Gill went up the hill, rates came tumbling after

"But why would you think that though, surely banks would benefit from the cuts in rates? But it is getting to the point where banks margins are actually squeezed with lower interest rates. But others, the geared retailers and the shorter term lenders in the form of ABIL and Capitec (with higher lending rates) stood more to benefit from the rate cut."

Jozi, Jozi. 26^o 12' 16" S, 28^o 2' 44" E. Wrong again! That is two meetings in a row here that I was wrong on the MPC. Whilst we were trying to bowl the "English" cricket team out (they speak English, if not all born there) in London at the Oval, locally we were surprised by a rate cut. I really hope for the Reserve Bank's sake that "things" don't get better as quickly as I think that they might. The enormous efficiencies that companies have managed to build in over these lean times mean that most businesses are better placed than ever before. Although, it is still very tough out there, not too much is going on. If it is different where you are, as ever we would love to hear from you, we can publish your pieces in the note.

So the surprise rate cut saw us blindsided, retailers rocked, big banks not so much. But why would you think that though, surely banks would benefit from the cuts in rates? But it is getting to the point where banks margins are actually squeezed with lower interest rates. But others, the geared retailers and the shorter term lenders in the form of ABIL and Capitec (with higher lending rates) stood more to benefit from the rate cut. The property loan stocks also took off, the thinking of course is that in the search for yield, at least these stock prices of the property sector are going to be better investments than the other fixed income options. Those stocks as a collective were up one and a quarter percent, whilst the banks were off 0.77 percent. The overall market, the Jozi all share index added three quarters of a percent to end the session at 34292 points.

Byron's beats covers most of the important news over here in the Anglo American stable. Gosh, they have been very, very busy, some good for some and some ugly for certain individuals. Here goes:

Lots of news coming from Anglo America over the last few days. First we had the Anglo Plats update which we already covered then we had an announcement yesterday afternoon indicating a big management shift.

Anglo American plc announces a number of executive management changes across its South Africa based businesses following Neville Nicolau's decision to resign as CEO of Anglo American's Platinum business to pursue other interests.

"The following changes are effective from 1 September 2012: Platinum - The Board of Anglo American Platinum Limited has appointed Chris Griffith as the company's new CEO. Mr Griffith has been CEO of Kumba Iron Ore Limited (Kumba) since 2008. Prior to joining Kumba, he worked at Anglo American Platinum for 18 years, reaching the position of Head of Joint Venture Operations. In the interim period until 1 September 2012, Bongani Nqwababa, CFO of Anglo American Platinum, will fulfil the role of CEO of that business.

Kumba Iron Ore - The Board of Kumba Iron Ore Limited has appointed Norman Mbazima as the company's new CEO. Mr Mbazima has been CEO of Anglo American's Thermal Coal business since 2009 and has an intimate knowledge of the South African mining landscape and many of Anglo American's key partners, including Eskom and Transnet. He was previously the CEO of Scaw Metals and joint acting CEO and CFO of the Platinum business."

This is big news. Chris Griffith is highly regarded, we will have a look at the Kumba results which came out this morning later and you will see why. We had a discussion in the office yesterday after the news came out and all agreed that we would rather be Iron Ore miners than platinum miners right now. It also spurred me to check the relevant market caps of Anglo Plats and Kumba. Fascinatingly Kumba is now comfortably larger at R182bn compared to Amplats at R113bn. Chris Griffiths has a big challenge ahead but maybe he is the right man for the job.

So that was yesterday. This morning Anglo released their production report for the second quarter ended 30 June 2012 followed by Kumba's results. In case you forgot Anglo own 65.2% of Kumba. We will cover these now.

Anglo production report.


The report looked good, everything showed improvement except for platinum and Diamonds. The Iron ore division grew by 12% largely thanks to Kumba. In fact of the 12.9 million tons Kumba contributes 11.4 million while the Brazillian Amapa production contributed 1.5 million tons. A lot is still expected from the Brazilian operations in 2013 and beyond.

Met coal was a record quarter after recovering from bad weather in Australia. This was up 23%. Thermal coal was up 7% from their SA division despite freight issues with Transnet (not good) while the Colombia division was up 22%. Copper was up 7% with the Los Broncos expansion project starting to take effect. Weather and safety delays caused production to decrease compared to the first quarter of the year. Nickel increased 65% because of a big ramp up while platinum, as you know from yesterday, declined 13%. Diamonds decreased by 11% thanks to market conditions and maintenance.

All in all it looked good and the market seems to like it with the stock up 2% so far. But the guys who are dragging the team down are a concern. And at the same time Billiton do not have these bad team players. This includes Platinum, Diamonds and mining in SA. Sad but true. We prefer BHP.

Kumba Results.


Another good set of numbers from the Iron ore miner, even though profits were down due to lower Iron ore prices. Here are the numbers from the release.

"Kumba's headline earnings were R7.4 billion for the six months ended 30 June 2012; 18% below the R9.1 billion achieved in the first half of 2011. The decrease in earnings was primarily as a result of substantially weaker iron ore export prices together with cost increases which were partially offset by higher export sales volumes for the six months. The higher export sales volumes and a more favourable Rand/US Dollar exchange rate aided the 5% growth in revenue to R25.2 billion for the six months, another record for the group, despite the decline in iron ore prices. Attributable and headline earnings for the period were R23.05 and R23.07 per share respectively, on which an interim cash dividend of R19.20 per share has been declared."

They expect Iron ore prices to settle at these levels so let's assume a similar amount is earned in the second half. That puts the company on a forward PE of 12 and a whopping dividend yield of 6.7% according to my calculations. Total Production is up 13% thanks to the Kolomela ramp up which again is running well ahead of schedule. The Sishen mine production was slightly down, 4%, due to weather and some operational issues.

Their prospects seem muted to positive. They have seen a levelling out in China but feel current stimulation will stabilise things. Don't forget that historically Iron prices are still extremely inflated even though they have come down somewhat this year. We like the stock but as with any single commodity miner it is a wild ride. At least you get paid a handsome dividend while you ride the volatility.

New York, New York. 40^o 43' 0" N, 74^o 0' 0" W. Hip-hip hooray. And then the another one, but Mr. Market did not quite take that one to heart. Just after midday on Wall Street everything was going swimmingly well, but stocks closed off their best levels. Still, I would take that every day over the opposite happening. The broader market S&P 500 added just over one quarter of a percent to close at 1376 and a half points, the Dow Jones Industrial Average added exactly the same amount, whilst the nerds of NASDAQ rocketed up, off the best levels of the day, but still a comfortable 0.79 percent up for the session to 2965. A couple more days like this and nerds will be closer to 3000 points, but bear in mind that the all time inflated Über-bubble high was back in March of the year 2000 (say it like Conan O'Brien says it!), where the tech bubble was at its hottest. 5048 is the all time closing high, March 10, the year 2000. I had not been in this industry for very long, so I guess what was normal for some, is not for others! In less than five years the index grew fivefold. If you were not investing in tech stocks, then you were just plain stupid back then. And then, after that, if you had avoided the sector, or got out "early" then you were clever.

I found these milestones online, from this Yahoo! source Milestones in the Nasdaq composite index:

First close above 1,000: July 17, 1995.
2,000: July 16, 1998.
3,000: Nov. 3, 1999.
4,000: Dec. 29, 1999
5,000: March 9, 2000
Next day: 5,048.62 (all-time high)
By October 9, 2002: all the way down to nearly 1,100

But of course these stocks that make up the biggest part of the NASDAQ by market cap are all much, much cheaper than ever before. Microsoft now trades on 11 times earnings, whilst the all time high (adjusted for the split last in Feb 2003) was nearly 59 Dollars at the end of December 1999. And the annual earnings per share back then was 1.42 USD, or net income of 7.785 billion Dollars on 19.7 billion Dollars worth of revenue. That was in 1999 when businesses were spending like gang busters, just two years prior to that in 1997, the business had made 3.454 billion Dollars off only 11.936 billion Dollars worth of annual sales. Just last evening the Microsoft revenue for the past quarter clocked 18.059 billion Dollars. The quarterly revenue was nearly more than the entire 1999. And more than double for the quarter past, than for the whole of 1996, where net revenues were 8.671 billion Dollars for the full year. And if you needed to know, last evening the company reported that they have 63 billion Dollars worth of cash on their balance sheet. Cash on hand for Microsoft in 1995 was less than 5 billion Dollars.

I am getting to some sort of point though. Adjusted for the share splits, the share price now is at the same level it was in 1998. 1.83 Dollars per share is what the company made back then, BUT, they have done two share splits since then. So divide by two in March 1999 and another in Feb 2003, and you get to currently 46 cents worth of annualized earnings. So, back then the stock was trading on nearly 70 times earnings. And today, for all the hard work and better products released (a few stinky buys) the stock can only get an 11 times rating from Mr. Market. The truth.

Google hit the streets with results afterhours and a beat of expectations, which is always comforting to see. A bottom line beat, but a top line miss. EPS was anticipated to be just over 10 Dollars a share, a slight beat of 10.12 Dollars was delivered, revenue missed but still showed a 35 percent increase on Q2 2011, the comparable quarter. If you are looking for the official release then you will have to check out Google finance ironically, over here: Google Inc. Announces Second Quarter 2012 Financial Results. I use Google Finance all the time, it is one of my favourite free services, if not absolute favourite. I do NOT use the Yahoo! service because that comes with a login.

So where did Google make all their money? Well, in the traditional places, paid clicks increased 42 percent over the comparable quarter, but only one percent on the prior quarter. 90 percent of their sales still come from the advertising revenues. Motorola made a loss and the jury is still out on that one, but I suspect that Google are a smart bunch, they are biding their time. I remember that my wife had one of those clam phones, they were very cool at the time. They made you look a little like that Horatio fellow from CSI Miami, remember him and his witty one liners? Cash on hand is now 43.1 billion Dollars, WOW! That is enough to buy Yahoo! twice over and have some left over. And then Google can reemploy Marissa Mayer and pay her less, check this out from BusinessWeek just a couple of days ago: Yahoo: Help Us, Marissa Mayer. You're Our Only Hope. I honestly do not think that one person can change something that is structural with a business, they are no longer market leaders. I know that Steve Jobs almost did not go back to Apple, and I know that Marissa Mayer is really amazing, but there are limits, not so? I hope that Yahoo! are going to get what they pay for, her immediate pay package is around 100 million Dollars. Check out what some folks think that she could do: 5 things Marissa Mayer will change about Yahoo.

We like Google a lot, and think that the company will continue to be an innovator, amongst the leaders in new product delivery and implementation. Quality attracts quality, that is what happens to good businesses, the smartest folks want to further their careers here, rather than at the laggards, dare I say it, at Yahoo! Earnings expectations next year are expected to be around 41 Dollars. So, with a share price at 600 odd Dollars a share, is that expensive? 47 Dollars worth of earnings per share in 2014 are the estimates, just under 13 times earnings for 2014. We continue to rate the stock a buy.

Currencies and commodities corner. Dr. Copper is last at 344 US cents per pound, the gold price is lower at 1577 Dollars per fine ounce. The platinum price is lower at 1409 Dollars per fine ounce. Commodities are lower across the board, the oil price is also lower at 91.69 Dollars per barrel. The Rand is weaker, 10.07 to the Euro, 12.94 to the Pound Sterling. The market is flat, GE results were a slight beat on the bottom line, a miss on the top line. Futures are lower, indicating that we are perhaps going to slide into the weekend here.

Sasha Naryshkine and Byron Lotter

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Resources rumble

"Annualise the monthly rate and you are looking at a very tame inflationary environment, which would and could mean that the MPC would have scope to cut rates. But I suspect that they will not. I wouldn't be surprised if they did cut rates, but in the bigger picture credibility is also key."

Jozi, Jozi. 26^o 12' 16" S, 28^o 2' 44" E. Yesterday was a fairly interesting day for equities markets, as every day almost always is, but because we are in the first bit of earnings season, it is *nice* to see the market responding to earnings, rather than getting anxious about Greek elections of Spanish bond yields. Don't get me wrong, I am not suggesting that those "things" are not important, but ultimately the levels of companies stock prices are determined by their past, current and more importantly future earnings. And not what happens in Greek politics. Or whether Spain must struggle to meet their future obligations, their funding costs might be high now, but they have been much higher in the pre Euro era. That does not matter over the long run. And wait for it, as I read on Twitter, someone pointed out that six countries had negative yields on their very short term debt. And the fellow suggested that was a bubble. Probably right too, why would anyone ever think of that as an investment, rather these instruments are being used to park money for the short term.

Session end here in Jozi we saw the all share close up 329 points, or 0.97 percent to 34035 points. Back above 34 thousand points! Yeah. Sasol had a cracking day, thanks to a much higher oil price, which some are suggesting have been manipulated. The oil price, and not Sasol. Phew, the participants are many and the trading of oil contracts is huge. Plus, we all use the stuff all the time, I used the processed product on my way to work this morning, you would have used it too. The goods you buy, the services that you use, they were all connected to energy prices, oil prices. So, until we all travel on transportation powered by the suns rays, or battery that gets its energy from elsewhere, oil is going to be the most useful everyday commodity.

Every day we use around 86 million barrels of oil a day, collectively. Oil consumption is expected to peak in around 2030, to be around 105 million barrels a day. Resource stocks added over one and one tenth of a percent, no thanks to the gold stocks, which sank one and two thirds of a percent. Retail stocks sank 0.6 percent, notwithstanding the very good retail sales number locally, but these were for the month of May, here in the middle of July, seems a bit slow, not so? Check it out Retail trade sales (Preliminary) May 2012 from the StatsSA website. Nice, upside surprise.

And that tees up the announcement out of the MPC a little later this afternoon. Governor Gill Marcus and the team would have fresher data at their disposal, including the release of Consumer Price Index June 2012 yesterday. And as per the release: "The headline CPI (for all urban areas) annual inflation rate in June 2012 was 5,5%. This rate was 0,2 of a percentage point lower than the corresponding annual rate of 5,7% in May 2012. On average, prices increased by 0,2% between May 2012 and June 2012."

Annualise the monthly rate and you are looking at a very tame inflationary environment, which would and could mean that the MPC would have scope to cut rates. But I suspect that they will not. I wouldn't be surprised if they did cut rates, but in the bigger picture credibility is also key. I am reminded that JC Trichet hiked rates too early and was stubborn about cutting rates later on as his tenure came to an end. I am expecting no rate cut.

Vodacom have released a trading statement this morning, for the period to end 30 June 2012. Subscribers have topped 50 million across the whole group, that is an increase of nearly 30 percent over the year. In South Africa the number of subscribers jumped to 31 million and grew by the same click. Operations outside of South Africa (Lesotho, Tanzania, the DRC and Mozambique) increased to 19 million folks. There was a big jump in M-Pesa (mobile payments) numbers in Tanzania, up to 3.6 million users, a monster gain of 120 percent. Group data revenue contributed 16.6 percent of overall revenue, whilst overall revenue gained 9.3 percent.

In South Africa the group saw strong growth in active smartphone users, jumping over 40 percent to 4.9 million folks. Average usage though looks still pretty low at 120 megs per user per month, we use too much around here, we are heavy, heavy users of data, by South African standards. But here is the part that gets everyone anxious, the data revenues increased by only 10 percent because Vodacom (in this case) reduced their pricing per megabyte by 26.1 percent. So that is why Vodacom struggled and saw revenue growth of only 1.8 percent to 11.769 billion ZAR. But that was more than offset by strong revenues from their International businesses.

From the official release, Vodacom Group Limited trading statement for the quarter ended 30 June 2012, outgoing Vodacom CEO, Pieter Uys made the following very valid point: "The connectivity revolution is well underway with close to 16 million customers actively using data, up 43% from the prior year." This is of course why we think that the mobile companies are not ex growth, as management quite clearly point out, they are seeing more people using more devices to access data, the connectivity revolution.

There were two things that made me scratch my head, I wondered why the number of subscribers outside of South Africa had fallen so much, but then I read the fine print under the subscriber numbers: "During the quarter ended 30 June 2012, Tanzania, Mozambique and Lesotho changed their disconnection policy from 215 days inactivity to 90 days inactivity. Prior period numbers have not been restated." That was solved, but the other issue was the fact that ARPU's are under pressure here, which is good for the consumer, but not necessarily good for the mobile service providers. Blended ARPU's are falling, currently they are 130 ZAR per month, whilst in the December of 2010 quarter, ARPU's were 186 ZAR per month. There are of course 12 million more subscribers in South Africa now, than there was back then. The mix is shifting, the challenge is for the handsets to become cheaper over time, which I guess is not good for someone else, think Nokia in that regard, they have just discounted the Lumia heavily. We will pay closer attention when the numbers hit the screens in the coming weeks.

Oh dear, not another trading update like the last one. I am referring to a late announcement from Amplats, after the market had closed yesterday. Here goes the ugly: "Headline earnings per share ("HEPS") for the period is expected to decrease to between 270 cents and 280 cents from 1,236 cents reported for the six months ended 30 June 2011." Is that it? Well, the stock got completely crushed this morning at the beginning of trade, down to as low as 407 Rand a share. It has settled to be down around two and a quarter percent on the day, on a day that the markets are doing pretty well.

OK, so why are "things" looking worse than the horrible environment that we already know about? Well, there are some things that you would have known about if you were paying attention a little closer: "The expected decrease in HEPS is primarily due to lower sales volumes and lower realised prices during the first half of 2012. Platinum sales volumes for the period were lower primarily due to the delayed restart of the converter plant post its annual maintenance." And then of course the more important factors, some would say that these are permanent in a sense: "HEPS for the period has also been adversely affected by higher than expected industry cost inflation, particularly for labour, diesel and electricity." Perhaps diesel prices, those will fluctuate the most out of these three costs.

But wait, it gets worse than this, because as a result of "a loss of R256 million resulting from revaluation of the Company's investment in Wesizwe Platinum Limited and once-off accounting charges of R388 million (post-tax) and R505 million (post-tax)for the writedown of the Tumela 4 shaft project and suspension of Marikana operations respectively," basic earnings per share are expect to show a loss of between 175 to 185 cents. Ouch. Like I said when Aquarius announced that they were mothballing shafts, we tend to just shrug our shoulders, but on more emotive issues, such as a painting, well then we will march. I suppose the one is linked to the economic woes of Europe (Amplats product), but the other we should be talking about. And raising the issues around higher wages linked to productivity. I mean, why not?

New York, New York. 40^o 43' 0" N, 74^o 0' 0" W. Markets rocked last evening on Wall Street, Microsoft, Intel, IBM all made great gains during the course of the session. Only financials were a drag, Bank of America looked like a beat in earnings to me, but the stock sank nearly five percent. Wow, the ride recently might have been volatile, but over the last ten years the stock is down nearly 80 percent. Granted that most of that sell off was from October 2007 (52 Dollars a share) through to March of 2009 (just above three Dollars a share) to the current share price, present day of 7.53 Dollars. So, as ever, it depends where you bought the stock. Back in the go-go days of 2007 the company was paying 64 cents per quarter worth of dividends, when they hit on hard times the best that they could do in 2009 was a single cent worth of dividends per quarter. Yech.

It is still at that level, the dividend, one cent a quarter. Peanuts, but better than nothing. The explanation on why the stock took a beating is apparent in this piece in the New York Times Dealbook section: Bank of America Posts $2.5 Billion Profit, but Mortgage Woes Remain. See that, the mortgage book continues to weigh heavily on the business, some deals with the benefit of hindsight seem to have been ill conceived, but the Countrywide Financial one, well that was just plain awful! Some folks still think that Bank of America is quite possibly the best opportunity in years, others, well, not so much.

Byron's beats looks at a sector that I like a lot. Food. Fast or not, food is something that humans need, in the same way that we need fuel for our vehicles. Sadly we all like eating a lot more than we ought.

Yesterday we had first quarter results from another multinational company which I'm sure you are well aware of. Yum! Brands the owners of KFC, Pizza Hut and Taco Bell (which is a massive Mexican food chain in the US) managed to grow earnings by 1% but maintain their full year growth target of 12%. Here is how the company introduce their presentation.

"Louisville, KY (July 18, 2012) - Yum! Brands Inc. (NYSE: YUM) today reported results for the second quarter ended June 16, 2012 including EPS of $0.67, excluding Special Items. Reported EPS for the quarter was $0.69. Based on first-half results and current solid sales trends, Yum! reconfirms full-year EPS growth forecast of at least 12%, or at least $3.22, excluding Special Items. The Company also raises new-unit forecast to a record 1,700 new international units for the year, including at least 700 new units in China."

Let's take a look at the numbers. Total revenues for the quarter grew 12% to $3.168bn. The reason for the big increase in revenues compared to a small growth in profits was a margin decrease in China due to food inflation. The country had bad weather last year but this is being normalised, we have seen this from recent Chinese inflation figures. So expect this to change in the second half of the year. Margins in China went from 19.7% to 15.6%

The share trades at $64 putting them on a one year forward PE of just less than 20. McDonald's trades on a one year forward of 16.6 while here locally Famous Brands trades on a one year forward of 18.7. Many have been calling Famous Brands expensive following their fantastic run recently but I guess these figures put things into perspective.

They put huge emphasis on China and as you saw above plan to add 700 units in the country this year. That is 41% of all new stores and have already added 160 this quarter. In the US same store sales grew by 7% while margins improved drastically from 11.7% to 17.5%.

The company has good international exposure, great brands and is expanding in the right areas namely China and India. It is certainly one we like but I will have to agree with Sasha on this one. McDonalds is our preferred entry into this sector. It looks cheaper and the brand is just as good if not better.

Currencies and commodities corner. Dr. Copper is higher, at 350 US cents per pound, the gold price is a little higher at 1582 Dollars per fine ounce, the platinum price is also higher at 1413 Dollars per fine ounce. The oil price is last at 90.71 for NYMEX WTI. The Rand is firmer, last at 8.15 to the US Dollar, 12.77 to the Pound Sterling and 10.06 to the Euro. We are over half a percent better.

Sasha Naryshkine and Byron Lotter

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Results rushing in

"You might frown on all of the stimulatory measures that the Federal Reserve has embarked on, but would you have preferred the alternative? If you needed reminding, Bernanke was perhaps the greatest student of the Great Depression, and the (lack of) policy response in the aftermath of the crisis."

Jozi, Jozi. 26^o 12' 16" S, 28^o 2' 44" E. It could have been better, it might have been worse I guess, US retail sales disappointed, and perhaps that was the reason for the late selloff. At the end of session the Jozi all share index had sunk 0.12 percent to 33696 points. The industrials sector did the best out of all of the majors, rising nearly one third of a percent, whilst resources sank nearly six tenths of a percent. We were happy with the results that we saw during the day, and on balance most results have beaten expectations so far.

BHP Billiton released their production report for the full year this morning and on balance it looks good. I think that the thesis that we have on the company will hold true over time, and in the short term however all these commodity producers are lumped together from a quality point of view. But in our opinion, we agree with company and the CEO, their quality of their asset base is unrivalled globally. Tier one assets as Marius Kloppers often calls them.

Whilst the company might refer to the environment as challenging, they will still be able to produce annual production records across ten of their operations. This is also the 12th consecutive year of record Western Australian Iron Ore production which saw the June quarter register an annualised record of 179 million tons per annum. For the full year Iron Ore production topped 159.4 million tons actual for the year, an increase of 19 percent for the full year, and 8 percent on last quarter. There was a strong bounce back in the copper division, a 15 percent increase quarter on quarter, but because of the "challenges", they registered 4 percent lower production, 1094.5 thousand tons of copper for the year. The biggest change, and I guess it is no coincidence, is the petroleum division which reported a 40 percent increase in the year to barrel of oil equivalent to end at 222.34 million. Or roughly two and a half days production to match our global usage.

So in this department (oil and gas) BHP Billiton are not necessarily a big producer globally, but it has become a significant part of their business. I remember when oil production was much lower than at these levels, but because of the high levels of the oil price relative to their other divisions, this division contributed half of the profits in 2007. Five years ago. Remember that Iron ore is now a strong contributor, as margins have widened significantly. Energy and metallurgical coal volumes both increased by 2 percent, perhaps ahead of folks expectations particularly with the flooding in Queensland.

I am pleased with these numbers, they seem to be ahead of consensus. BHP Billiton is for us the only truly well diversified mining company at that scale. At most scales really. We continue to believe that you must be patient here, whilst earnings are never going to be smooth with commodities companies, they are more likely to be reliable. We will be closely watching on the 22nd of August, that is five weeks today. I don't think that I can wait that long.

New York, New York. 40^o 43' 0" N, 74^o 0' 0" W. Markets did a whole lot better from mid morning onwards and perhaps that can be directly attributed to commentary from Ben Bernanke, as the Fed chair outlined what tools they have at their disposal to fight a slowing economy. Many armchair critics continue their Ben bashing and FOMC SMH'ing, but in my world they have done a fabulous job. Because whilst you might frown on all of the stimulatory measures that the Federal Reserve has embarked on, but would you have preferred the alternative? If you needed reminding, Bernanke was perhaps the greatest student of the Great Depression, and the (lack of) policy response in the aftermath of the crisis.

And decided to take on extraordinary measures to combat against the same happening again. Because regardless of your political affiliations, that is and was not good for America. The purists could argue that this is necessary to restore balance, but it does little for ordinary humans, mass unemployment, bank failures, GDP getting crushed (by as much as a third contraction from the highs to lows in the Great Depression) and general massive tax hikes to shore up government revenues. Although the purists would have said that the Fed were to blame in the first place. I don't blame, I am in awe of that team.

Johnson & Johnson, one of the best known consumer brands globally, reported second quarter numbers before the market opened on Wall Street yesterday afternoon. Jozi time afternoon of course, I guess we are luckier that US markets are open whilst we are awake and not in the wee hours of the morning. Hmm... another reason not to live too far East of this time zone. JNJ reported revenue of 16.5 billion Dollars, which was actually lower than the comparable Q2 in 2011, mostly as a result of a negative currency translation, which had as much as a 7.5 percent impact. Excluding special items, EPS clocked 1.30 USD, slightly better than expected. The guidance for the full year however was lower than prior guidance with the range now expected to be between 5.00 to 5.07 USD for the current financial year. Prior guidance was 7 cents higher than the top end of the range given. The dividend was actually declared a day prior, 61 cents for the year. So, based on that guidance and 244 cents worth of dividends a year, the stock trades on a forward earnings multiple 13.8 times and a dividend yield of 3.8 percent. That is a huge attraction, that yield is really awesome when compared to that of US treasuries. Oh, and if you need reminding, the stock was higher than it is now in 2008, where it was a little above 71.50 Dollars. That looks like the all time high.

So what is compelling about owning this business? Well, the structure of the business for starters, first of all the consumer products divisions, a pharma division and a medical products division. Just recently that medical products division was boosted with the acquisition of Synthes for a whopping 19.7 billion Dollars in both cash and stock. AND, a smaller acquisition, the first of its kind in China, of a business called Guangzhou Bioseal Biotech Co. which is a manufacturer of controlled bleeding surgical product. Sounds like, I don't know, a life saver?

In the consumer division there are awesome products in the baby care segment that you would know well, the baby lotions, soaps and shampoos. Neutrogena is another global brand that you would be familiar with, perhaps it is something that you use too. Band-aid is another iconic brand, the American word for plaster. Listerine, you know that one too. Acuvue contact lenses and products, that is a household name too, for those short of sight. And then in terms of the OTC products, again, there are well known global brands, check them out, scroll down to OTC under Consumer Products. This division is strangely the smallest, revenue for the quarter clocked 3.619 Billion Dollars, lower than the comparative quarter in 2011.

Next, you have the Medical Devices & Diagnostics division, which is the biggest revenue contributor, this last quarter revenue was flat at 6.565 billion Dollars. Again, I am sure that if you are a medical professional, you can vouch for their product. Lastly, the Prescription Products, which contributes 6.291 billion Dollars to overall revenue.

This is one of the most compelling characteristics of the business, its diversity. And many have been calling for the business to be split up. As per an excerpt from the Jim Cramer show, and a note from Goldman Sachs, both parties think that either two or three separate business (that have VERY little other than the shared brand name) would unlock enormous potential for shareholders. We agree. Although this is not necessarily the reason to own them, rather than their absolute quality as one of the key healthcare stocks you can own anywhere in the world. We continue to add to the stock at these cheap levels, from a historic point of view.

Byron's beats looks at another of our favourites, and another company that reported results yesterday, the iconic Coca-Cola. A business whose flagship brand is seemingly everywhere, and perhaps deserves a better global ranking from Accenture (Most valuable global brands) last year, sixth place. And that was slotting behind Apple, Google, IBM, McDonald's and Microsoft. Hmmm, methinks at a retail level it is better. I am sure that remote folk recognise Coke over all of these brands above.

Yesterday we had second quarter numbers from one of our recommended stocks in New York and one I am sure you have all heard of and in fact probably contributed to personally. Coca-Cola released numbers which showed good growth in the developing markets, week numbers from Europe and pretty anaemic numbers from the US. In case you were in the dark, here are the brands that fall under the Coca-Cola umbrella. This from their website.

"The Coca-Cola Company (NYSE: KO) is the world's largest beverage company, refreshing consumers with more than 500 sparkling and still brands. Led by Coca-Cola, .... our Company's portfolio features 15 billion dollar brands including Diet Coke, Fanta, Sprite, Coca-Cola Zero, vitaminwater, Powerade, Minute Maid, Simply, Georgia and Del Valle. Globally, we are the No. 1 provider of sparkling beverages, ready-to-drink coffees, and juices and juice drinks."

Let's take a look at the numbers. Global volumes grew 4% for the quarter while comparable currency neutral net revenues grew 7%. Comparable earnings came in at $1.22 which was up 4%. Analysts are expecting around $4.30 for next year so at $77.7 we see a forward valuation of around 18. This seems fairly valued for a company which has so much brand equity and potential for massive growth in developing markets.

Let's look at the geographic spread which always tells an interesting story. It's broken up into 5 regions with the bottling business filling up the sixth revenue driver. Eurasia and Africa grew volumes by 12%. This was led by 20% growth in India, remember I wrote about their drive up into India a few weeks ago? South Africa even gets a personal mention up 10%. Well done guys!

European volumes declined 4% with unseasonable weather, large marketing campaigns for Euro 2012 and the Olympics and of course ongoing macroeconomic uncertainty in the region being the main reasons for the decline. The marketing campaigns should pay for themselves later in the year. In Latin America volumes grew 3% with 6% growth in Brazil, 4% in South Latin and 1% in Mexico. This is a massive region for Coke.

North America only grew by 1%, this was despite Easter and 4th of July not falling into the quarter. Obviously these are big holidays for the company. Interestingly Powerade grew 13% in the region which falls under the active lifestyle theme I like so much. The Pacific which includes the likes of Japan and China grew 8%. Margins in this region are strengthening as operating income grew 15% in the quarter. The bottling investment group grew revenues by 10% whilst operating income declined 15% due to structural changes and acquisitions.

All in all we really like the mix. Risks include commodity inflation decreasing margins and stiff competition but against its peers Coke seem to be gaining the best market share. If you like SABMiller you should like this one even more. It's the same theme chasing after the developing market consumer but they don't face the regulatory pressures.

Currencies and commodities corner. Dr. Copper is last 344 US cents per pound, the gold price is lower at 1578 Dollars per fine ounce, ditto the platinum price, last at 1409 Dollars per fine ounce. The oil price is last at 88.77 Dollars per barrel. The Rand is last at 8.17 to the US Dollar, 12.75 to the Pound Sterling and about to crack 10 to the Euro. In the right direction from an imported inflation point of view. We are higher here, thanks to the rally in the US. Yes, thanks for that.

Parting shot. Sometimes the same piece of news is interpreted differently. Or no, the same piece of news is good for some, and bad for others. Chinese housing data this morning suggested that the property sector has rebounded and as such makes it much more difficult to justify a policy response from the central authorities. So this is bad for the resource stocks, and as such they were sold down heavily in Aussie this morning. BUT, this is good news for the retailers in China, and we have seen a strong bounce back for Richemont this morning. The same news, different interpretation, good for some companies and not good for others.

94 years ago today one of the greatest statesman ever to have walked the planet of the earth was born in a small rural village in the Eastern Cape. Not Qunu, but Mvezo, the two are close though. I have read the autobiography years ago, the Long Walk to Freedom, it is a must read for any South African. Happy birthday to, without a doubt, the greatest citizen of this fine continent. I managed to find something really amazing, the Dow Jones Industrial average started the year that Nelson Mandela was born was at 76.68 points. It ended the year at 82.60 points. In 1964 when Nelson Mandela went to jail, the Dow Jones started the year at 874.13 points. When Mandela was released from jail, the Dow Jones levels was around 3000 points. It closed last evening at 12805 points. Amazing, and increase of 12700 points plus in the lifetime of Nelson Mandela.

Sasha Naryshkine and Byron Lotter

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Expensive? Perhaps.

"The PIC, Christo Wiese (Mr. Suitcase), Whitey Basson and Shoprite Checker (Pty) Limited own nearly 39 percent of the business. So that is nearly 80 percent of the South African shareholders are not sellers, in fact if anything the PIC would be slow acquirers of the shares. It is then completely fair to say that the share price is set by the Americans and what they are willing to pay by way of valuations."

Jozi, Jozi. 26^o 12' 16" S, 28^o 2' 44" E. Financials enjoyed a good day, but banks were where the real action was, up over a percent and one third. I cannot say for sure that I know the answer as to why, but the banking sector has fallen from grace in recent weeks. Libor perhaps, but probably more likely linked to the ABSA trading update, which definitely spooked the markets. As at April 19, ABSA and the overall index had hugged each other for the better part of a year. But from that point onwards ABSA has underperformed the broader index badly, with the overall index flat (up 1.8 percent) and ABSA down 13.5 percent. The overall market over the same time frame is off one percent. So, it is fair to say that ABSA has been stinking up the joint, mostly with that one day drop back in late June, remember we wrote about it, if you need the refresher: ABSA warning sends share price over eight percent lower!.

Yesterday the Jozi all share index lost 0.13 percent to end at 33737, not exactly flying. If you know what I mean! OK, that was dull, not too witty this morning, I ran a crushing run in the wee hours, that was a little too taxing. Fast is a relative term, I am still very slow. Working on that though.

All the retailers are starting to hit us with trading updates, firstly Shoprite Checkers hit us with a trading update yesterday afternoon. It looked like a slight miss to me, the market was initially disappointed with the number. You can read for yourself on the Shoprite Checkers website: Operational Update. Or you can just carry on reading here, copy paste style: "For the 12 months to June 2012 the Group increased total turnover by 14.4% to about R82.7 billion, compared to the corresponding 12 months of 2011. Growth on a like-for-like basis was 8.5%. During the 2012 reporting period, internal food inflation averaged 4.9% compared to -0.1% in the 2011 reporting period."

OK, so what does that mean for Shoprite Checkers, because these are full year numbers of course? The expectations, the consensus as far as I could tell was six Rands worth of earnings for the period, which puts the stock on a forward multiple of close to 26 times. Relative to their peer group, this makes them the most expensive stock around. The dividend yield is not too much to talk home about, less than two percent forward. Earnings are expected to grow by just less than 20 percent per annum for the next two years. At current share price levels then, that puts the stock on a forward earnings multiple (2014) of around 19 times. Which still sounds too expensive. BUT, and this is where you must pay attention, most of these companies are showing really decent (in comparison) top and bottom line growth. And this is what you have to lean in closer to your screen. Take a look at the shareholder make up of Shoprite Checkers, taken from their last annual report:

As you can clearly see from the above graphic, Shoprite shareholders (as at the last annual report) were half South Africans and half foreign ownership. But it gets even narrower than that when we start talking about South African ownership, check out the table of shareholders, I have underlined the "safe" South African hands of owners of the business and you can quickly see that the price makers are not us. They are foreign share holders, and mostly dominated by Americans.

See that? Amazing hey, the PIC, Christo Wiese (Mr. Suitcase), Whitey Basson and Shoprite Checker (Pty) Limited own nearly 39 percent of the business. So that is nearly 80 percent of the South African shareholders who are not sellers, in fact if anything the PIC would be slow acquirers of the shares. It is then completely fair to say that the share price is set by the Americans and what they are willing to pay by way of valuations. Wal-mart Mexico trades on 34 times earnings. Yes, sports lovers, 34 times, and Wal-mart Mexico is valued at 50 billion Dollars on that lofty valuation. Whereas Shoprite has a market cap of 90.5 billion, at 8.18 that is a little over 11 billion Dollars. So whether this valuation is too much to stomach for South African investors is not the question to ask here, it is whether they can keep pace with their international counterparts, such as Wal-Mart Mexico. And let the emerging market funds determine what they should pay. Obviously a cooling or earnings miss then comes with great risks to the share price.

Woolies also released a trading update this morning, and it looks good to me, Mr. Market has the stock flat at the beginning of the day, so you could say that this was anticipated to some extent. The share price has been on an absolute tear, but so has the sector. Over the last 12 months the stock is up a whopping 70 percent. Wow. But this might seem a little light for Mr. Market as they digested it through the morning, the stock eventually took some tap. Here is the TRADING UPDATE AND TRADING STATEMENT from their website SENS portal. So expectations are for a 20 to 30 percent increase in both HEPS and EPS for the 52 week period to end June 24 2012. Remember at the half year stage, when we wrote up about Woolies: Woolies results look good, our expectations back then were for around 270 odd cents per share for the full year.

In the middle of the range (25 percent increase) we should expect earnings to be 269 cents per share, which means at the current share price of 52 odd Rands, the stock trades on 19.3 times earnings. With expectations pretty lofty, and seeing that the market is looking for 20 odd percent increase in earnings next year (and 17 odd percent the year after) the valuations seem just fine to me. What people are paying up for though is the yield, they are a very generous crowd. The prospective yield is around three and a third of a percent to June this year and rises to beyond four percent the year after AND nearly touches 5 percent the year after that, 2014.

But, the shareholder makeup is not the same as Shoprite and as per the 2011 annual report major shareholders are South African. The PIC owns (owned, as at June 2011) 17.22 percent of the business. And Woolworths holdings limited (the staffers) are the second biggest holders of the stock, with over 6 and a third of a percent of the business. So, I am just guessing here, but it is not going to get the same market rating as Shoprite. Perhaps they would do well to attract a different subset of shareholders, what about a road show? Ian? Buddy?

Byron's beats explores one our favourite themes, payments and our preferred stock in the sector, Visa. Great to have these beats back! Poor Byron went all the way to Knysna for a run, but they cancelled after all the flooding. At least he ate a couple of oysters. Nice, if that is your thing of course.

Visa is now our third most widely held stock in the US portfolio behind Apple and GE. So when big news concerning the company is released it is important to cover it. The biggest risk facing Visa comes from regulation and lobbying from merchants. Remember that they are not a financial institution and they take no credit risk. They process payments and take a small percentage.

Yesterday a pending deal with plaintiff's valued at $7.25bn was announced but is not yet final. This is from cases opened as far back as 2005 that claimed that Visa, Mastercard and some of the banks colluded over fees known as interchange which retailers pay each time a consumer swipes a card. Anti competitive agreements meant that retailers were paying inflated fees and now want pay back.

The announcement yesterday came up with a figure of $6.6bn of which Visa are responsible for 67% or $4.4bn. This amount has been more then covered for by the company hence the stock was actually up 1.8% yesterday. In fact $12bn was a potential figure for the combined settlement so $6.6bn looks a lot better.

What does this mean for investors? The companies have admitted guilt by provisioning for the fine but it has been factored into the share price a long time ago. These kinds of things do happen and they are potential risks. I have written about this before but I will mention it again. Yes, if there is collusion and fees are unnaturally inflated then there should be repercussions. But retailers should realise what these companies have done for their industry. By making it a lot easier to purchase goods without having to have cash can only be good for the retailers. They should not shoot themselves in the foot by lobbying these guys out of business.

The margins are huge so this will of course not happen but you do not want things heading in that direction. And what about regulation? Well it looks like more transparency will be the crux of it all. Disclose the surcharge at the point of sale so that customers know where their money is going. From there, I do not think clients will care. It is a lot better than queuing at the bank every pay day to get cash. Now that we are starting to see some clarity and once the overhang is gone, the Visa share price will carry on growing as more and more people embrace electronic payments.

Currencies and commodities corner. Dr. Copper is last at 347 US cents per pound, the gold price is steady at 1592 Dollars per fine ounce. The platinum price is also slightly higher at 1421 Dollars per fine ounce. The NYMEX WTI price is higher at 88.71 Dollars per barrel. There have been some important numbers from Coke, a beat, Goldman Sachs, also a comfortable beat, but a slight disappointment from Johnson & Johnson. 17 S&P 500 companies report today, it is a busy time for earnings, both this week and the next. US futures are higher and have taken us higher with them too.

Sasha Naryshkine and Byron Lotter

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Reflections of what used to be

"I am guessing that you can directly attribute the growth of the government wage bill to stronger unsecured lending growth numbers in our economy. The two go hand in hand, as people get wealthier in a relative sense, their access to credit improves, as well as their ability to service that debt. And as long as banks maintain the correct risk profiles, people make headway in life. I am yet to meet a person that was proud of reneging on a credit contract and telling the whole world to do the same, the "moral hazard" argument that Rick Santelli once used."

Jozi, Jozi. 26^o 12' 16" S, 28^o 2' 44" E. Boom. We closed at the best levels of the day, a Chinese cheer on the GDP meet (and greet) saw us initially open higher, led by resources which gained two percent on the day. The Jozi all share index added nearly a percent and one fifth, 390 points to the good to close at 33780 points. Banks sank just over one third of a percent, I suppose the same news really, banks under pressure in Britain and the US, from a reputational (and earnings) point of view, one should expect a whole lot more regulation and scrutiny. Banking forms one of the most valuable roles in society, it is of no coincidence that countries with advanced banking systems also have the most prosperous societies. But the future of banking in its current format, like most industries I guess, is being questioned by society. To blame is easy, to accept responsibility, well that is just hard. And when all the cogs have a careful inward reflection of the ills of the last banking crisis, just as many over-leveraged individuals are to blame. The loan officer might have made the loan too easily, but it took someone to ask. After all, we always think that we are "good" for it, not so?

The reasons why we do not like big banks are perhaps not plentiful, but will become apparent as we go along. The incentives are too strong (currently) for excessive risk taking. I have no problem with the way that people make money, it is just a question of risk. Now that might sound strange to you, that I have no problem with it, but I didn't say that I would be a shareholder or encourage people to be shareholders. The banking crises are well documented through the ages, and at the core often have the same root cause, greed of some sort. Managed greed is what ultimately leads to prosperity, caring greed if there is such a word is rare. But history has shown that society (and more recently so) is protected by big government from their own wrongdoings alongside the risk taking of banks. Governments do not want to be voted out as a result of the banking system falling over. As was pointed out to me by a good friend of the blog, it took the Republicans over 20 years to get back into the White House after the Great Depression. Perhaps the war had something to do with it, but the fall out of banks failing, unemployment rising led to a lot of push back from general society towards the perceived architects of the crisis, the free market types.

The solution is not an easy one, there is no one size fits all banks globally, even though we are moving in that direction. And I guess it is about the economics models that are followed by each and every country, currently the American model is seen to be not working, but the European model seems to be not working either. Not working is a relative term, because I am guessing for instance in East Timor those poor folks are trying to find their feet. And if ever there is a working government in Somalia, they will have their problems too. These banking and economics crises are rich people problems, because elsewhere in the developing world (as much as the Spain is not Uganda gaffe that is fun to explore) I am sure the problem of too many benefits would be a nice to have for the under developed world.

That would mean that if you have the relative resources to deal with the issues at hand, your expectations just need to be managed downwards, but you still have the resources. In South Africa we are in a rare and unique situation where there is an enormous gulf between the problems of the rich and poor. And in-between the two there is a very healthy and well regulated banking system. And a well run central bank. And treasury and the revenue collection authorities are good. So, in that respect we are all good, so in the years to come we should have a prosperous economy? Well, I hope so, although state control of the economy is not necessarily the best way to go about building wealth. My argument sometimes that I use in that regard is that the state is now a bigger contributor to the pensions savings schemes, through more employees contributing, and then becomes a bigger investor in locally listed entities. You see where I am going with this? The state, through the Government Employees Pension schemes is actually is a bigger investor as every month goes by. And as such, the irony might be that the state wants more control, but the private sector is getting bigger shareholders from government employees savings.

As per the PIC annual report in 2011, assets now top 1 trillion Rands (they did then) and equities represented nearly half a trillion Rand. Offshore is represented for the first time in 2011, a mere 25 billion Rand. The year prior, 2010, that offshore exposure was zero, zip, nil. The massive ramp up in total assets under management is astonishing, it has increased fivefold from 2000 to 2011. Now to put that into perspective, the PIC assets under management took 62 years to double from 100 billion Rands to 200 billion Rands as I understand it from the PIC integrated annual report 2011. These next graphic shows you actually how successful the forced savings from a growing government sector has been. For the country that is.

Amazing, yes? I am guessing that you can directly attribute the growth of the government wage bill to stronger unsecured lending growth numbers in our economy. The two go hand in hand, as people get wealthier in a relative sense, their access to credit improves, as well as their ability to service that debt. And as long as banks maintain the correct risk profiles, people make headway in life. I am yet to meet a person that was proud of reneging on a credit contract and telling the whole world to do the same, the "moral hazard" argument that Rick Santelli once used. All I am trying to point out above here is that the government through their equity holdings of their employees, have become more powerful in big business in South Africa. And as such, could influence South African companies more through the board room. But that would require more skills at a board level, and I am not too sure if government, let alone any fund manager is up to that kind of active approach. But that is not what happens for now.

OK, but we were discussing the banks and their role in society. Should they be more like utilities, or change and evolve and push the limit with regards to innovative new products that make their stakeholders money? Or should the two be split up? The practice of money making using excessive leverage is not new, but there could be a serious argument to be made that financial engineering outside of normal lending and transactional activities leads to innovation and greater advancement of human kind. Financial engineering of the last crisis is almost always of the Icarus kind, the wings work, the way you use it to fly, well those do not work if you push the envelope. Your wax melts. And lest you need a reminder, the Barclays stock price is getting hammered this year. Down 11 percent year to date (down 78 percent over five years), most of that moving in the wrong direction as a result of the lofty Libor fine.

Surely law makers must also take some blame. As Paul Kedrosky snarkily tweeted: "Pegging rates by surveying self-interested bankers on what rates they might, but don't, you know, actually lend at: How could that go wrong?" That is the core of the issue, if something is that important as LIBOR is, then why is it not managed in a much better way. This analysis has a good conclusion, but offers few solutions: Analysis: Banks behave badly redux: Is it killing confidence? I think yes, as Doug Kass from Seabreeze has said, all these scandals do little for confidence. Whilst law makers will use this opportunity to lay on the regulations, I am sure that it will not prevent the next crisis. As investable companies, big banks are not for us, and I also wonder how confidence levels are sitting at these big institutions.

New York, New York. 40^o 43' 0" N, 74^o 0' 0" W. Whoa. Friday was a huge day, the expectations of Chinese intervention in their economy was one of the reasons that US markets rocketed ahead, the other was perhaps the Fed would be soon to act. Remember that Ben the bearded (the measured) Bernanke testifies twice this week and the Fed speak interpreters look for signs of QE3. Not that the ship was ever built, but because the Fed might see the recent signals from China and Europe as an opportunity to act. We could see that, and coincidently, the Fed dual mandate could be called for, heading into US presidential elections. Many are starting to cite that single event as a reason why there would be more accommodative action, myself, I am not convinced that their independence is compromised by that. There are too many Fed armchair critics for my liking, let the smartest minds do what they have to. In the same way that the Europeans must solve European issues and problems and undoubtedly will solve their issues. Just give them time.

Currencies and commodities corner. Dr. Copper is last trading at 346 US cents per pound, the gold price is lower at 1584 Dollars per fine ounce. The platinum price is also lower at 1418 Dollars per fine ounce. The Nymex WTI share price is slightly lower at 86.8 Dollars per barrel, the Brent crude oil price is higher at 102.65 Dollars per barrel. The Rand is firmer, 8.26 to the US Dollar, 12.84 to the Pound Sterling and 10.07 to the Euro. Surely it must be time to buy some of those if you are long Dollars? We are slightly lower to begin with.

Sasha Naryshkine and Byron Lotter

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China relief. Throw out your paper bag.

"Back in 2000, the Chinese economy topped 1 trillion Dollars for the first time. Roughly 40 percent of that is 400 billion Dollars worth of savings. Fast forward to 2010 and you see the economy of China stand at 5.878 trillion Dollars. And 51.7 percent of that is over three trillion Dollars worth of savings. A massive seven and a half fold increase. Surely, if there ever was a statistic to show you how rich the Chinese have become, this is the stat."

Jozi, Jozi. 26^o 12' 16" S, 28^o 2' 44" E. The selling started in earnest in the last hour and a half of trade when the Americans came back to spot market trading time. The sell off doubled from three thirty all the way through to the close, leaving the Jozi all share index down 332 points on the day, or a loss of nearly a full percent to 33392. Oops, where did 34 thousand go? Resources sold off nearly a percent and a half, industrials sold off as much as the rest of the market, whilst the banks were down just shy of three quarters of a percent. MTN and by extension telecommunications stocks were down pretty sharply, in recent days there have been more investigations into wrong doings associated with their licence award in Iran. Until the Turkcell claim is dismissed, or the government agency tasked with the investigation finds something (or nothing) the news will weigh on the stock. Recently the stock has been on a tear, after the move to get the US courts to dismiss the Turkcell claims. Yesterday MTN sank 2.22 percent. Well, if it makes you feel better the stock clocked a 52 week high on Tuesday, so we are closer to that than the 52 week low in early April.

Wow. Telkom are getting crushed here this morning as the announcement comes that you no longer need to exercise caution when trading their shares. Errr.... tell that to the people that have sold them off 4 percent plus, that looks like either they are throwing caution to the wind OR they are exercising extreme caution and just getting out, no matter what the cost. And the cost is apparent to Telkom share holders, the stock has MORE than halved in the last year. The stock price this time last year was 36 Rands and some change. This morning the low that has been reached is 1716 cents. The overall market over the last year is up around five percent, Vodacom is up over ten percent (and that is ignoring the whopping dividend). The MTN share price is flat over the last year, again that ignores the much better dividend flow. Naspers, a choice of sorts in the listed space when compared to Telkom is up 19 percent. Telkom has lost more than 50 percent.

Why don't you have exercise caution anymore? Because it seems that the South Koreans from KT Corp. are going to leave town, at least with the prospect of being a shareholder in Telkom. Perhaps the leftist policies and the red book carrying (I am being facetious) members of government should rather invite people from North Korea to take a stake in Telkom. Because as you well know, North Korea knows their state owned enterprises better than the developmental model neighbours to the South. Sarcasm alert in the extreme here folks, apologies. But what next for the company? Really? This is not good news for the average internet user in South Africa. Whilst government might have good intentions of letting the state control of a strategic asset reach all households, but this is at the detriment of the current users. Who have poor speeds and worse service to blame on the folks that own the backbone. We reckon that Telkom are going to go along hopping on one leg shouting "come back you coward" ala the black knight in Monty Python when taking on the king in a sword fight. You should watch it. So, we don't own any, we don't feel compelled to buy any presently, although it is completely nuts that the installed infrastructure is a multiple of five (or more) times the current market cap.

When you read this, you will weep: Highlights of the Telecommunications History of South Africa. Check out the Finances sector, I am presuming that this is from 1994: "With total assets of R16.4 billion at book value, turnover of R8.3 billion and as staff complement of more than 60,000, Telkom is one of the largest companies in SA."

Fast forward to the last set of results (Telkom SA Limited Group Annual Results), there are only now 20,9 thousand people who work for Telkom. Property, plant and equipment are valued by the company at 36.155 billion Rands. The current market cap is four percent less than 9.5 billion Rand as at the last close. Mr. Market is either delusional, or tells you that Telkom cannot make enough money in the future off that asset base, unless something seriously is done. Break it up, sell the whole lot to Naspers or Vodacom, heck, even the marginal Cell C could probably sweat those assets harder. But, that is not going to happen. And if I need to remind you, Telkom just bumped their ADSL pricing up. That is almost an admission of failure. But what do I know.

Today it is going to be all about the release from Beijing central. 39^o 54' 50" N, 116^o 23' 30" E. I am guessing that there is a slight sigh of relief when the Chinese released their numbers for the second quarter of the year 2012. GDP estimates came in line with expectations, with the second quarter registering growth of 7.6 percent. Retail sales grew by 13.7 percent year on year, and that was a slight beat in expectations. Industrial production came in slightly lower than the estimates suggested, but still registered a very healthy 9.5 percent growth year on year. There are of course those suggesting that this is the trough and the second half will be stronger. I am already seeing the question marks about the official release on my twitter stream. I turned on the twitter "thingie" just before my run with the hound this morning, and saw someone quite rightly point out that electricity demand increased only 3.7 percent year on year, how could it be possible that the Chinese had become so energy efficient? Maybe. I do not actually know the answer as to whether the Chinese massage their numbers or not, I suspect that any statistical body tasked with an economy the size of that of China is always going to have problems.

If you want to take a closer look at the numbers, the Chinese statistical body, the National Bureau of Statistics of China, actually does have an English website, where you can read all of the numbers if you would like to: Overall Economic Development was Stable in the First Half of 2012. The real growth driver in these numbers however was in fixed asset growth, 20.4 percent better year on year. The Western and Central regions are growing comfortably ahead of that number. The encouraging news is that construction build has turned positive again, if only for the short term.

There are a whole lot of useful graphs in the Industrial Production Operation in June 2012 page, including some interesting ones which tell you the landscape changed in April, with all the anxiety over the Greek elections and lack of a government, the not as yet having happened exit from the Euro zone. Let us look at that electricity consumption graph over the last 12 months.

What I am trying to point out is that the nervous managers and consumers globally were stuck, were paranoid, and as such did nothing for a number of weeks spent like bunnies staring into the lights. On that score my mate and I running earlier in the week saw a distraught woman wipe out a bunny (with her motor vehicle) early in the morning, just in front of us. It was not *nice* for her, let alone for the bunny who never recovered. Poor bunny.

As I said at the start of this piece on Chinese growth, there would be a collective sigh of relief from the China bulls, even though I am seeing the headlines that already say "things" in China are cooling, with the slowest quarterly growth since the first quarter of 2009. Yes, this is indeed true, but since then the base was gotten wildly bigger. And listen in closely to this factoid, according to the Google finance database, which gets their data from the World bank, the Chinese savings rate, as a percentage of GDP rose to 51.7 percent in 2010 from 37.53 percent in the year 2000. Does that sounds like a lot? Well, let us try and quantify that. First, a wonderful chart from the folks over at Tradingeconomics.com:

Slowdown? What slowdown? It does not look too bad to me. You only get the sense of the base when you view it over the years like this, and how it becomes less possible to grow at 8 percent or 9 percent or even 6 percent per annum on a multi decade basis. Because you cannot go on building "stuff". Stuff of course is another word like things. Not a very useful noun at all. But what is apparent that Chinese people have extended their savings over the last decade by a whack. Back in 2000, the Chinese economy topped 1 trillion Dollars for the first time. Roughly 40 percent of that is 400 billion Dollars worth of savings. Fast forward to 2010 and you see the economy of China stand at 5.878 trillion Dollars. And 51.7 percent of that is over three trillion Dollars worth of savings. A massive seven and a half fold increase. Surely, if there ever was a statistic to show you how rich the Chinese have become, this is the stat. Now, the tricky part is to get the Chinese to spend this. To become bigger consumers of goods. It is happening already, you just have to look at the numbers from the global retailers.

Currencies and commodities corner. Dr. Copper is last at 347 US cents per pound, higher on the day, as is most of the commodities complex. The gold price is also higher, last at 1582 Dollars per fine ounce. The platinum spot price is last at 1429 Dollars per fine ounce. The oil price is also higher, 86.93 Dollars per barrel for NYMEX WTI, and 102.09 Dollars per barrel for Brent Crude oil. The Rand is still weaker, 8.32 to the US Dollar, 12.90 to the Pound Sterling and 10.19 to the Euro. We are better here today as a result of the relief rally around the Chinese GDP number.

Sasha Naryshkine and Byron Lotter

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Don't talk about it.

"The market in a way is rewarding this round of austerity with lower borrowing costs, the ten year yield is close to six and a half percent. The last time the Spanish voters got together nationally, the centre right folks took the baton over from the centre left. But as recently as March in a regional election, things were not as good. Voters and citizens are impatient, because a job lost today means lost revenue tomorrow."

Jozi, Jozi. 26^o 12' 16" S, 28^o 2' 44" E. Oh no, not another day like yesterday, was the punch line to a wise crack (you can't use the j word in email folks) I used to tell, but yesterday the markets felt strangely like that too. Same old issues, Spain, lack of clarity about European responses to the sovereign debt issues, the US fiscal cliff, US presidential elections, slowing Chinese economy, these are all the same old issues that we have to deal with day in and day out. And yes of course they do have a proper impact on peoples decision making, if you read the headlines and mainstream and then base your business decision on that basis, then I am guessing you are likely to err on the side of caution right now.

The Jozi all share index closed down 276 points, or 0.81 percent to close up shop at 33722. The new JSE trading systems mean that there are still a number of issues with regards to SENS (the format looks average, still working it out), and the software providers trying to work it out. There must be many frustrated high frequency trading types who are still waiting to unleash their programs, waiting for the trading platform to settle somewhat. I must put my feelers out and ask the trader types what their experience has been so far, because for the time being it seems pretty quiet. Resource stocks sank a percent and a quarter, I think that tomorrow morning early, if you suffer from insomnia, make sure that you tune into business TV to get the Chinese numbers fresh. I am not a short termer, but I think that this is important, these numbers can either put paid to the anxiety levels, or hasten the idea that policy response should be swifter, more on that later actually.

Spain are starting to enter the zone in which all of the austerity measures are becoming increasingly unpopular at a general public level, and we are seeing the violence escalate a little. In a sense this may be comparable to Greece, but the size and scale of the Spanish economy relative to the overall zone makes it a much more important cog. As the Spanish prime minister said, Spain is not Uganda. Whatever that means, and however you want to interpret that, you will find that is a personal thing. I dislike using the word "thing", it should only be reserved for the hand from the Addams family. Is that right? Yes, Addams is with two d's.

So what do all of the cut backs mean for the people on the ground in Spain? Not only are there cut backs, but there are also tax increases too, perhaps the most visible being a hiking of the VAT rate from 18 to 21 percent. Coal subsidies are set to be cut, meaning that coal miners very livelihoods are at stake here, the FT pointed out, the state funding will be reduced by 20 percent, which would have a direct impact on the profitability of the mines. Mineworkers had journeyed nearly 500 km to Madrid from their workplaces and there were heated arguments with the police. Rubber bullets and the like. This is hard, but this happens when you spend too much and don't collect enough.

This ALSO happens when you promise too much. The market will lend you money, but at a worse rate than the one you were used to. Plus of course the labour laws in Spain are the most restrictive in the zone, which makes it hard to be a flexible business. All I am saying is that you get what you create. If you overpromise, of course people will vote for you, but when the money dries up, you had better watch out, because then the very people you tried to appease and attract over the years quickly turn into your enemy. But different countries have different economic models that either work or not. The market in a way is rewarding this round of austerity with lower borrowing costs, the ten year yield is close to six and a half percent. The last time the Spanish voters got together nationally, the centre right folks took the baton over from the centre left. But as recently as March in a regional election, things were not as good. Voters and citizens are impatient, because a job lost today means lost revenue tomorrow. Down here we could learn a lot from what we have seen in Europe, but my sense is that the same mistakes are repeated time and again.

New York, New York. 40^o 43' 0" N, 74^o 0' 0" W. I am not too sure whether the Fed minutes from the prior meeting should be the most important thing to focus on, but I guess the fact that members of the FOMC are open to stimulus (if the economy starts looking worse) means that perhaps the recovery continues to look weaker. Strangely the US Treasury can continue to get debt away at record low yields, this is a golden era for government issuances. Markets bounced around again, but ended in the red, the broader market S&P 500 nearly managed to eke out a gain. But not quite, the S&P 500 lost a mere 0.02 points to close at 1341.45 points. The nerds of NASDAQ lost half a percent, whilst the Dow fell by 48 and a half points to end the day at 12604. It was close to 13 thousand just a while back.

Yesterday Paul Krugman appeared on CNBC Squawkbox, and it almost seemed as if Joe Kernen had something personal about this particular interview. Krugman, who is outspoken, and everyone knows that he is a liberal. In fact his very New York Times platform is called The Conscience of a Liberal, if you had any illusions as to what his political persuasions are/were, then just follow the blog for a while. Now on that specific CNBC show there is the very colourful and outspoken Joe Kernen, who makes the Republican case well known with every single opportunity that he is given. Everything big government is bad in Joe's opinion. As you can see from this posting by Krugman Zombies on CNBC, he objected to the badgering from Kernen. I am pretty sure that this will be the very last interview that he has on that platform. The expectation from Krugman was that he was going to talk about his book.

If you want to, you can watch the full interview via the "interwebs" (which my eldest daughter was confused with, just the other evening, I had to tell her, they are the same thing) then you can follow the following link, but I warn you that you need good bandwidth: Krugman on How to End This Depression.

Possibly the biggest issue to deal with to tackle the US deficit is the one that is the biggest hot potato. Healthcare. As we said yesterday, everyone wants access to better healthcare and is willing to pay for the expensive therapies. But the cost of healthcare in the US is way too high. You might have heard people say, the average American family is only one medical disaster away from bankruptcy. This is what Krugman had to say about costs associated with healthcare: "If we could suddenly have French health care costs instead of American health care costs, our budget problems would be solved forever. So it is about the very high costs of the U.S. health care system and can you not resolve our budget problem without resolving that. And if you do resolve that, then this whole thing becomes a whole lot easier."

And now you can see, from the US pie chart what he actually means by this:

The source of this fine pie graph is taken from the following place usgovernmentspending. If you fast forward to the 2017 expected budget, healthcare then becomes the most expensive item on the list. Then Krugman is right, how come Canada, Norway, France and Germany manage to cope with a smaller allocation of their budget to healthcare? Is it just a numbers thing? The US has a massive population when compared to these other countries. And perhaps the space and administration of a public healthcare sector is not for everyone. And what about the levels of obesity? The world health organisation (WHO) term this "globesity", as it is not just an American problem, but a global problem. But the US and Mexico top the list, check it out: Obesity (most recent) by country. Europe seems to be much lower than the average, which is a function of their lifestyles in general. That is the hottest of all potatoes, tackling obesity, although Mayor Bloomberg in New York seems to want to make a serious go of it.

This article Mayor Bloomberg and the Real Path To Obesity goes to the core of the issue. Choices. I do not necessarily agree with the conclusion, but the fact that the medical insurance companies are/might be involved soon, seems to suggest to me that lifestyle choices should be monetary. Find an insurance program that rewards you for healthy choices, that sounds strangely like Discovery's vitality program. And if you needed reminding, they have a business in the US, Destiny.

Currencies and commodities corner. Dr. Copper is lower, last at 339 US cents per pound, the gold price is also lower, last at 1562 Dollars per fine ounce. The platinum price is also lower, last at 1406 Dollars per fine ounce. The oil price is 84.85 Dollars per barrel, lower on the day, the whole commodities complex is lower with all the anxiety around. The Rand is weaker (of course), last at 8.34 to the US Dollar, 12.89 to the Pound Sterling and 10.17 to the Euro. We are lower here today, but there is a small buffer that has been built in by way of the weaker Rand. Tomorrow is the big one. It really is, almost as important as the US jobs number last week.

Sasha Naryshkine and Byron Lotter

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