Wednesday, 12 March 2014

Iron no score ore

"Where is the iron ore price heading in the future? According to BHP Billiton the medium term (the next 5 years) does not look great for the miners, with the growth in supply expected to grow by faster than the growth in demand. BHP expects China's demand for iron ore to keep growing (albeit at a slower rate each year) until about 2025 and at the same time the rest of the world's demand will also grow, the demand will be coming from an expected 1.2 billion people who will urbanise globally by 2030. The extra supply is to cater for the increased demand over the long term, the demand that should push iron ore prices up once the increased supply slows."

To market, to market to buy a fat pig. The stalemate between the Russians and the "West" over the Ukrainian situation continues, I am advised by my parents that I can speak with great authority on this matter, my great grandmother (And I had the opportunity to meet her many times, she lived until the ripe old age of 101) was born in the Ukraine. In Kiev I think. She lived out the rest of her days in Versailles, I could think of a lot worse places to live, that is for sure! But honestly, I am as qualified to talk about the Crimean crisis as much as anyone else. I will say this however, I think that the capital markets (capitalism beat communism in the end 1917-1991) will dictate and temper the aggression that Putin has. If the value of the inner circles investments continue to fall heavily and the growth prospects in Russia dim and there is inflation as a result of a weakening Rouble, I think that President Putin will get a tap or ten on his shoulder.

Nobody is quite sure how rich Putin himself is. Some simple searches suggest he is worth around 70 billion Dollars. WHAT? How? Well, I read somewhere that he holds a 4.5 percent stake in Gazprom. Not sure if that is right. Indeed the other listed stakes that he (Putin) supposedly owns a 7 percent stake in oil company Surgutneftegas as well as a 50% stake in Swiss oil trading business by the name of Gunvor. But yet Putin is able to portray this "man of the people" image, shirtless, riding on horses, unflappable and everything that strong Russian people hope for. Proud of course. But in the capital markets, he will no doubt meet his match. The market has more liquidity than any one given institution or individual, unless of course they are cornering a bite sized acquisition.

So yesterday the local market closed the day much higher after being underwater from mid morning through to mid afternoon. We forgot to tell you that the only good thing about going into Winter (you can feel the chill a little) is that daylight savings in the US and Europe (and the UK) means that we get another hour of trade during our normal hours. That happened for the US on Monday, where they would have had to turn their clocks back an hour. So I guess you get one hour less of your March weekend, but gain it back later in the year. The extra hour for us locally here means that the US market opens at 15:30 local time, instead of 16:30 local time. Our market closes at 17:00 and this extra hour is fabulous for us. At least it means our market has direction for an extra hour, but more importantly, the market now closes at 10pm and not 11pm local time. So more TV watching time for different programs, it just bumps up an hour. But it is a reminder that daylight savings is not for us, but it impacts on us.

What do they know that we do not? The bears that is. There are numerous people always making market related predictions that are normally way out there. It is very rare that you will get someone who will attract attention when they say something like, if you invest 1 Dollar in the S&P 500 over a 35 year period from 1979 to 2013, it will end up being being nearly 53 Dollars, equating to a CAGR of 12 percent. That is an excellent return over a savings period of 35 years and guaranteed to see you through your golden years. Adjusted for inflation, that one Dollar over the same period would have turned into 15 Dollars, meaning that your real purchasing power would have increased 15 fold. But let us start today with one Dollar and invest it at the same return (12 percent) over 20 years, what do you end up getting? 10 Dollars. Or roughly doubling your money every seven and a bit years.

Differently put, let us presume that you have a pot of 10 thousand Dollars and you save 750 Dollars a month at a 12 percent per annum return for 20 years, what do you end up with? 744 thousand Dollars. Yes. Obviously Dollars twenty years out are not the same as today. But it is hard to save like this, it takes discipline and more importantly you need to stick to your guns whilst life happens. Life includes unforeseen expenses. It is John Lennon who said "Life is what happens to you while you're busy making other plans."

But more to the point that I am trying to make, when somebody says that the market is going to halve, there will be massive deflation and the financial systems will collapse. And more importantly, commodity prices will do x or y or z, but mostly in a markedly higher position to what they are now. Today I saw two articles that are a little "out there": Jeff Miller from a Dash of insight reviews one such doomsday prophet: FANCY FOOTWORK AND CONFIRMATION BIAS. But the one that caught me more was a throwback by Josh Brown, an article that Paul sent through in the middle of the night (I was sleeping, man flu hurts real bad) titled A man and his signals. The passing shot about a man (Granville) and his signals is worth repeating:

"No one has a system or set of signals that can be relied upon to do that in all market environments.

No one ever has, no one ever will. Granville didn't either.

Nor will any his modern-day successors."

All true. Ignore the doomsday prophets, if they knew everything then they would be able to be all in and concentrate on making money rather than telling people to trade around certain indicators or events. Beware the person telling you how to get rich by selling tickets to a conference. Normally overpriced ones. If they knew the answers, open a cheap low cost open ended fund and accept only retail clients. Make them money that way, rather than getting them to pay to hear you speak. End of little rant for the day.

Three years ago we sat horrified in the office as helicopter footage showed a tsunami roll in and devastate one of the most industrialised countries on the planet. The aftermath was a nuclear catastrophe at the Fukushima Daiichi power station, which lead the rest of the world to deeply rethink power generated in this form. Cynically I remember that everyone tried to be a nuclear expert, I suppose the inquisitive nature of all of us meant we had to be alongside those people to "solve" the issues.

An Economist tweet from their graphics department had this look at operating nuclear power stations. There are still many, many left. What amazed me about this graphic is that there are NO nuclear power stations in Australia or New Zealand. Italy has no nuclear power stations, all shutdown in the 80's and 1990. The biggest issues are the solid waste disposal, and understandably I can see whilst this is a cleaner way of generating electricity. But of course the waste is horrible, so is it really cleaner? I stupidly in a flu induced haze yesterday said something along the lines that this is the biggest investment theme of our time, alternative energy. Amongst many others of course!!!

Michael's musings: Iron Ore

This week we have seen some of our miners taking heat, with Kumba Iron Ore in particular really feeling it. Monday saw Kumba Iron Ore down by 8.5%, about 4% of it was due to a dividend, and then a further 5.4% yesterday. Why the huge drop in price? The price of iron ore dropped on Monday by 8.3% to $104.7 per ton, it's lowest in over a year. The spark that started the drop was concerns that the demand for steel from China and by extension iron ore would not be as high as anticipated. Once the price started dropping, it gained momentum due to people using iron ore as collateral for loans, which meant that as the price dropped they had to sell some ore to ensure that their collateral value did not drop too low.

Where is the iron ore price heading in the future? According to BHP Billiton the medium term (the next 5 years) does not look great for the miners, with the growth in supply expected to grow by faster than the growth in demand. BHP expects China's demand for iron ore to keep growing (albeit at a slower rate each year) until about 2025 and at the same time the rest of the world's demand will also grow, the demand will be coming from an expected 1.2 billion people who will urbanise globally by 2030. The extra supply is to cater for the increased demand over the long term, the demand that should push iron ore prices up once the increased supply slows.

From BHP Billiton's point of view, increased supply may result in the price of iron ore dropping over the medium term but it will also result in their unit costs also dropping because they are bringing online low cost supplies. For Kumba Iron Ore, their Sishen mine which is their biggest contributor of Iron Ore has a unit cost of about $35 per ton which is expected to drop to about $33 in 2016 and their second biggest mine, Kolomela has a unit cost of about $24 a ton which is expected to drop to about $20.5 in 2016. If the Iron ore price stayed the same, the increased output as well as the lower unit costs would result in higher profits but with iron ore prices expected to drop, profits will most likely be subdued until demand growth outstrips supply growth.

BHP also point out that as there is a drive to become more environmentally friendly higher grades of iron ore will be needed because it is cleaner to make a higher grade of steel than a poor grade. This didn't sound right at first, but the reason is due to higher grades of iron ore having less impurities. In the case of carbon which needs to be removed, they blow pure oxygen into the molten metal, where the oxygen and carbon join to form carbon monoxide, not a gas that environmentalists want being released. This is good news for BHP and Kumba who are suppliers of high quality iron ore.

In the long term the iron ore assets are still quality assets and there is going to be a demand for what they are selling. Over the next couple of years though, unless there is unexpected demand for iron ore I think that Kumba's share price is going to struggle and BHP who have half their earnings in iron ore probably won't be shooting the lights out. BHP are of course diversified, so many of their other businesses can pick up the slack. Spare a thought for their copper business however.

Home again, home again, jiggety-jog. Markets are lower, the copper price was slashed leaving commodity stocks (other than gold companies) lower. Reason? Chinese jitters and copper being used as collateral. Beware, markets are bigger than you or your collateral.

Sasha Naryshkine, Byron Lotter and Michael Treherne

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Friday, 7 March 2014

Aspen still hot

"That is what Aspen has become, a massive business operating on all the continents, of course most companies do not have a business in Antarctica. What is interesting about the local business is that when the currency had weakened, Aspen maintained their ARV contract with government even though they were losing money, it is/was part of their social contract with the country. Feels not so great as a shareholder, but as Saad said in the interview, they will get it back in time, when/if the currency goes the other way, so it feels good as a shareholder in that a public company is committed to greater society. And that part ties into what we said about companies able to reach a size and scale (thanks to the free market system) in that they are in a position to operate a low margin business."

To market, to market to buy a fat pig. I saw that somebody (the BusinessInsider) remembered, I certainly did not remember the "generational low" birthday of the equities market in the US yesterday, the day that the S&P 500 touched an intraday devilish low of 666.79 back on the 6th of March 2009. Five years on to the day, the S&P 500 closed last evening at an all time high at 1877 and a bit, away from the intraday high of 1881.94. By my count that is 1215.15 points from the intraday lows on that sorry day to the intraday highs of yesterday, exactly five years on.

The thing is, there must be some people out there who said that this is it, the market is going much lower on that day. In fact I remember that the "man who predicted the financial crisis" Nouriel Roubini said that the market of course was going lower. I was ironically thinking of Roubini yesterday when I saw the ECB president, Mario Draghi delivering his press conference post the decision to leave rates on hold in the Eurozone. Yes, Roubini had predicted that the US government would nationalise more banks as the markets continued to fall for the rest of 2009. Making predictions is a dangerous business, even if you are credited with being the person that predicted a housing crash. Admittedly he (Roubini) beat on that drum for years, so I guess it is true what they say about an old clock.

But the lessons that perhaps the meltdown of 2008/2009 had is that in the midst of the selling and panic it is hard to stay focused on the end goal. Because owning a business is one thing, but seeing the value of that business on a screen, with a quoted price (sounds like Cluedo) continue to slide heavily day in and day out, seemingly without respite, that is very hard to suck up. For the record we did not sell a single share in anger, if there were people wanting to cash out because they were spooked, we tried to convince them not to, this would pass. It feels bad whilst you are in the storm, the little surety that you do have is that these events are few and far between as far as an investing history is concerned.

The problem is that history has examples of pre crisis highs not being passed or taking an entire generation, so it is easy to see why ordinary investors can lose the faith. The Japanese asset price bubble from the last day of the 1980's to present still sees the Nikkei 225 comfortably below its all time high. 6 March 2009 the Japanese index closed at 7173 points, currently at 15256 points. But 38957.44 is the all time high of that index, dated to December 29th 1989. Wow. That was a long, long time ago in a land very, very far away. Since then the sun has struggled to rise in the land of the rising sun. So when does 15256 points, the current level, reach the all time highs of 38957.44 points again? Another decade? Perhaps more.

Another good example of hot markets that failed for a generation again to reach their high water mark again was the Great Depression stock market sell off. 25 years is certainly a long time to wait to get back to the levels last seen. The Dow Jones Industrial Average high of 3 September 1929 would not be seen until 23 November 1954. Of course there was also a major war in-between to take into account. However, it is important to note that one Dollar in 1929 was the equivalent of 1.57 Dollars in 1954, so on an inflation adjusted basis it took even more time. You could have, if you subscribed to Dollar cost averaging you might have definitely been in the pound seat by the time you retired.

But the more recent example is the dot com bubble. The Nerds of NASDAQ printed an intraday high of 5132.52 points on the 10th of March 2000. The intraday low on the 6th of March 2009 was 1265.52 points. Heck, it would have felt absolutely awful back then, it did feel bad, I remember it well. Currently however the NASDAQ level is 4352.13 points, we need another fabulous year like last year just to reach the highs of 2000. A Dollar in 2000 however is not a Dollar in terms of purchasing power in 2014. 1 Dollar of purchasing power in 2000 is equal to 1.36 Dollars in 2014.

Inflation, that pesky little thing that eats into your purchasing power. Which is why of course you must continue to own stocks, which almost always outperform inflation. I was doing an informal tutorial with my daughters last evening, my eldest said that she had a one cent coin from 1991 (Two Cape Sparrows on the front according to the SA Mint site), but in terms of current circulation a five cent coin has not been minted since 1 April 2012. What is quite interesting about our coins is that different languages are used when the coins are minted in a particular year, with a rotation of the official languages using two at a time. A Ten Rand coin would eliminate one of the big five notes, hopefully that is in no way connected to the extinction of the Rhino.

OK, but I think the most important point to make is that when markets enter bubble territory the valuations are very expensive, relative to historic norms. Or growth rates are overestimated. Future earnings are way too optimistic. Do I think that we are there? Hell no. But others use Shiller P/E, which suggests the market is 54.5 percent higher than the long term average, but that uses very depressed earnings that suggested that based on actual earnings from Q1 2009 the market was valued at 123 times earnings.

Yowsers, but stocks anticipated that profitability would quickly return and it did. Using a huge distorted period that during that time was compared to the worst draw down since the great depression. Fair enough, but surely if those were generational lows and the indices were too skewed to financials, the massive amounts written off by the banks, nearly 1 trillion Euros over the period surely skews this? Yardeni suggests that the market trades on 15 and a bit times forward. Time will tell, but I think that stocks individually should be separated from the rest of the index. Apple trades on a cheaper multiple than Starbucks for instance, should it? The market says so.

Stay the course, own the quality, that theme has been beaten into us. Do not get spooked by sell offs, they always feel bad. The reason why I think that many people are looking for corrections are because we have had two very big ones by historic standards over the last 15 years at a global level, the dot com bubble bursting and the US mortgage crisis which spread to a European sovereign crisis. What is next? A Chinese credit meltdown?

It is possible and could well happen, the Chinese are painfully aware that the infrastructure boom needs to shift to a more sustained consumer sustained economy. It is happening, it just needs to be managed. Having large growth rates off increasing bases, last year the official statistics suggested Chinese GDP was 56,884.5 billion yuan, an increase of 7.7 percent from the previous year. With expectations of around 7.5 percent, the size of the Chinese economy is set to be 61,150.8 billion yuan, or just shy of 10 trillion Dollars. Nearly there guys, nearly there. Of course this is presuming that there are no shocks to the system, there are still signs of strain, with the first corporate default (a small solar company) in mainland China today of all days.

Aspen released half year results to end December yesterday afternoon. First question, why healthcare, why generics, why this company? Well, the whole idea that there are more middle class entrants globally with more access to therapies that they can afford, and that have become more affordable over time. There is no doubt that healthcare is just as much a demographics story as an other adoption of technologies that people want and need. I for one have no problem with expensive therapies, because the more adoption of these therapies, the cheaper that they become and that means that humankind gets to live healthier and fuller lives. That is why healthcare, that is why this company answered.

You would remember that comparison a few weeks ago of the developed world 150 years ago and now, and how childbirth and infant mortality rates plunging are a direct result of advanced healthcare. Sadly, as Warren Buffett puts it bluntly, it matters whether or not you win the ovarian lottery or not. It is far better to be born in Stockholm today than it is in say, ummmm Timbuktu? With all due respect of course to Mali, it is not Sweden, and not everyone has an even chance in life.

And that is where I think that generic pharma companies fall into the equation, the fact that they are profitable is great, because that means that they will continue to roll out cheaper therapies to customers that previously could not afford it. You might well know that the major pharma companies spend over 100 billion Dollars a year in research and development, their medicines justify the price. Unfortunately, because it is so incredibly emotional, healthcare that is, it feels awful when you have to fork out huge savings for the saving of a life. But then again, what is a life worth?

OK, we are close to existential argument domain, and that in itself is tricky and comes with a giant fat avoid!! So let us stick to the company that has certainly created an extraordinary amount of wealth for its shareholders, which includes some of the smartest management that there is. Talking of which, I was told that Stephen Saad, founder and CEO, has travelled on Kulula internally in South Africa, and as you know, there is only one class there. That tells me that the man in his official capacity as CEO is focused on the costs of the company, he should after all, he is a big shareholder, he owns bucket loads of shares. Which he acquired at 55 odd cents. What!!! He owns 12.1 percent of the company, 55 132 421 shares in total. At 281.5 ZAR a share he is worth 15.519 billion Rand. More than 1 billion Dollars. Another reason to own the company, the chief has your best interests at heart.

Bronwyn Nielsen had a great interview with Stephen Saad last evening -> ASPEN H1 REVENUE UP 33%. You can see a couple of things from this interview, manufacturing of course all in South Africa (the bulk) is a bit of a problem, but it has worked recently for the company as the Rand weakened significantly last year. This year, since the bottom of around 11.30 to the USD to somewhere around 10.60 currently. 71 percent of operating profits however are as a result of their offshore businesses. 32 percent Asia Pacific, that region is growing quickly, with early stage businesses in the Philippines, Taiwan and Malaysia. One of the most exciting however are the Latin American businesses, as well as the recent Russian business. Yes, Russia is an exciting and big opportunity.

That is what Aspen has become, a massive business operating on all the continents, of course most companies do not have a business in Antarctica. What is interesting about the local business is that when the currency had weakened, Aspen maintained their ARV contract with government even though they were losing money, it is/was part of their social contract with the country. Feels not so great as a shareholder, but as Saad said in the interview, they will get it back in time, when/if the currency goes the other way, so it feels good as a shareholder in that a public company is committed to greater society. And that part ties into what we said about companies able to reach a size and scale (thanks to the free market system) in that they are in a position to operate a low margin business.

An amazing business with loads more irons in the fire, including the exciting biopharma space (extracting mucous from pigs stomachs to produce therapies, as well as urine from pregnant women to help with fertility drugs), to the less exciting but has just as good prospects, infant formula business in Latin America. There is loads on the go, which means that the company is difficult to value at any one given time. The market research analysts in aggregate has the full year EPS number to June at over 11 ZAR, which means that Aspen trades on 25 times forward at current levels. Not cheap. Sometimes however, for quality businesses, you have to pay up.

Aspen has been perpetually expensive, even when the company was one tenth of the current share price. The yield is negligible and will remain that way as long as debt levels remain high as a result of acquisitions (gearing over 50 percent currently), but that may change as the company matures.

So what to do as a shareholder? The company has a great management team an entrepreneurial nature, decisions are made by those empowered to make them. That is a huge positive to find a company of this size and scale (but still small by global standards) with these growth prospects. We continue to add, the company ticks all of the boxes of a core part of ones local portfolio.

Michael's musings: IPO Boom

This year has seen the highest number of IPO's in the US since 2007. The number is currently 42 that have gone public, and there are many more in the pipeline. So why so many listings this year? There are a couple of reasons, the first is that the evaluations on companies is higher than it is has been for the last 5 years, making it advantageous to list now. Another reason is that legislation has changed to make it more attractive for smaller companies to list.

Having more IPO's is great news for investors and the economy. For investors, the more companies that are out there the more options that you have and the more diversification you can have in your portfolio. Another good thing is there are now more companies out there for all the money flowing into the market on a regular basis from retirement saving. With more investment options it should mean that less of a premium is paid on the earnings of other companies, making buying companies cheaper.

Out of the 42 IPO's this year, 23 have been in the Health care and Biotech space. These companies are now able to raise cash at higher rates than over the last 5 years, which they are putting into growing and R&D. I don't know about you, but the more money that is spent in the medical space the better, I'm hoping that by the time I am due for a major "old age" related operation, medicine has got to the point where it will be non-invasive. A pill adapted to my DNA or a couple of Nano bots crawling around me doing their thing, less pain (I would hope) and more efficient.

Just under 66% of the IPO's were for companies that have turnover less than $50 million, which makes them very small with great potential. I would not be putting my money in a small company unless I had intimate knowledge of the company and industry, otherwise I think that the risks are too high and approach gambling. IPO's are risky where a number of these companies will probably not be around in the next decade, but a couple could turn out to be the next Aspen or Apple at which point they will be changing the world.

Home again, home again, jiggety-jog. Markets are flat here mid morning, the Russians are faced with prospects of being isolated by their mani trading partners or to comply, I wonder what move next, but I would think that it is smartest to back down. And remember, or don't forget should I say rather, today is non farm payrolls, it could as a result of the weather turn out to be a damp squib.

Sasha Naryshkine, Byron Lotter and Michael Treherne

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Thursday, 6 March 2014

Sugar do, do, do, don't

"Tastes wonderful in cakes and fizzy drinks, but here at Vestact with long teeth initially we cut our sugar in coffee intake to zero. Coffee with a little milk, tastes better and in fact is better for you. But check out this FT article, which is leading me believe that investments all the way up and down the chain that are associated with the sugar industry are going to struggle in years to come, as the World Health Organisation warns on sugar consumption"

To market, to market to buy a fat pig. Well, well. I have been reading stuff that suggested that the capital markets beat the threat of another cold war. Meaning that once you are inside of the system of capital markets, there is very little you can do to avoid the longer term impact. Although that said, and you have probably seen this widely documented of course, there have been many studies done on the Argentineans and how they lacked the ability to build momentum on what was once one of the most powerful economies on the planet 100 years ago. In fact the Economist has a recent story about that, it is worth a read I think: A century of decline. So you see that economic policy really does make an impact in the long term and ignore the warnings of capital markets at your risk.

The other point I heard made about the Russians, I think that I read it in Barron's, was that the market in Russia is owned by the State (30 percent) and rich people (30 percent) and no doubt the foreign selling had a marked impact on their net worth. Add to that the decline of the Rouble and in Dollar terms the richest in Russia had been decimated over a couple of days, equally ordinary people and their pension funds too. Now everybody knows that business and politics are joined at the hip (in some places conjoined twins), but more importantly for political continuity, Putin needed to save face quickly.

The parallels to civil unrest in the Middle East (and indeed next door in the Ukraine) was that economic instability quite often leads to political instability. And that is exactly what Putin (all leaders really) are trying to prevent of course, because that means a loss of power and influence. And in politics, losing is perhaps the worst thing ever, in football you may have a chance next week (poor Bafana, out sambaed last evening by Neymar, the 57 million Euro transfer man), in politics you possibly only get that one chance. A little like batting, so close but yet so far for the Proteas.

Last evening in New York markets hit the pause button, weaker US economic news has weighed a little, Janet Yellen was sworn in a while back (3 Feb) but I saw comparisons being made to Velma Dinkley from the Scooby Doo series fame, if you do not know what I am talking about, see here ->

It is a little eerie (jinkies!!) but rather look like the smartest person in the gang than ... Shaggy. ADP data, the precursor to the Friday non farm payrolls number was weaker than anticipated, particularly in the services sector, which again was displeasing. Perhaps the weather (FT, subscription only, sorry -> US feels the chill of more weak jobs data), perhaps signs of a weaker US economy, a bit of a stumble in terms of the recovery. Still, I would not get too anxious, Buffett a few days ago said that his 80 odd companies, American of course, had seen steady growth if not runaway growth. Steady as you were.

On the local front however resource stocks sank, leading to the overall market being lower. Today seemingly better than yesterday. The Rand continues to firm now, perhaps in a sign that the emerging markets demise was too early to call. As we had said earlier in the year, the billion or so people added to the middle classes since the Asian contagion. In fact, closer to home, in an article tweeted by Paul -> The startling human progress that economists fail to see. We fail to see this progress possibly because it happens slowly, but at a very large scale. Mesofacts, our old pal Samuel Arbesman, a systems scientist wrote a piece that stuck with me, I cannot shake it: Warning: Your reality is out of date. Read it again, as old as it is, it is always relevant. I even went further and read his book.

Shorts

I am really struggling with this segment, because there is so much juicy news out there that I want (encourage) you to read. But of course we cannot get to everything all of the time, and it is my job to slim the news down into what is important. Relevance of course. Why cover European Banks when our clients own none, or barely any? Exactly. So I will in this shorts piece try and keep it relevant.

Sugar. Tastes wonderful in cakes and fizzy drinks, but here at Vestact with long teeth initially we cut our sugar in coffee intake to zero. Coffee with a little milk, tastes better and in fact is better for you. But check out this FT article, which is leading me believe that investments all the way up and down the chain that are associated with the sugar industry are going to struggle in years to come, as the World Health Organisation warns on sugar consumption: ‘Cut the sugar' WHO warns in new guidelines.

I must tell you though, a client the other day when we chatted about potential investments, we spoke of sectors to avoid. We agreed that tobacco was one such industry, even though (and he has a few more years on me) in his early twenties he was told to avoid tobacco stocks, and that was over 40 years ago. Humans, love change, but slow to adapt. We continue to prefer coffee beverages to fizzy drinks, i.e. sell Coke and Pepsi, buy Starbucks.

Food. Let us stay with food, because one thing more addictive than your vices (booze, gambling and smoking, and perhaps in light of lent being upon us, chocolate, coffee and the list goes on) is actually food. You can argue that you can/could go days without your vices (40 in fact), but you cannot go too long without food. Well, some Russian fellow, Agasi Vartanyan, went without food for fifty days in an attempt to get into the Guinness Book of records. He should have done his research earlier, because unfortunately the record was longer (Irish jailed Republicans in the twenties went on hunger strike for 94 days) and most importantly, you have to let Guinness actually know. It was an #epicfail all around.

But back to Food. I was quite interested to come across this piece -> Food in America is more affordable than ever before because the US farm sector keeps getting more and more productive. The interest was sparked from a conversation that I had with a client about genetically modified food companies (seeds) the other day in which I presented the flip side of the argument of higher yields (with the same amount of land) was that eventually nobody would fall under the poverty line anymore, and a global abundance of food would mean that we could worry about education and health and declare abject poverty finished.

Sadly for places like Zambia, Malawi, the DRC where vast portions of the population live below the poverty line, this means daily life is a grind. But I said to the client, what happens if companies like the ones we were chatting about (Monsanto, Syngenta, Du Pont) were able to eliminate poverty. Do we not have a moral obligation to feed everyone?

Lastly, on this conversation, a farmer (of 50 years plus experience) told me that this is just speeding up of a process that already exists. In the early days the seeds were chosen manually by picking off the quality kernels off the cob of corn. Yes. Does that not count as modification of sorts, or only when you use a chemical process that involves science? Sounds the same to me!

Home again, home again, jiggety-jog. The power was out here for two hours. Eskom says the coal is wet. Load shedding, that ugly word returns. I guess it heightens our reliance on coal as an energy source, we cannot help it that we have so much of it, and provided it remains relatively cheap, there should be enough until we have turned ourselves into gas and alternatives energy based economy. That is a long, long way away no doubt.

Sasha Naryshkine, Byron Lotter and Michael Treherne

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Monday, 3 March 2014

Buffett and Berkshire zone in on 50 years

"What is interesting about Berkshire is not that they have a unique philosophy in buying attractive assets at attractive prices, but that they almost never intend to sell their companies that they hold. And more recently, whilst they are not a private equity business, they do loads of funding (which sometimes converts to equity) with the intention to not unwind/re-list in the ordinary sense that private equity operates. Berkshire funds transactions and then sometimes converts that to equity at favourable prices for both Buffett and ordinary shareholders."

To market, to market to buy a fat pig. The Russians versus the West, this is just like the good old days, except there was nothing good about it then and there certainly is nothing good about it now. The Ukrainians are the pawns in this Chess match, the Russians because of their proximity to Ukraine no doubt have the upper hand. And this sounds nothing like a markets and companies report, because often these geopolitical dramas and real life tragedies impact on equity markets. And to top it all off, something we were just speaking about last week coincidently, the North Koreans fired four missiles into the ocean, that is about how far they can actually go, fortunately for everybody else.

But the upshot of it all is potentially real life trade threatened and potential for the Ukraine to default. The ex (or in his mind the guy still in control) Ukrainian president had a patsy press conference in Moscow on Friday, he is bulletproof and teflon like. John Kerry is heading to Kiev on Tuesday, as secretary of state of the US he has the unenviable task of unravelling this mess.

And if true that the former bosses of the Ukraine have looted the country by the billions of Dollars, the interim Prime Minister has accused the former president, Viktor Yanukovich of stealing 37 billion Dollars from Treasury, then returning it all will solve the monetary issues. But this week no doubt will be a tense one for the markets, geopolitically speaking. I would think that by 2014 we have enough sense to resolve these issues. And as far as I understand it, Presidents Obama and Putin have had some serious phone time together. Hopefully less big old red telephone, more lightweight equipment.

But this is a reminder that no matter how bad you may perceive your own country, there are always places that are much worse than your own. The media has the power and ability to unmask these horrible doings, that exist here and travel a long road with them. Seemingly the people of the Ukraine had no idea of the opulence of their leaders. None. The leaders have allegedly stolen tens of billions of Dollars. And apparently nobody knew. Just saying. We live in a place that is making progress, very slowly for some peoples liking and there are still many inefficiencies, but as long as we continue to work hard at exposing corruption, we are making progress. We are not Ukraine and for that you can be very pleased. But you must still demand excellence.

The upshot of this chest puffing is that the Russian market has plunged, down 13 percent plus and if that is not bad enough, the Central Bank has raised rates to 7 percent from 5.5 percent. The currency is taking some tap, down 1.7 percent plus today. I am just guessing out loud here, but I think that the market responding and the flight of capital could lead to the Russians holding the line. Because whilst they might have the ego, no country can act like this and expect the markets not to respond in a negative fashion. It is far harder to attract capital than it is to lose it.

The Russians have "seized" Crimea, an area that we know well because of the legend of Florence Nightingale. The Russians (and excuse me for jumping around here) have reserves in excess of 500 billion Dollars and feature in the top five of countries by foreign reserves. So I do not see them running out of money and having a cash crunch of any sort, BUT, foreign ownership of assets might sink quickly.

So. Markets down over eight percent in Moscow. And everyone all along has been saying that the Russian market is cheap, it trades on less than 6 times earnings. But this is why, cheap for a reason you see. Sometimes "investors" give your region a giant fat steer for a reason.

It is that time of the year again, when the Oracle of Omaha (Warren Buffett) releases his annual chairman's letter, possibly the most read of all annual letters. You can, in an electronic age read this too: Berkshire's Corporate Performance vs. the S&P 500 is how it starts. Whilst Berkshire may have under performed the market for two years in a row, since 1965 Berkshire has outperformed the market per year on average of 9.9 percent. Wow. And even more amazing, Berkshire has only under performed the S&P 500 ten times in a calendar year since 1965, that is 49 years of records. So, Buffett would have been in charge of this most amazing company. There are stories of people, ordinary people who bought Berkshire all those years back and now have an astonishing wealth from doing, well ..... nothing. What Berkshire does not give you however, is the benefit of dividends.

What is interesting about Berkshire is not that they have a unique philosophy in buying attractive assets at attractive prices, but that they almost never intend to sell their companies that they hold. And more recently, whilst they are not a private equity business, they do loads of funding (which sometimes converts to equity) with the intention to not unwind/re-list in the ordinary sense that private equity operates. Berkshire funds transactions and then sometimes converts that to equity at favourable prices for both Buffett and ordinary shareholders.

Charlie Munger (90) and Warren Buffett (83) have 108 years of investing experience and essentially form the core of the team that makes up Berkshire, but that will change over time. Buffett is a well know philanthropist with specific instructions that his stake be "invested" on his behalf after his death. Apart from the stake given to the Bill and Melinda Gates foundation, the portion for his wife is to be invested as such: 10 percent cash and 90 percent in an S&P 500 tracker, a Vanguard one he suggests. But do not think that there is no continuity at Berkshire, when both Munger and Buffett are gone. In fact both major equity managers (they manage 7 billion Dollars plus for Berkshire, each), Todd Combs and Ted Weschler crunched the market last year, as well as Berkshire of course.

The buying continues of their major stakes (not to mention the Heinz deal and NV Energy - major ones in the year) in Coca-Cola, Wells Fargo, American Express and IBM, the company adds when they see fit. I can certainly see how Coca-Cola with their lacklustre price performance on some average volume growth across the globe would have lagged the market, and as such how Berkshire would have been buyers. But remember that these stock holdings are not even major stakes, in the bigger picture, but because these businesses are so huge, even the big four as Buffett calls it, they have a major impact on the overall portfolio. But this part is interesting, and goes to the core of the Berkshire philosophy and how they manage to find gems:

"The four companies possess excellent businesses and are run by managers who are both talented and shareholder-oriented. At Berkshire, we much prefer owning a non-controlling but substantial portion of a wonderful company to owning 100% of a so-so business; it's better to have a partial interest in the Hope diamond than to own all of a rhinestone."

The Hope diamond origins are unknown, it has been around for centuries, other than we know that it was formed deep in the earth and is over 1.1 billion years old according to Wikipedia. But whilst (block your ears and shut your eyes kids) Charlie Munger looks a billion years old, I think that the enduring qualities here of Berkshire is that the company holds businesses that the Berkshire management can trust. You know the old Buffett line: "I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will." But of course Buffett and Munger own quality, but you know what they mean. You can't mess up shaving cream and razor blades, perhaps the hipster culture of growing beards can scupper their business.

After all is said and done, this is quite simply a business as usual Buffett letter. Keep buying American stocks and invest in the future of the country that he knows and loves so well. Keep adding quality when the opportunity presents itself. Stay passionate about the business, or leave, disinvest. Just stay the course.

Michael's musings: Socialism

The word on the street is that the National Union of Metalworks of South Africa (NUMSA) is in the process of forming a new political party. The parties name will be the United Front and Movement for Socialism, Irvin Jim NUMSA's general secretary saying that "We need a movement for socialism"

Coming from an economics background I was a bit embarrassed that I could not give a definitive answer to what the difference between Socialism and Communism. So the best short description of each system is the following, "From each according to his ability, to each according to his deeds (socialism). From each according to his ability, to each according to his needs (communism)", which is a quote popularised by Karl Marx.

Based on those definitions, socialism would sit somewhere between capitalism and communism. Socialism advocates having producing private property (companies) in the hands of the many instead of the hands of the few, so everyone would still be paid a wage based on what job they do, but when it comes to sharing the profit the shareholders of the companies is now society instead of a few private shareholders.

Communism is more extreme in that the "public" own everything, even going as far as to determine what peoples religion will be, i.e. atheism. The biggest problem with Socialism in my opinion is that it has to be run by people, who have less of an incentive to be efficient and innovate. Taking it a step further how do we attract foreign capital and skills if there is no mechanism for investing; compensating people for the risk that they take/punishing people for not being efficient and innovative enough.

The modern economy is littered with socialist policies, for example bigger social security nets (cradle to grave), having free schooling or health care and higher tax on the rich. Society has determined that this is the best way to spend government's money, and if a particular country gets the spending mix wrong investment/skills will flow from that country to another country (which should hopefully result in a correction is the government funds). As Sasha always points out, a large chunk of the working class have pensions which means that they are capital owners as well, which is a good thing for everyone involved.

As an investor, Socialism normally means a transfer of ownership from the investor or higher taxes to pay for socialist policies, both of which hurt returns, so not a good thing. I might not agree with what are likely to be the policies of the new party, but for democracy competition is a great thing and the amount of new parties that have been formed over the last year shows that our democracy is a healthy one.

Home again, home again, jiggety-jog. Ukraine. I crane ... my neck and wonder what and where and when this will end. Will it impact stocks forever? No. In the mean time it is fun to watch the oldest and best stock picker of our generation. That is Warren Buffett. He is certainly a lot less depressing than the fact that Leonardo DiCaprio is never going to win an Oscar (he will), nor whether or not we escape at Newlands (unlikely) or every single person and their obsession with an Oscar. And lastly, the Ukraine, that will pass, but for now it weighs heavily on markets.

Sasha Naryshkine, Byron Lotter and Michael Treherne

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Tuesday, 25 February 2014

Mount Gone-zo

To market, to market to buy a fat pig. Financials and banks were on a tear, but the strengthening Rand had a negative impact on resource stocks and single commodity miners in particular, namely the platinum miners. OK, enough of that market report mumbo-jumbo! After the Koos Bekker news, Naspers short tremors had something to chew on, the stock eventually ended the session higher. Up 1.5 percent on the day, well, 1.46 percent to be exact. The stock nearly crossed 1300 Rand for the first time and is up nearly 19 percent year to date. TenCent, listed in Hong Kong, how has that done? Well, it should come as no surprise whatsoever that TenCent is up 18.2 percent year to date and is trading near their all time highs. So, follow TenCent and that will = Naspers. For now.

If you needed a gentle reminder, take the TenCent market cap in Hong Kong, which right now is 1.09 trillion Hong Kong Dollars. Naspers owns 34.5 percent of TenCent, that translates to 376.05 billion Hong Kong Dollars. Now one Hong Kong Dollar is equal to 1.39 Rands. So, quite simply, multiply 376.05 billion HKD by 1.39 and that equals 522.7 billion Rand. Naspers closed at 1290 Rand last evening, which translates to 536.5 billion Rand. The rest of Naspers is worth less that 14 billion Rand, according to the market participants. Businesses like their pay TV business, which generated 4.5 billion Rand in trading profits, for the half year to end September basically as valued at zero. I suppose that their ecommerce business registered a trading loss of 1.8 billion Rand, that counts for something! Mail.ru, their other significant investment made Naspers 601 million Rand for their first half.

So why is TenCent then given a discount by the South African investor crowds? Do we (South Africans) feel that somehow the Hong Kong investors stretch the valuation of TenCent too far and we should really show them how it is done? Discount a valuation that another market already values. It does not really make sense that Mr. Market here discounts what I think is a pretty efficient market there in Hong Kong. I think it does smack a little of conservative arrogance or perhaps it is a misunderstanding of TenCent growth, either one or the other. Whatever it is, I still think that Naspers is a buy, but will from time to time go through periods of extreme volatility, because the TenCent multiple is so aggressive. Which ever way we do not have to wait too long until we find out a whole lot more about TenCent and their full year numbers for their 2013 financial year, pen into your diaries the 19th of March.

I still think that a lot of investors struggle to understand what TenCent is exactly. Well, they are a chat service, they are a gaming service, they are a music service, they offer other online services that includes film, fashion, there is a search engine (soso.com - recently merged with sogou.com), the biggest of the lot of course is the QQ.com portal. Tenpay and Paipai are both online web portals, one is ecommerce and the other offers payment systems. Perhaps if all the platforms were in English, the English speaking investor community would understand these businesses better.

If you want to understand how TenCent actually monetises their platforms, search no further than here, a fabulous breakdown: Tencent Service Offerings. so whilst you have seen a slowdown on some fronts with regards to paid for services, the potential base could grown tenfold (on the paid side). We continue to hold the company and we are really thrilled to see what Koos Bekker comes back with once his head and mind are cleared of the day to day fog of running a business.

OK, it is terrible to laugh at the demise of Mt. Gox, the crowd that was supposed to enable you to trade your BitCoins, but really, ....

All withdrawals from Mt. Gox Bitcoin exchange were halted on the 7th of February and just this morning we heard that the website had been turned off. For good seemingly, over, gone for good. If you try and browse there, you are met with a blank page. Money laundering allegations, security concerns, withdrawal irregularities, concerns about the exchanges solvency and the list goes on leaves Bitcoin "investors" feeling probably a little battered and bruised right now. The other major exchanges released a joint statement saying that there was a tragic violation of the trust of users of Mt. Gox. Yes, yes, thanks for that guys.

If you want to have alternative ideas of the world of "investing", I think that the world of digital currencies is the Siberia for explorers. It makes whatever leverage used in currency trading seem like fishing in a goldfish bowl. I will rather stick to buying real companies that offer real services or make real goods that real people want and use. And the fact that they make real money, that helps too.

Do I think that digital currencies will disappear? No ways. Do I think that authorities will force the users to comply with real world rules to prevent money laundering? Yes. It has happened already. And whilst the users may think that the regulators can never interfere, I think that they are wrong. The only question I am left with is where has the money gone and does this mean that more Bitcoins can be mined? Nearly half of the Bitcoins ever mined have been made. Sigh ... you really cannot understand everything, or NEED to understand everything, let alone something as way out as this.

Michael's musings: Paid for your economic contribution

I read two articles this morning about inequality, not intentionally it just happened that way. The first was about the inequality that is rising in San Francisco. The summary version is that long time residences are complaining about the rising cost of living in San Francisco due to all the tech companies growing and bringing many new, highly qualified people to the area. The result is that the "middle class" there now earn more than $110000 a year, which translates into more consumption (demand) and then higher prices. One of the main areas that people are feeling the increased prices is in property prices. The biggest problem is the divided that is growing between skilled and unskilled people and that is why people are complaining.

A bus driver in the city makes $50000 a year, yes in rand terms he is better off than 99% of South Africans, but his purchasing power is a lot less than it is for South Africans with the same amount of money. This is compared to the average "techie" who is earning twice that straight out of university. Is that fair? Yes. Who contributes more to moving the human race forward? Who contributes more to the economy?

At the end of the article it was mentioned that the bus drivers two children where at university, one was studying medical engineering and the other had a job at one of the tech companies. This is the key to the future, unskilled people are going to have to bite the bullet now so that the next generation is skilled. In China for example their unskilled are taking the pain now but the life that the next generation will live is going to be far better than the current generation.

The biggest problem (in my opinion) for South Africa is the number of unskilled workers. One of our strengths should be our cheap labour but stats show that we are moving toward mechanising. If the current generation bites the bullet and essentially work for pitifully low wages, but that results in economics growth, higher number of people employed and a skilled generation to follow, is that not better than slow economic growth and large unemployment for generations to come.

There are 16.5 million people on government grants, compared to 15.2 million people employed and being funded by about 4.3 million tax payers. Those 16.5 million people are essentially getting a pitifully low wage from the government, isn't it better if they were employed and earning the same amount? If that were the case we have a higher GDP, higher corporate tax income, lower government grants but more government expenditure on education. If the unions view formal employment remuneration as "slave" wages, I am not too sure how this would be palatable however, these extremely low social grants.

Imagine if 20 years ago government went to the people and said that we are going to create an investor friendly environment and lower labour regulations. The result will be that you will have a job, your current circumstances will not improve much for now but in a generation your children will be out of the poverty trap. What would South Africa look like today? There is no easy solution to the problem and if you are unskilled the future does not look bright.

I want to add to Michael's piece, but at the same time leave it alone. Those are his thoughts entirely and because this is an opinion piece, we are entitled to our opinions. His background is economics and therefore he would be looking for the absolute best from a resource utilisation point of view. Michael is younger than myself and therefore does not have the same reference points with regards to the history of South Africa, he only knows what he is told and reads, on the other hand I can say that I was lucky enough to vote in the first free and democratic elections in South Africa.

The piece is no doubt going to touch on elements in society that make people angry, a lack of resources usually leads to a vicious cycle. The answer is simple, solve education and you solve everything in my opinion. You can't take away someones thoughts and intelligence, that will enable skilled individuals to create employment opportunities for others. We need more education, more learning centres, more celebrating of excellence, more private sector, less government.

Home again, home again, jiggety-jog. Poor Byron is man down in hospital for over a week, which means unfortunately he is not well. I have interacted with him, he seems all good, but of course nobody wants to spend that amount of time in hospital. For starters in the local market we are lower, not by a lot.

Sasha Naryshkine, Byron Lotter and Michael Treherne Email us Follow Sasha, Byron and Michael on Twitter 011 022 5440

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Monday, 24 February 2014

Bekker back on the trail

"But do not fear, Bekker will return after travelling the world again for a year, gathering information, visiting both the developed world as well as "oddball spots". And as the release puts it, Bekker will again be searching for the next "big thing": "Koos intends to travel widely and research where the group's next spurt of growth may come from, once ecommerce has reached maturity." Amazing, he and the company are already looking beyond the current businesses that they have. No wonder the man is so highly regarded."

To market, to market to buy a fat pig. The situation in the Ukraine moved so quickly that is was pretty difficult to keep up. I should care, after all my family lineage is from around there, a little further east into Russia, and who knows what Putin's next steps are likely to be. For the Europeans and the North Americans, this is a good outcome, because the Russians might well lose their stranglehold over the Ukrainians. But the size of a possible bailout, being prepared as we speak by the Europeans is not likely to be huge, but very likely to be unpalatable for many Europeans. It could in reality translate to higher gas prices for both Ukrainians and northern Europeans, and that is not good for a population that has had to downscale for the better half of 6-7 years now.

Make no mistake, this muscling by both the "West" and Russia might be small monetary wise, but it is big geopolitically. And the reason why I say small, the Ukraine may only need somewhere in the region of 4-6 billion Dollars (think how small that is in comparison to the Facebook acquisition of WhatsApp, thanks for that comparison Michael), but if the country fails to get the necessary funding they will default. Standard & Poors have basically downgraded the rating of Ukraine sovereign debt to CCC. And it was downgraded one notch, from CCC+. The difference is sublet, from substantial risks to extremely speculative.

To even be considered investment grade, the Ukraine debt rating would have to move up 8 notches and even that would be "lower medium grade". We watch, for the time being the ex-president is gone, perhaps he is in Russia. His life was full of, well, opulence. For what it is worth, people of the Ukraine, had little idea of the living quarters of the ex-president. If you draw any parallels here in South Africa, the media bats for the tax payer. And politicians might not be as accountable as we may want (the chattering classes), but at least there is major exposure of irregularities, to word it mildly.

Friday locally we reached record highs, a weakening Rand had something to do with of course. Again, the inflationary concerns no doubt will manifest themselves into reality in the coming months and for the rest of the year. The best case scenario for the SARB is that globally there is less concern about emerging markets and we start to attract the flows again. For the time being, even though they are marginal at best as investment destinations, the Ukraine and Venezuela (watch carefully) are no doubt likely to attract negative headlines and as such deter the inflows. Hopefully not though.

Oh dear, Koos Bekker is stepping down at Naspers, that was announced on Saturday. The official .pdf is available for download: NASPERS ANNOUNCES CEO AND CHAIRMAN'S SUCCESSORS. Bekker is only 61, but I guess after an interrupted 17 years at the helm of Naspers, the timing is probably right. The appointment of Bob van Dijk, who is currently head of ecommerce tells you the direction that Naspers are heading in. You will recall that Koos Bekker made remarks about satellite TV being a business in decline (notwithstanding the additional subscribers across the continent time after time), and saying that ecommerce was going to be the next big thing. There are of course many working examples today, Amazon.com of course the one that strikes you as the leader in ecommerce.

But do not fear, Bekker will return after travelling the world again for a year, gathering information, visiting both the developed world as well as "oddball spots". And as the release puts it, Bekker will again be searching for the next "big thing": "Koos intends to travel widely and research where the group's next spurt of growth may come from, once ecommerce has reached maturity." Amazing, he and the company are already looking beyond the current businesses that they have. No wonder the man is so highly regarded. The release also identifies four technology spurts that Naspers has undertaken with Koos Bekker at the helm, digital satellite TV in 1985 (M-Net leading to DSTv), MTN and mobile communication in 1991, the internet businesses in 1997 and most recently ecommerce in 2008. And now, in search of something new for himself as a shareholder of Naspers, Bekker once again travels the world.

When Bekker returns (his last day as CEO is the last day of March this year) in a years time, he assumes the role of chairman. Current chairman, Ton Vosloo, who has been at the business since they were in this "spurt" phase, steps down 1 April 2015. But who is Bob van Dijk? Well, van Dijk is from the Netherlands, is six foot three and a long suffering football fan "only" 41 years old, and as per the release is married to Tina (a finance exec) with whom he has two daughters. More importantly for the shareholders (it is nice of course that he has a stable family life) is that van Dijk is formally the head of eBay Germany, the second biggest market for that company outside of the US. He also speaks five languages, English, Dutch and German no doubt, the other two, not so sure, but as a guess I would think French would be another one. The last one, well, we can only speculate.

Bekker is not going away. He is also human and recognises the time to pass the baton on to someone young, who looks more than capable of running what is now a global business. In our eyes the company still remains cheap, there are several concerns about the valuations of TenCent, but that business continues to grow really quickly and we are not worried. Chinese consumers are still on the cusp of something special, in terms of a change of patterns and behaviour. I expect that there will be sympathy selling, but once the shareholders realise that this is the right thing to do, and their "wealth creator" is going hunting (in the business sense) and will return fresh and invigorated, full of fresh ideas for the company, they will be happy. We continue to add to the stock on the basis that it is cheap in a sum of the parts valuation.

Home again, home again, jiggety-jog. We are mixed to begin with here, resources are lower here. The Rand had firmed up, that had a lot to do with it! Good results from Nedbank are giving the stock a lift, up three percent plus!

Sasha Naryshkine, Byron Lotter and Michael Treherne Email us Follow Sasha, Byron and Michael on Twitter 011 022 5440

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Friday, 21 February 2014

Fine tuned Tesla

"Make no mistake that the stock is very expensive because investors are expecting big things from the company, but I would still have a small part of my portfolio in the stock. Tesla are a pioneering company whose battery technology can be adapted to other industries. Also in the transportation industry Tesla are talking about their driverless car technology being only a couple of years away, and talk of potentially coming up with electric aeroplanes."

To market, to market to buy a fat pig. It was not a day for the bulls yesterday, the bears stood front and centre. In part as we said yesterday to do with the Chinese PMI number, the HSBC preliminary one that showed that the countries manufacturing was contracting and also the Fed indicating that the glide path into an era where they are NOT participating in the markets. As far I thought, the second one is what everybody wants, less stimulus and letting the economy stand on their own two feet by itself. That could probably take place right now, but the assurances are sometimes what Mr. Market, at least the participants need.

It is astonishing that the longer I do this, the more that you see quality individuals saying the same thing over and over again, whatever the flavour topic is right now in the market. Yeah, it is absolutely terrible that the Greeks were allowed to get away with fudging their public accounts and gave their civil service benefits that were ultimately unrealistic without growth rates equal to that of China. But it happened. At the time, and cast your mind back, how many individuals and institutions predicted that Greece was out of the Eurozone by a specific date? Many. Citi predicted that Greece would exit on the 1st of January 2013, well they did say that there was a 90 percent chance. The very term Grexit was coined up by two analysts, Willem Buiter and Ebrahim Rahbari, who published a paper just over two years ago.

Now, I have not been to Greece since 1986 when they used Drachmas, I am pretty confident that they are still in the Eurozone. In fact, the same Citi crowd changed their mind in late May 2013, saying that the chances had fallen to basically nothing. But day after day, over two years ago, there was a crisis meeting between the Germans and the French over what to do with the Greeks. Yields in the other periphery countries in the Eurozone began to rise, Italy and Spain were the elephants in the room. Portugal and Ireland were manageable.

The PIIGS, remember? Portugal, Italy, Ireland, Greece and Spain. And what happened? Humans intervened and squashed the chattering classes. In fact it took the ECB president to quite simply wave a giant stick at the nay sayers and say that they (the ECB) would do everything possible to "save the Euro". And all along, it was the Europeans that eventually solved European problems, not outsiders. For the outsiders had not experienced hardships associated with wars that had been fought in Europe for centuries.

The only listed conflict in Europe at the moment (on Wiki) is the Euromaidan conflict in Ukraine. That is the official name. But the last official conflict in Western Europe was in 1993 where the British Royal Navy and French fishermen had a scrap around fishing rights. Yes. And that was serious. For the time being Eastern Europe still has places where tensions run high, Georgia/Russia and now Ukraine. But they want and need unity. It is better for Europe, they are the ones who remember the great wars more than anybody else, because it actually impacted on their families lives.

What exactly am I trying to say though? A crisis can come and go. A crisis is normally always an opportunity. There are many. Most of them, the vast majority however, do not impact on asset prices in the long run. If you have held a stock for longer than ten years, get the graph and try and identify all the moments that made the financial markets anxious along the way. Go back further and you can of course see the Dot Com crisis, the Asian debt crisis, the collapse (or near) of Mexican debt, the Japanese asset bubble explosion, Black Monday and so on. But that is less fresh in our minds as the Financial Crisis of 2008/2009. The 2010 European Sovereign Debt crisis. Less fresh. And that is why as human investors we are somehow looking for repeats, so that we can see a drawdown in prices to get stocks cheaper than they are now. Just stay invested in the quality, capitalism will do the rest for you.

Company corner

I suddenly wondered to myself when I heard the Cell C advert saying that a certain network provider was taking the regulator to court for not liking the regulations. That perhaps more time is needed to be focused on getting their network better, rather than advertising like crazy. Everywhere I look, I see Cell C adverts and their new building is nothing short of very swanky over at the Buccleuch Interchange. Very, very nice guys. But in fairness to the company, they HAVE actually been spending heavily on their infrastructure, and have attacked the market from the point of view of pricing on voice calls. They are by numbers the third biggest network in the country and have wrestled market share away from MTN recently. Check the legal battle, courtesy TechCentral, from yesterday: Why we really sued Icasa: MTN

Yes. It goes to the heart again to that point that I made earlier in the week. Vodacom and MTN have been hugely successful where the alternative, the government has failed terribly in connecting people. If the service was so prohibitively expensive, nobody would use it. The market has adapted accordingly where ICASA, the regulator was protecting the states interests in Telkom, and now that dominance has gone. Although, remember that governments stake in Vodacom is more valuable than their stake in Telkom. Ironically, the very best thing that the regulator could have done for the countries consumers was to leave business to their own devices. That would have benefitted the consumer the most.

That one paragraph written by MTN South Africa CEO Zunaid Bulbulia that I want to share with you is telling:

"There are documented economic, social and employment benefits in ensuring broadband for all. Every government understands this and all are proposing targets and policies to deliver these benefits to their citizens. South Africa is no exception, and our government has set very ambitious targets in terms of broadband for all. Such ambitious targets will require significant further investment."

But Cell C have done more than that, jostling and taking MTN on in the public domain. How can you tell though that MTN are under a little pressure? Well in the last set of Blue Label Telecoms results, in the pre paid market, Vodacom market share was flat (51 to 50 percent), Telkom Mobile was nowhere flat too (1 percent), whilst Cell C (12 to 17 percent) gained from MTN (36 to 32 percent). My only question is, in the quest to attract people to the Cell C networks, what quality have they managed to pick up? And lastly, if Cell C are going to tell you that MTN is taking the regulator to court, perhaps they can throw in that MTN has invested 26 billion Rand over the last five financial years. Tell it as it is.

Byron's beats: Interims

Yesterday we received interim results from Discovery for the 6 months ending December 2013. Here are the financial highlights.

"The period saw normalised profit from operations up 21% to R2 383 million; normalised headline earnings up 22% to R1 650 million; growth in new business annualised premium income up 19% to R5 883 million; excellent performance in the key drivers of new business, loss ratios and lapses across all of Discovery’s businesses; growth in embedded value of 19%; and cash generated from operations over the period of R1.3 billion."

The company is still growing at a strong rate off what is becoming a very high base. But as you will see below, the opportunities and potential are huge. Before we look at the business per division, here is a graphic which lays out the different businesses by profits.

Health. As you can see from the table, Health is the second biggest contributor to profits (R860mn). New business increased 15%. As a member myself I can see why new business is growing so strongly in a fairly mature market, the product is great. What else was impressive was that loss ratios continue to decline as the Vitality product succeeds in making customers healthier. Because believe it or not, it is a general rule for insurers to pay out more than the premiums they receive.

Life. Life is the biggest part of the business (R1246mn) which grew earnings 21%. There are huge synergies here between the Health division and Vitality. Firstly Vitality users who are healthier live for longer and therefore pay premiums for longer. Secondly it makes perfect sense that if you have Discovery Health, you will do your Life insurance through Discovery and visa versa. Of course the company makes that decision a lot easier with all sorts of incentives. It is also nice to have all these products under one umbrella.

Invest. Again people who are not in the know (otherwise they would all come to Vestact) and want to keep all their products under one umbrella will just use Discovery Invest to manage their money. Assets under management grew by 35% to R36bn. It is still small and has plenty room to grow.

Insure. Sasha recently insured his car with Discovery. He loves it because he drives like a granny and gets plenty benefits. Remember they install a tracker and monitor your driving. It is a very innovative product. New business grew 40% to R257mn.

The UK. Business is starting to take off in this region. Profits grew by 27% (now the third biggest contributor) and new business grew 35%. The national health system in the UK has a bad reputation and people who can afford it are insuring their health and going private. We already know that the Discovery product is quality, especially with the addition of Vitality. Those Brits need to exercise!

Ping An.The Chinese market has huge potential. 37% of healthcare spend comes from out of pocket. Discovery own 25% of Ping An health which is a subsidiary of the biggest insurer in China, Ping An Insure. The business is still small but new business doubled for the period so expect this to become more influential in the future. 3-5 years according to Adrian Gore.

Vitality. Now this the exciting part. Both in the US and in Asia, Discovery are leasing out their Vitality intellectual property, mostly to corporates for their employee wellness solutions. A healthy body is a healthy mind which means more productivity from employees. I am a strong believer of that, plus it is win win because the employee gets healthier at the same time. This is taking place in Singapore, Australia and the US. I suspect that we will be seeing plenty more of this adoption going forward.

Valuations. Embedded value sits at R39.8bn. The current market cap sits at R45.8bn, a 15% premium. And rightfully so. The growth rates and potential are huge. Earnings came in at 307c. Very simply, if you annualise that we get R6. Trading at R77.50 the stock seems cheap at 13 times earnings. I remain conviction buy.

Michael's musings: Tesla powering ahead.

Yesterday Tesla finished up over 8%, significantly breaking the $200 mark for the stock. If you bought the stock today a year ago, you would have paid ... (wait for it) ... $35 a share. Yes a year ago you could have bought Tesla for $35 and today they are worth $210, so you would have made a cool 500% in a year.

If you haven't heard of Tesla, they are an electric car company selling the first cool and stylish electric car, and are run by one of South Africa's greatest exports, Elon Musk. So why is the stock up 8% yesterday and up 500% for the last year? Tesla are the disrupter in an established industry and are run by one of the greatest innovators of our generation, so people are paying for the companies potential (I also think for bragging rights, nothing like an ego boost to say around the braai that you own Tesla).

The results yesterday beat the already high analyst expectations, their revenue is up 43% compared to the previous quarter with margin growth to 25% from 23% in Q3 (Q1 margins were 14%). So this company is growing at breakneck speed and they are growing margins while doing it. Both those metrics are expected to continue growing, with Europe and Asia market expected to grow and as production numbers increase, economies of scale will improve their margins further.

In terms of their growth, Tesla are a North American based company and in their words, "Towards the end of the year, we expect sales in those regions (Europe and Asia) combined to be almost twice that of North America. To give you an idea of how far ahead Tesla are of the rest of the industry in terms of margins, Fords current gross margin is only 15.5%.

Would I own the stock? Yes. Make no mistake that the stock is very expensive because investors are expecting big things from the company, but I would still have a small part of my portfolio in the stock. Tesla are a pioneering company whose battery technology can be adapted to other industries. Also in the transportation industry Tesla are talking about their driverless car technology being only a couple of years away, and talk of potentially coming up with electric aeroplanes. Elon Musk was one of the founders of Pay Pal and one of his other companies SpaceX is developing rockets and have the goal of enabling people to live in space. Tesla is in the position to not only revolutionise the car, but many other industries and they are led by an innovator who already has a proven track record.

Home again, home again, jiggety-jog. We are better to start with. The volatility is testing in the short term. Year to date, the S&P 500 is down half a percent. We are up over two and a half percent.

Sasha Naryshkine, Byron Lotter and Michael Treherne Email us Follow Sasha, Byron and Michael on Twitter 011 022 5440

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