with 10.394 million subscribers.

Only three of their territories saw their respective subscriber bases contract were Guinea-Conakry, Congo - Brazzaville and Syria. MTN describes the Syrian business as follows: "Its performance continued to be hampered by civil unrest in the country, which resulted in a reduction of subscriber numbers of 23 000 subscribers and a decline in local currency ARPU of 8,5%." Hampered? The place is as close to a disaster as you get, it is quite surprising that it is still OK, relatively speaking. Notwithstanding that, MTN still expect to add 450 thousand subscribers in Syria for the year. In fact, in total MTN are expecting to add 21.3 million subscribers.

All ARPU's (Average Revenue per users) across the board fell, blended ARPU's in South Africa are 123.5 Rands per month. Or roughly 15.83 Dollars per subscriber, blended of course. In the pre paid market in South Africa, the ARPU is 93.2 Rands, or 11.94 Dollars per user, which is still a lot more than our African counterparts. Here goes, Nigeria is the highest at 9.4 Dollars per user per month, Iran 7.5 USD, Ghana 6.6 USD, Syria at 10.4 USD whilst some of the lower ARPU's in MTN's operations not unsurprisingly come from Afghanistan (4.5 USD), Zambia (4.4 USD) and Rwanda (3.8 USD). I think that notwithstanding that economic progress has been made in all of the countries that MTN do business in. OK, perhaps Swaziland and Syria for the time being are exceptions, Swaziland has a long road to travel.

Cyprus with a subscriber base of only 283 thousand folks (population estimate 834 thousand people on the Cyprus part) has ARPU's of 27 USD per user, a fall of 16.4 percent in Rands and 11.2 percent in local currency. Uganda saw a significant jump in ARPU, but again, it is just less than 4 USD. The MTN subscriber base is by in large in relatively poor countries that are growing their economies quickly, but that does not detract from the fact that ARPU's are still shrinking. As more marginal users are added to the network, ARPU's will continue to decline. And greater competition will continue to see lower ARPU's.

MTN data revenue (which includes SMS) is 14.4 percent of total revenue, mostly South Africa though. MTN Mobile Money at the end of the period had 6.2 million subscribers and is now active in 13 of their territories. Mobile payment systems are going to become increasingly important as societies trend towards less cash based payment systems. The stock rallied in the face of a weakening market after these numbers, quite clearly Mr. Market enjoyed this release. MTN closed at its best level in over a month, at 136.68, up 1.62 percent.

Oops. I was wrong. I thought that Mr. Sarkozy would have piped François Hollande and retained the French presidency. Oops. Sarkozy has conceded defeat. And with that, Hollande now needs to make new friends. I am pretty sure that more than a cursory telephone call has taken place between himself and Angela Merkel already. But this is, how should we say, not the best news, political instability. It will matter immediately what Hollande does to calm markets, to say that he will stick to the plan. All we have to do is wait and see, but now you know, the socialists are back in charge in France, at least of the presidency. If you have a look at the Senate and National assembly, it is still the Union for a Popular movement that holds the edge. But guess who is leader of that party? Nicolas Sarkozy. Well, excuse me for thinking out loud here, but probably not for much longer. Time to go and change diapers I am guessing. Eish, not good, but I guess the French have spoken, and the right of centre in France has a lot of soul searching to do now. And the socialists, well, they will be dancing. Ugghh.

Byron's beats has a look at companies who are doing better!

Today we are going to cover two trading updates from two companies who have had very different fortunes of late. One falls in the retail fast food category while the other is in construction. I'm sure you can guess which one has done well and which one hasn't. Esorfranki and Famous Brands both had updates this morning, let's look at the construction company first.

"Esorfranki is currently finalising its financial results for the year ended 29 February 2012 and shareholders are advised that the company expects a basic earnings per share of between 4,5 and 5,4 cents and a headline earnings per share of between 5,5 and 6,5 cents for that period, these numbers represents an increase in earnings per share of between 132% and 138% (2011: loss per share) and headline earnings per share of 143% and 151% (2011: headline loss per share)."

This is very good news as we finally see a turn in fortune for a company that is an important indicator for the sector as a whole. This is because they do the earthworks and pipeline construction for sites before the actual building takes place. They are one of the first to be contracted and paid when a building goes up and will therefore be one of the first companies to indicate a turn in the sector. As you can see from the update this is a massive turnaround from a big loss in 2011 to a decent profit. Good to see.

Famous Brands, another one of those over achievers, released a trading update which indicated headline earnings per share growth of 14%-16%. On a diluted basis this will come in between 270c-275c per share. The company is not cheap but in recent memory, it never has been. Trading at R52.90 the stock trades at 19.3 times earnings. But the fundamentals look very strong for this extremely well managed business to carry on growing.

They have great brands in a nation that has a growing middleclass with aspirations to consume their products. Fast food around the globe is being lapped up by the developing world. Yum Brands and McDonalds are doing fantastically and it makes perfect sense. It's convenient, affordable and people absolutely love to eat. As the demographics of South Africa changes, Famous Brands are perfectly poised to benefit. They just need to maintain their brilliant brand portfolio. The full results are coming out on the 21st of May where we will have a closer look.

New York, New York. 40^o 43' 0" N, 74^o 0' 0" W. Jobs. Nobody wanted to be taking any chances late in the session Friday, the worst week of the year unfolded with the worst day that we have seen in a while. The broader market S&P 500 fell 1.61 percent, the Dow sold off just over a percent and a quarter whilst the nerds of NASDAQ bore the brunt of the selling, down two and a quarter of a percent. Yech. You know how I feel about the "jobs number", and it was great that I stumbled across this article titled Wise Up to the Proper Flaws of Monthly NFP Data, by Barry Ritholtz. For him, and his publication, the "stuff" that is useful is hours worked, temp help and wages paid. Well, for the record as far as Barry is concerned, you can find out everything about the jobs numbers Friday here: Employment Situation Summary.

There you go, only 115 thousand jobs added for the month of April, less than the anticipated 175 odd thousand. What I found quite interesting was revisions upwards for the month of February and March were 53 thousand MORE collectively. So, simple math, add this number to the headline number, and hey presto, don't we have consensus? Not sure, the number is unpredictable, and we tend to side with earnings, that ultimately gives markets direction.

OK, but back to the Barry big picture measure. Hours worked? Unchanged. Temp jobs? Temp help? That increased 21 thousand. Average hourly earnings? Up a single cent to 23.38 USD. Hey, that is twice as much as a South African (on the MTN network) uses in mobile charges per month. Let me get that right, what the average South African uses for a whole month in airtime on their mobile phone, that is equal to half an hour of the average hourly wage in the USA. Getting distracted, so by Barry's measure "things" are looking average. My thoughts exactly, this was a decidedly average employment report, with only the unemployment rate at 8.1 percent moving in the right direction.

What is particularly disturbing (or strange) is that the civilian labour participation rate was at its lowest level since December 1981. Most are struggling to explain, many are pointing fingers at the ageing US labour force. And those who were expecting employment before they thought that they would retire, well, that is not happening, many close to the cusp are being "forced" to retire earlier. Which is why strangely the unemployment rate is falling, fewer folks making themselves employable. So who knows, ironically in the recovery, perhaps the unemployment rate will rise again. As Paul said on Friday, what is the Romney crowd saying as we continue to see jobs added and the unemployment rate fall? Perhaps by the time the election takes place the number will be closer to seven and a half percent.

I did see that one of my favourite bloggers, Prof. Mark Perry explains all of this, and as usual makes the most sense, at least to me. Read it, it is a summary. And after having finished the piece, I almost feel like buying more healthcare stocks! Prof Perry's theory is simple, and listen in everyone:

"An increase in population would exactly confirm and support the trend I am highlighting:

LFPR = Labor Force / Population

If population increases relative to the labor force due to increased life expectancy, then the LFPR would decrease."

Read the whole piece here: Decline in Labor Force Participation Reflects Demographics, May Not Be as Bad as Reported.

Currencies and commodities corner. Dr. Copper is last at 377 US cents per pound, perhaps not as weak as you might think. The oil price has taken a beating. Yes. Beating is the word. 97.06 Dollars per barrel for NYMEX WTI. The Gold price is last at 1639 Dollars per fine ounce, slightly lower, the platinum price is lower at 1518 Dollars per fine ounce, the gap has opened up sharply. The Rand is weaker at 7.86 to the US Dollar, 12.69 to the Pound Sterling and 10.27 to the Euro. Asian markets have started off weaker, we have started weaker here too!

Sasha Naryshkine and Byron Lotter

Email us

Follow Sasha and Byron on Twitter

011 022 5440

Time to Face up to the book facts

"Facebook talk about 125 billion friendships (900 million monthly users and 525 million daily users) and 300 million photos uploaded each and every day. Whoa! And 2 billion "likes" a day. 1 billion comments a day. It is of course easier to "like" something than it is to write a comment."

Jozi, Jozi. 26^o 12' 16" S, 28^o 2' 44" E. We were trading at a record high, and then we slipped after the ECB decided to keep rates on hold. Not the actual event, but rather the press conference where the ECB basically said that governments should follow a pro-growth path, and that the central bank would not be intervening to boost economic growth. In other words, no more stimulus from them, or extraordinary measures other than the ones in place right now. What ECB governor Mario Draghi did say however is that credit was not given to the various governments for their extraordinary work that they have done thus far. Draghi said that they had done more in two years than in the last twenty. Like I have often said, nothing like a good old fashioned crisis to crystallize the thought process. I am not like the mainstream thought out there, but rather side with some of the more sensible insiders in Europe. Europe will solve European problems in their own way, if that means bumbling along for a while, then so be it. But I am confident that in a decade, there will be more members of the union and not fewer. And I still can't understand how Mario Draghi looks so good for a 64 year old.

The after effect of no more extraordinary measures from the ECB weighed on commodity prices from that point on in the day, and that weighed on the global producers of the underlying metals. There was also at the same time the sense that we are closer to some sort of resolution as far as Iran is concerned, I saw yesterday that India was no longer buying big quantities of Iranian crude. So crude started to slide, alongside the gold and platinum price, but the copper price remained steady. So we slipped, the gold stocks slipped just over two percent, and are now down 23 percent year to date! What? Resources slipped 1.3 percent, the overall market was down only 0.31 percent, or 107 points to 34376 points. Banks were up over two percent. What? AND, are now up 20 percent for the year, that is amazing. Short gold, long banks, who would have thought?

Mondi gave a trading update for the first three months of their financial year, to end March. This is their weakest quarter, or that is what I can establish anyhow. They made 120 million Euros in the first quarter, which is both less in the last quarter and the corresponding quarter last year. But they do make some interesting observations: "Pleasingly, following the low levels of demand seen towards the end of the previous quarter and into the early part of 2012, there was a clear trend of improving demand through the period under review, such that, on average, sales volumes were higher than the previous quarter across all paper grades."

Nice, so I am guessing out loud here, but "things" are improving a little, not so? And that is also in March I guess, I would think that since the Greek debt restructuring that confidence is slightly higher in Europe than before the event. And as such I suspect that Mondi will register a much better second quarter. BUT, do I want to own a paper and packaging producer? No. No thanks.

Byron's beats looks at one of our most widely held stocks that has been in the news.

MTN are in the news again for the wrong reasons. This time there is news that Nigerian authorities are threatening to impose sanctions on the service provider over alleged poor service to subscribers. The Nigerian Communications Commission (NCC) issued a warning to the company today. Apparently subscribers experienced problems with connecting over the last few days without MTN communicating reasons why to either its subscribers or the regulator which are required.

To put things into perspective MTN have 42 million subscribers in Nigeria which is about 50% of the market share. That gives them massive control of the market. There are pros and cons to this. The negative is perhaps an arrogance over so much market control hence bad services which lead to allegations like this. The lack of competition may cause them to fall asleep at the wheel. I don't believe this is the case however. MTN have a great reputation for thorough efficiency and wouldn't let such an important market slide.

But because they have such a big market share I doubt the regulators would sanction a service that keeps 42 million people connected. That would be a disaster. This gives MTN a lot of bargaining power. So I wouldn't be too worried about such threats. MTN have 24 hours to respond but have not released any statements as yet. But according to this article from a website called allAfrica.com, MTN suffered a fire on Tuesday which was of course a public holiday. It's not that the service was down which seems to be the issue, it's the communication of the incident which was the problem. They seem to have a good relationship in Nigeria and I am sure they will deal with the regulators accordingly.

Although they are dealing with big issues in Iran they should not let this kind of things slide. The company has a fantastic reputation which is being tested. I'm sure unhappy subscribers in Nigeria feel the same.

New York, New York. 40^o 43' 0" N, 74^o 0' 0" W. Stocks slipped and closed at the worst point of the day. There was a pleasing reduction in the weekly jobless claims, which had gone back up after having fallen to a four year low in March. Pleasing to see on the way down, hopefully the nonfarm payrolls is a surprise too. That number is set for release mid afternoon. That will dictate how the day ends up for everybody that is open around the world.

Undoubtedly the biggest news yesterday was the Facebook announcement that they would be aiming at the top end of the range to have a valuation of as high as 96 billion Dollars. Some folks are worried that some of the original shareholders, even the Zuck himself (around 6 percent of his stake), are looking to take money off the table when the company IPO's. Which is not what has been happening much at some of the other recent social media listings, the owners have been hanging onto all their stock on listing. Like Paul said, if they want to sell, why not do so on the first day? Or perhaps the size of it, the company is set to be the most valuable US technology company on listing, perhaps that is the reason. When Google listed in 2004, the company was worth one quarter of what Facebook is hoping to be, that 96 billion. The first day of trade will be 18 May, the price will have been determined probably the day before, my eldest daughter's birthday. She is turning 7, Facebook is 8. I can't believe that!

At the top end of the range Facebook are looking to raise as much as 13.6 billion Dollars, the offering is between 28 and 35 Dollars per share. Like we said above, 96 billion Dollars. Time for a road show, you can check it out here -> Facebook Video roadshow. If you have the time, go and have a look over the weekend. The Zuck talks about a better world, because people understand each other better. I have always said that the internet has done more to demystify one another from each other. They talk about their product, timeline (which was not very well received) and news feed. I have been using Facebook a whole lot more lately, because I want to understand THEIR angles, how they (Facebook) see their product changing the world. They talk about 125 billion friendships on Facebook (900 million monthly users and 525 million daily users) and 300 million photos uploaded each and every day. Whoa! And 2 billion "likes" a day. 1 billion comments a day. It is of course easier to "like" something than it is to write a comment.

Facebook says that the mobile phone means that people will become linked more heavily with their product, they currently have 488 million mobile users, Facebook is the number one most downloaded application on all mobile phones in the US. The road show video is a really good production. 100 million people were choosing Farmville and the like for extreme time wasting entertainment inside of 1 year of their launch. WOW.

And then the most important "thing", advertising. Zuck said he did not start Facebook as a business. Adverts. In keeping Facebook free, advertisers will have to be able to reach you and I. Ben and Jerry's (the best ice cream in the world according to my wife) has over three million fans. Thanks to Facebook. And in fact, Ben and Jerry's say that for every one Dollar they spend on Facebook, they get three Dollars in sales back. This is where Sheryl Sandberg comes in, and she weighs in with this slide:

And why should advertisers send more of their money towards Facebook and not in the traditional places? In fact Sandberg suggests that advertisers are soon going to shift strongly towards an online presence, you see how skew it is still to the "old" media. I am pretty sure that a pie graph 50 years ago showed how TV was starting to impact on print. These are their compelling reasons to advertise with them.

There is a much higher accuracy, because Facebook knows who you are and what you "like". In fact Facebook knows more about you than any other advertiser. This is true. That makes sense that Facebook should have the most important data to deliver to advertisers. Next, their financials, the part that EVERYONE struggles with, why would you pay so much for this business. Here is a screen grab from their video, revenue.

And then I guess from a valuations point of view, here is operating income, and how it has grown.

As the CFO points out, high margins whilst they are still spending heavily in investing in their business. New staff, new developers, new products. The future part, a short one and a half minute piece from the Zuck is quite moving, talking about how all web based information will be plugged into Facebook. And Facebook will be your first port of call. I am sold on the company, what I am not so sure on are the valuations. But I believe that the power for advertisers is enormous. Bigger than any other platform. And there are a lot more young people who have lived the experience, even though the age gap between myself and the Zuck is not that big (9 years), I did not grow up with the internet, I had to learn how to use it as a young adult. I suspect that like a Google, or Microsoft, this is a company that is going to be integrated into peoples lives. And worth a lot more than it is today.

OK, so what now? Byron and Paul are of the opinion that the reason that Facebook are doing it this way, pricing the stock a little cheaper (the stock has traded in the OTC market as high as 40 Dollars) is that they WANT a pop on the first day. Because I can assure you that stock will be hard to get. If not impossible. Unless you are inside of the inner circle.

Currencies and commodities corner. Dr. Copper last traded a little lower to 376 US cents per pound, the gold price is also lower at 1631 Dollars per fine ounce. The platinum price is last at 1530 Dollars per fine ounce. The oil price, well NYMEX WTI was last at 101.64 Dollars per barrel, the Brent crude oil price was last at 115.30 Dollars per barrel. The Rand is last at 7.73 to the US Dollar, 12.51 to the Pound Sterling and 10.16 to the Euro. It is all about nonfarm payrolls, that number will hit our screens at 14:30.

Sasha Naryshkine and Byron Lotter

Email us

Follow Sasha and Byron on Twitter

011 022 5440

Forget canvas, it is pastels and cardboard baby!

"Visa. Total transactions processed were a whopping 13 billion, which was 8 percent higher. Or, 141.3 million transactions per day. I said to Byron that does not sound like a lot really, and he pointed out that 85 percent of all transactions globally are still in cash. "

Jozi, Jozi. 26^o 12' 16" S, 28^o 2' 44" E. We started off well enough, led by positive surprises in Chinese and US manufacturing data, but the wind was taken out of the sails with weaker than anticipated European country manufacturing data. Plus, it seems that the unemployment situation in Europe is worsening, with youth unemployment being a large part of the focus. Sadly we know exactly how they feel, but those are rich people problems whereas the same problems we have here are poor people problems. Not to detract from the issues in Europe, but the safety net and the family help is far greater than the ones that we have here. Nevertheless, problems are problems. We managed to hang on to our gains here in Jozi, even though we slipped into the red for a little in the late afternoon. The Jozi all share index ended at an all time closing high of 34482 points. Up one quarter of a percent on the day, or 83 points. Led higher by resource stocks, perhaps reacting positively to the Chinese PMI data released early Wednesday morning.

We saw a Vodacom trading statement after the bell yesterday, these are for the full year numbers to March 2012, which are expected to be released on the 21st of May. Basic EPS is expected to be 20 to 25 percent better than the prior years 561 cents, so expect the range to be between 673 to 701 cents per share. Headline earnings per share are expected to be between 5 and 10 percent higher to be between 689 to 722 cents. Nice, that looks like decent enough growth for a company that was supposedly "ex-growth" with a mature market here in South Africa. This is the shift from voice to data, albeit at lower margins, people are going to consume a whole lot more data on their newer and fancier handsets. Even at the lower end, phones are going to become smarter. But is the stock expensive at one hundred and seven and a half Rands? Let us explore this later. Byron always tells me that an iPhone consumes three times more data than comparable smart phone users. Either the iPhone is more intensive in terms of data usage, or/and easier to use.

With basically an 80 percent payout ratio, you should/could expect 295 cents for the second half, bringing your total for the year to around 555 cents worth of dividends. So, the ratios for the fundamentals junkies looks as follows: 14.9 times earnings at the TOP end of the range and a dividend yield of just more than 5 percent. Factoring in the dividend tax of course, around five percent yield is very juicy. And that, I think is the part that attracts the international investors to Vodacom, because you can bet that Vodafone, the 65 percent shareholder (and the South African government, who own 13.91 percent) will want to extract as much as they can. One could on that basis expect the payouts to continue to be high, and as such perhaps the stock will continue to attract a higher valuation. I guess when government bond yields (on the "safer" bonds) start to tick up, then this "endless search for yield" might actually change. Until then though.

Byron's beats explores the trading update from African Bank yesterday.

Yesterday we had a trading statement from one of our recommended stocks which indicated a 24%-26% growth in earnings for the 6 month period ending 31 March 2012 compared to the corresponding 6 months last year. In that period the company made R1.095bn or 136.3c per share. Taking the middle of the range, 25%, that means we should expect around 170c for the 6 month period. Before we talk about the fundamentals let's look at the valuations.

Last year the company had a better second half, making 155c vs. the 136c in the first half. The company has been growing fast on a 6 month basis so we should expect the same. Let's say they make 180c in the second half and 350c for the year. The share is trading at 3888c and a forward PE of 11. Last year they had a very generous dividend cover of 1.57. Assuming they maintain this we should expect around 220c at a current yield of 5.7%. Those are some (very) favourable valuations and a great yield.

The two biggest risks for this company are increasing competition and a possible unsecured lending bubble which has been discussed by many analysts. Let's talk about competition first. Competition is always going to happen in a market where companies are making big profits. Capitec have done really well and now the big 4 are targeting this market because the return on equity is so strong. African Bank have also ramped up their book very aggressively using the Ellerines stores as kiosks. This has been their niche which has been very successful and finally showing some returns to that Ellerines purchase. Although competition is strong I think Abil are more than equipped to face up to this challenge whilst the SA economy still has ample room to provide clients.

So what about this so called bubble? I don't think there is an issue. According to Rene Van Wyk, the registrar of banks whose office is currently conducting a survey on the issue, there is no bubble being caused by the increase in unsecured lending. Unsecured lending only makes up 8% of total credit assets. I also believe that our informal sector is heavily underestimated and these people who earn reliable salaries have to use unsecured lending for credit. Wages are increasing fast in SA, way above inflation and if rates do increase, we are at 25 year lows, we can still handle an increase.

All credit to management for growing the book and therefore the earnings so well. We believe this can be maintained going forward and continue to add at these levels. More analysis will be done when the results are released.

New York, New York. 40^o 43' 0" N, 74^o 0' 0" W. It could have been a whole lot worse than the final print, but I guess with a disappointing ADP employment read we should have been happy with the final number. The monthly precursor to the nonfarm payrolls number registered only 119 thousand, whereas the expectations had been closer to 175 thousand. Weirdly though, remember that last month the ADP number exceeded expectations, but the actual nonfarm payrolls number was a sizeable miss, relative to expectations. Perhaps the opposite could happen on Friday? Who knows. What I do know is that Standard & Poor's upped the Greek credit rating to triple C, what is thought as a largely symbolic move. Not sure if it means anything.

There were results from the folks over at MasterCard, it looked like a beat to me, versus consensus, but the stock fell in ordinary trade. Payment systems companies, some folks are starting to get excited about eBay because of course they own PayPal. The precursor to PayPal of course had names like the South African Elon Musk (who now is into fast electric cars) and Peter Thiel (who is perhaps the smartest Facebook investor, he bought 10.2 percent of the company as an angel investor back in 2004), but those two have since made money elsewhere. We prefer Visa (ha-ha) as an investment, the stock took some heat afterhours with an announcement that coincided with their earnings release, and a US anti-trust investigation.

So, Visa had results post market yesterday, here is the full release here:Visa Inc. Posts Strong Fiscal Second Quarter 2012 Earnings Results. EPS of 1.60 Dollars per share, which was a beat of ten cents per share, and a dividend of 22 US cents per share. Net income increased 23 percent when compared to the prior year to 1.1 billion Dollars, with GAAP net operating revenue higher by 15 percent to 2.6 billion Dollars. Total transactions processed were a whopping 13 billion, which was 8 percent higher. Or, 141.3 million transactions per day. I said to Byron that does not sound like a lot really, and he pointed out that 85 percent of all transactions globally are still in cash. WHAT? And which way do you think the regulators want this to move? Electronic payments will tell you everything that you want to know of course, all governments from a safety point of view. There is a holding cost of cash.

What I found quite interesting is this line: "International transaction revenues, which are driven by cross-border activity, grew 17% over the prior year to $733 million." Cross border activity? That means that people are buying stuff from other countries and using Visa's secure network. Or, tourists are using their debit and credit cards for buying stuff or services, trusting the network more and more. Which is interesting in a way I guess, but not surprising really. 17 percent? And as we said, look at that, still there are many cash transactions. And strangely, as they mention on their website: "70 percent of Visa payment transactions in the United States are not credit, but debit and prepaid" So, folks are transacting in electronic "cash" transactions.

Back to these results, which were a beat of course, and guidance for the full year which was as follows: "Annual net revenue growth in the low double digits", I read that as around 12 to 13 percent or so. Perhaps higher. Marketing expenses under 1 billion Dollars looks a little high, bearing in mind that the quarterly marketing expense ran at 170 million Dollars. Just looks "high", but perhaps just guidance. As ever there are always risks, they spell it out, rules capping the charges and further government "reforms". And then Visa talks about economic conditions like European sovereign issues, other global "problems" and currencies are also an issue too. On balance, the stock forward looks cheaper than MasterCard, and we will continue to accumulate shares of the major electronics payments system globally.

Currencies and commodities corner. Dr. Copper is lower, last at 380 US cents per pound, the gold price is also lower at 1642 Dollars per fine ounce. The platinum price is also lower at 1550 Dollars per fine ounce. The oil price, well the NYMEX WTI price is last at 104.73 Dollars per barrel, the price of Brent was last at 117.65 Dollars per barrel. The Rand is last at 7.74 to the US Dollar, 12.52 to the Pound Sterling and 10.16 to the Euro. We are marginally lower here this morning, just a little bit though! The ECB meet today, expectations are for no rate cute, but I have a sneaky outside suspicion that they could cut rates here by 25 basis points.

Parting shot. Art. I certainly do not understand the willingness to pay 119.9 million Dollars for the Norwegian artist, Edvard Munch's "The Scream". There are four of these, not all the same, but this one is the pastels version on a piece of cardboard done in 1895. The third version. I wonder what they would be sold as a set? Anyhow, this is a unique piece, so you cannot actually compare this to any other investment. Or so that is what the art people will tell us. But if you bought 120 million Dollars worth of stock, would you be better placed? Or enjoy it as much? Perhaps the enjoyment factor would be so much less, for some people. There is only so much you can get out of staring at the same painting, or have I got this wrong? Anyhow, the idea I guess will be to sell that version of "The Scream" for so much more and make a large capital gain. One just hopes that it neither burns, nor gets spoilt along the way. Pastels on cardboard? That was my initial reaction, madness, but then as far as art is concerned, I am an absolute heathen.

Sasha Naryshkine and Byron Lotter

Email us

Follow Sasha and Byron on Twitter

011 022 5440