Thursday, 10 April 2014

Fed fuel

"Anyhow, all that I have learnt from this is that it is easy to be an armchair Fed critic and expert, but the job itself is hard. Making forecasts is a hard job, and somehow everyone thinks of the Fed as the "comfort blankey" that they are looking for. "Investors" (and I use the inverted commas cynically) are always looking at the Fed. If you are following the Fed and looking for direction to make an informed investment decision, then you are doing it all wrong."

To market, to market to buy a fat pig. Sigh. Sometimes the volatility can get you down. I mean, how can big companies have that wild a swing, from one day to the next? After all, their business did not change that significantly, why should their share prices? But that is the world we live in, with a whole lot of market participants with greatly varying objectives ranging from milli seconds to many decades, and owning the securities instruments that are associated with the companies. For some people the security might only mean a number, or part of a chart, but for the company it is access to capital markets. For longer term investors it is the ability to own quality businesses at the right price. A company is not a number. A business is made up of a multitude of individuals who form a team, or many teams to become a collective who try and offer the most compelling product offering or service in their respective market.

You cannot fight the liquidity and other peoples usage of the same thing, it is not just a case of whether you prefer Test cricket to T20, they are both cricket and I guess that the ultimate goal for all people participating in capital markets are exactly the same, to make money. I have yet to meet anyone with any intention to lose either themselves or their clients money on purpose. Everyone risks their capital in the markets in order to grow it. Different strategies from High Frequency Trading to deep value investing operate side by side, again all with the same intention, making money. And the edge that each and every participant has over one another is only evident over time. Skill, luck, patience, quality, these are all characteristics that you are looking for. For some people the allure of trading, be it forex or using leverage in the equities market is not to dissimilar to viewing being a pilot as a romantic vocation. But pilots spend a lot of time away from home, operating under some tough conditions.

Trading is hard, there are few who are wildly successful and have made a runaway success. We have a forex trading crowd opposite us offering courses on how to trade. My first question (that I have never asked them) is if the course and the software are so successful, why teach someone to do it when you could be doing it full time yourself? It makes sense that if all the triggers and signals were bulletproof, it would be easier to do than to teach, plus it would be more lucrative, right? OK, I am getting way off the topic here, the reason is that we sit at the end of the market that is patient, happy to own quality businesses, accumulate wealth over time and roll with the many punches. Stay out of trouble. But. After all is said and done, the many market participants who have the same objectives by different methodologies provide ourselves with the necessary liquidity to be able to execute inside of a tight range. So we should be grateful for the liquidity, I think that is what I am trying to say!!!

Markets locally sold off from their best levels, where the ALSI reached an intraday record of just over 48500 points for the first time. And all of this was against a backdrop of a currency that continues to strengthen up, the Rand has now gained over 90 cents to the US Dollar in 10 weeks, roughly 70 days. That must have improved the inflationary outlook. The Brazilian Real however has been on an absolute tear, strengthening by over ten percent to the US dollar since the troughs of emerging markets on the 29th of January this year. Currencies!!! Trying to actually predict with accuracy and with a straight face whether or not any particular currency is over or under valued, hard work that. Year to date we are about flat, the Rand to the US Dollar. To the Pound the Rand is 1.48 percent stronger. To the Euro, the Rand is still weaker year to date by one quarter of a percent. So all things considered this year, which includes some wild swings backwards and forwards, has been relatively uneventful.

US markets were on an absolute tear last evening, post the Fed minutes release from their prior meeting. If you are in the interest of reading the minutes and want to absorb all of the information, then here is the document you must download: Minutes of the Federal Open Market Committee March 18–19, 2014. I might have double counted, but I don't think so, there were 61 people at this meeting. Either it is an exceptionally large boardroom, or it is an actual small room designed for such meetings. Not everybody gets a chance to talk, obviously, but their input is made in the run up to the meeting. The main paragraph that attracted attention, was at the bottom of page 6 of that PDF document:

"Inflation continued to run below the Committee's 2 percent longer-run objective over the intermeeting period. A couple of participants expressed concern that inflation might not return to 2 percent in the next few years and suggested that a protracted period of inflation below 2 percent raised questions about whether the Committee was providing an appropriate degree of monetary accommodation."

All and sundry are petrified of deflation. Why? Deflation is a bad, bad cycle. Deflation is defined at Investopedia as :"A general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression. Central banks attempt to stop severe deflation, along with severe inflation, in an attempt to keep the excessive drop in prices to a minimum."

But I am sorry. If Japan are the example of deflation that everyone is using, are they not way off? That was a crazy event, not dissimilar to the tech bubble. How can the after effect be the same deflationary environment. Anyhows, the best read with regards to these deflationary versus the right amount of inflation I thought was nailed yesterday by Bob McTeer: Two Percent Inflation: A Good Thing Or A Bad Thing? Bob, an ex FOMC member has some great points, he talks about one percent perhaps being a better target rate.

Anyhow, all that I have learnt from this is that it is easy to be an armchair Fed critic and expert, but the job itself is hard. Making forecasts is a hard job, and somehow everyone thinks of the Fed as the "comfort blankey" that they are looking for. "Investors" (and I use the inverted commas cynically) are always looking at the Fed. If you are following the Fed and looking for direction to make an informed investment decision, then you are doing it all wrong.

This is big. Well done to the fellows over at Taste for having secured the exclusive Master Franchise rights (30 years) for Domino's Pizza for seven Southern African countries, obviously including South Africa. Domino's, for those of you who do not know are the biggest pizza outlet in the world and are synonymous with the food that is right up there with the comfort food of choice. Cheese, melted on a crispy base, with your favourite other foods. Piping hot.

So what happens from here? The existing Scooters Pizza and St. Elmo's stores will be converted to Domino's stores. Those chaps must be excited beyond words, I am not sure whether or not the franchise owners will have to pay more for the better known franchise, perhaps we can explore that later. According to the Taste release, there are 125 plus outlets of theirs currently, that will be rebranded. I had read however in the annual report that there were 136 Maxi's and 26 St. Elmo's, as at the last annual report. The goal is to become the leading pizza delivery brand across Southern Africa over the next five years. As per the February 2013 Annual report, there are 344 Debonairs inside South Africa and 60 outside, so these plans of Taste (for Domino's) are huge, if you think about it. That would make it bigger than Fish and Chips (good timing and purchase there), which as per the annual report had 312 outlets, which is more than half of all stores.

What is more huge, for me, is the entrepreneurial spirit. In 2001, system wide sales (store to customer) across the business was a mere 4.3 million Rand. You read right. By 2011, it had grown to 752 million Rand. For 2013, their system wide sales, from stores to customers had grown to 1.38 billion Rand. I've known these guys since they listed, I know Carlo Gonzaga, the CEO. He is energetic, he remains entrepreneurial, he is still young, I think he turns 40 this year (39 in the last annual report). And he ignores the noise around him. And I am even going to throw this one in, I remember being stuck in a room full of know it alls who were suggesting that the only person buying the shares post the Taste IPO were the directors, and indeed Carlo himself. Perhaps they were sellers below the IPO price because they didn't see a pop. Ha-ha, and what now guys? The share price since 2006 is up around ten fold.

The business is now worth 750 million Rand, and is certainly going places, the stock is up around seven an a half percent today. We should celebrate entrepreneurs like this, people who despite everything thrown at them continue to persevere, notwithstanding the combative approach from government to businesses. Without small businesses that become medium sized businesses and ultimately big businesses, there would be no creation of any jobs. Truth.

Lynx, I'm reading this, you should too

This is simply astonishing, via AEI.org and in particular, our old pal Prof. Mark Perry. The service is called Amazon dash. Check it out: Amazon Dash - Shopping made simple. The future is going to be here sooner, for now Amazon are building the most amazing ecommerce platforms. No wonder Mr. Market is so in awe that the stock trades on a 500 odd multiple.

Remember when Greece was finished? Two Citi guys made up the cute blended word -> Grexit. Well, that might have been two years ago, but Greece have returned to capital markets. Paul re-tweeted in his usual forthright way:

Ah yes, Facebook were buying Instagram for so much, what a laugh, so funny. But wait..... it turns out that they are cleverer than you and I around there, check this out: STUDY: Instagram Is Most Important To Teens. This is all via an informative report titled Taking stock with teens. Nike is the number one clothing brand for the spring quarter, and has been that way since Spring of 2011. Footwear, Nike, hands down. Starbucks, favourite place for teens. Nice. Sounds good to us!

Home again, home again, jiggety-jog. Stocks were up, now they are down. Futures were up, now they are down. Worries, persistent ones about the slowing Chinese economy. It is being cooled, no doubt about that, and I would think that is a good thing in the long run. For now, "investors" (being generous again) are being cautious.

Sasha Naryshkine, Byron Lotter and Michael Treherne

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Wednesday, 9 April 2014

Woolies peers into Davey Jones' locker

"I think that they could raise money Down Under and here, a combination and use lower interest rates in Australia as an opportunity to acquire this business. There are obviously going to be costs involved with regards to the bridging facilities, the rights issuance, debt funding and so on, but that is life. So my conclusion on the funding part of the transaction is that the rights issue might not be as onerous as one might think. Perhaps a 2-2.5 shares for every ten that you own now. I guess that is not insignificant at all, but because there is a time line here, we have to wait."

To market, to market to buy a fat pig. Snapping the losing streak here in Joburg, both this morning and yesterday, all share index is trading at an all time high this morning. It is tiresome to see everyone talking about waiting for the FOMC minutes before making a call on equity markets, being "cautious" ahead of that. Let us be clear, our opinion around here is simple, if you are focusing all of your energy and efforts on what it is that Janet Yellen is saying or doing, then I think that you are doing it all wrong. Investing and not trading, Michael and I were having a chat about High Frequency Trading. He is further through that Michael Lewis book, Flashboys, than I am. Seeing as I have not read a single page, and Michael is 35 percent of the way through the Kindle edition, of course he knows more than me. I should start reading it, that would be a good start! I am going away for a little bit, from next Tuesday to the following Wednesday, apologies in advance, that should be enough time to read it!

Stocks in New York added a bit, the NASDAQ is now off 260 odd points from the highs of the year, the overall index is down 5 and a bit percent. Year to date the NASDAQ is down 1.5 percent. There is going to continue to be anxiety about the Ukraine, the parliament had a free for all yesterday. check it out: Fistfight Breaks Out in Ukrainian Parliament. Be thankful that you live here, notwithstanding all the problems that we experience on a day to day basis, that is seemingly madness. AND, if you needed reminding, this is the second time that this has actually happened this year.

But today, it is all about this. And wow, this is huge! Woolworths are looking to buy Australian retailer David Jones. Davey Jones and their locker, lock stock and barrel. The price tag? 4 Aussie Dollars a share or around 2.1 billion Aussie Dollars, which translates to 21.4 billion ZAR, as per the release -> Proposed Acquisition by Woolworths Holdings Limited of David Jones Limited and Cautionary announcement.

The effective exchange rate is 9.95 ZAR, the premium is around one quarter as to where David Jones Limited was trading. Merger talks between David Jones and Myer (another Aussie outfit) were terminated Monday. But I guess that the Myer offer was less compelling. But forget about that, this is sizeable, relative to the Woolworths market cap. 62.2 billion ZAR is the Woolworths market capitalisation at 73.47 Rand a share, where it closed last evening. The proposed deal is 34.4 percent of their market cap. Big.

So how does Woolworths propose funding this deal? Existing cash, new debt facilities and a "an equity bridge facility" that will be repaid by an underwritten renounceable rights offer. That means YOU, the shareholder will have to put extra money into this business in order to own David Jones Limited, at a specified price. I always wanted to be a pirate! It is not easy I guess to work out immediately, what the quantum of the rights issue will be, but perhaps the answer lies in the existing debt facilities, what the company is comfortable with from a gearing point of view and what the current cash reserves are.

Cash and cash equivalents as per Woolworths interim results was 1.927 billion Rand. Dividends paid last year, as per their annual report was 1.64 billion Rand. I am not suggesting for a second that the company are going to suspend their dividend payments, but it is an avenue that could be explored, lower dividends for the time being. The company, as per the 2013 annual report has un-utilised banking facilities total 3.025 billion Rand. Non-current (being longer than 12 months) interest bearing borrowings were "only" 705 million Rand. Current interest borrowings (to be paid inside of 12 months), as per June 2013 was 127 million Rand. So, you could argue that Woolies are relatively un-geared. But still, this is going to be big, the company is going to need to raise serious money. But find this screenshot grab, from the 2013 annual report, because the lines at the top are important.

Why do I think that little line, "The Australian prime interest rate is 2.75% (2012: 3.5%)" is important? Well, with a substantial business in Australia currently, Country Road contributes 20 percent to the overall Woolworths profits as at the end of December, and for the half year profits grew to 471 million Rand. Obviously there were some positives from a currency translation point of view, but the business is very profitable and has a big presence, 136 Country Road stores as at the end of June 2013. 93 Mimco stores and 13 Trenery stores Down Under. More in South Africa actually, Trenery specifically, there are 25 stores. Witchery, there are 172 stores in Australia.

I think that they could raise money Down Under and here, a combination and use lower interest rates in Australia as an opportunity to acquire this business. There are obviously going to be costs involved with regards to the bridging facilities, the rights issuance, debt funding and so on, but that is life. So my conclusion on the funding part of the transaction is that the rights issue might not be as onerous as one might think. Perhaps a 2-2.5 shares for every ten that you own now. I guess that is not insignificant at all, but because there is a time line here, we have to wait. We should know everything, including the shareholder votes and various regulatory approvals, as per the release, from Woolies shareholders in mid June, David Jones shareholders in late June, the various law makers in late June to early July, with the deal expected to be implemented (money in the till for David Jones shareholders) in the middle of July. That is roughly 95 days away.

A few things as to why Woolies wants to own this business. For starters, Ian Moir (the Woolies CEO) is in his 16th year in retail in Australia, although strictly speaking he lives here. He joined the Country Road board on the 23rd of October 1998. So if anyone knows Australian retail, it is most certainly Ian Moir. What I found quite amusing is that Gordon Cairns, the chairman of David Jones was on Bloomberg Television (inside of a mall) earlier and he sounds Scottish to me. As is Ian Moir. Cairns has an MBA from University of Edinburgh. The Scottish connection, where is Sean Connery when you need him?

Who are David Jones? One of Australia's oldest businesses. David Jones himself was a Welsh immigrant who wanted to sell (as per the David Jones website): "the best and most exclusive goods". The first store was opened in 1838 (it turned 175 years old last year), which is a while back, but currently there are "only" 35 stores, two warehouses and an online presence. David Jones has over 1000 brands. Astonishing. Food and wine, kids clothes, as well as electrical items, homeware products, beauty products, shoes aplenty of course. Lots and lots of products and brands for 1.042 billion Aussie Dollars of sales for a half. Wow. Sounds very hard. But this business has 265 thousand Facebook followers, so their brands obviously attract a lot of attention. So with all that history, this is a brand well entrenched in Australian retail.

OK, so is this a good deal for you, a Woolworths shareholder? At 24 times forward earnings it seems like a very rich price. But. The retail environment in Australia has been under pressure, sales have been going sideways. That should be a good thing, right? In 2008, the company had sales of just over 2 billion Aussie Dollars. So not much action there for five years, about the same applies now from a sales point of view. Going sideways. By another metric, Woolworths are buying the business for 1.16 times annual sales (2013 - 1.8 billion Aussie Dollars revenue). Woolies trades at 1.75 annual sales. It seems expensive, the purchase, and in that very Bloomberg interview, the DJ's (Paul says it is known colloquially in Aussie as that) Chairman says it is a great deal for them. Cairns spoke about increased competition from Zara, Top Shop and H&M and the deal was necessary for building scale and creating a South Hemisphere retailer to compete with their Northern counterparts.

There is an opinion piece, titled David Jones takeover: The foreign brands are here because Australia is rubbish at retail in the Sydney Morning Herald (SMH - not, shake my head) written by Michael Pascoe, who describes himself on his website as "one of Australia's most experienced and thoughtful finance and economics commentators with four decades in newspaper, broadcast and on-line journalism, covering the full gamut of economic and business issues". He describes the current crop of management as inexperienced and a little old style.

Paul Zahra is taking over a company that had drastically underinvested in its future, concentrating on immediate profits using a dying formula while persevering with a steam-powered point of sale system.

So perhaps this sweep from Woolies is at an opportune time. It seems a little strange though, Australian expansion when many have tried and failed from this neck of the woods. The massive difference however is a) Woolies own a successful business Down Under already and b) perhaps more importantly, Ian Moir, even if he is Scottish, knows Australian retail very well. We continue to recommend Woolworths, we are paying key attention to the details of the deal, first things first, let all the relevant authorities and regulatory bodies give the green light and more importantly (in my world) let the shareholders of both companies decide. The biggest Woolworths shareholder as of the 30th of June 2013 was the Government Employees Pension Fund, who owned 16 percent of the business. I want to know what they think, that is all that matters to me. And what could also happen is that Myer might come back with a better deal, the company is of course up for sale.

Byron beats the streets

Over the past few days two recommended stocks, Famous Brands and Massmart have announced expansion plans outside of South Africa. It is one of the beautiful things about investing in equities, the world is sometimes your oyster. Companies can search for areas (on your behalf) where there is growth potential, they do the hard yards to get there and as an investor you benefit. Assuming of course that they get it right.

The Massmart announcement, which came out yesterday, said that they are opening up 2 stores in Angola by next year. This is a country where they do not yet have a presence. The oil rich nation is one of the fastest growing countries in the world. According to Wikipedia, the Angolan economy grew an annualised average 11.1% from 2001 to 2010. According to The World Bank the economy is expected to grow 8% in 2014 so you can see why Massmart are pushing for entry. Since the Walmart acquisition I have felt the expansion up north of our border has been slow, it has obviously been harder than they (or I) thought. It was never going to be easy. This news is encouraging, but we have to remain patient.

The other announcement from Famous Brands went as follows:

"Famous Brands has established a strong platform for growth in the Middle East and North Africa regions with the signing of a Master License agreement for Saudi Arabia, Lebanon, Morocco, Iran and Egypt.  The agreement applies to the Group's Steers, Wimpy and Debonairs Pizza brands in all of these countries, as well as the Mugg & Bean brand in Morocco and Egypt."

According to the announcement they are not doing going into this alone, they have formed a partnership with Xcelium, a Lebanese food services business who actually got the master licence.

Kevin Hedderwick said the following about the region.

"The demographics of Middle Eastern and North African consumers favour quick service food consumption.  Approximately 25% – 30% of the Middle Eastern population is aged between 15-29 years old and has grown up eating processed foods and dining in Western-style fast food restaurants and coffee shops. 

In addition, women in these regions are now better positioned to build careers and financial independence than previous generations, promoting increased disposable income.  Furthermore, similar to many other emerging markets, as consumers become cash-rich but time-poor, they gravitate towards convenience-food solutions.  Given these factors, we are optimistic about the potential this Master License agreement holds for Famous Brand."

Same theme different region, may it continue.

Home again, home again, jiggety-jog. Beware of the forecasters. Remember that John Mauldin fellow who was writing aggressively about the Eurozone falling apart and Greece looking more like the Mad Max landscape. Check this out, via one of the fellows that I follow, Jeff Miller: FACEOFF ON GREECE: AN INTERIM UPDATE. Beware the market doyen with a bad track record.

Sasha Naryshkine, Byron Lotter and Michael Treherne

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Tuesday, 8 April 2014

Internet patterns

Internet patterns

"TenCent has been sold off as a result of concerns of the valuations of internet stocks. Yes, there are many that fall into the category that the companies share price movements in the broader "internet" sector are not too dissimilar to that of 2000, the tech bubble. I am not too sure that any two times in the market are worth comparing, back then Google was not even a household name. Most of the overvalued stocks, anything with a high multiple, early stage earnings (or none at all) have run into the sellers. And that is understandable, nervousness around what people know and remember (the tech bubble) leads to more caution, if people think that they recognise a pattern again. Humans are excellent at pattern recognition."

To market, to market to buy a fat pig. Yech. It was not pretty yesterday. This was, as far as I read, the worst three days for the NASDAQ since 2011. New tech is overheated, old tech has been ignored, that is the current flavour. Industrials, resources, there was little place to hide in the face of a much stronger Rand too. Banks caught a serious bid, Standard Bank closed near their all time high, FirstRand closed AT their all time high. Since the early February emerging market lows, Barclays Africa Group (the old ABSA) is up over twenty percent. That is in just over 60 days!! As a collective the banks are up seven and one third of a percent this year. Gold miners ended the day up half a percent.

What was up with the cell phone companies too? Vodacom is close to their all time highs, MTN is not too far away from theirs. I suppose that if you "add back" the very recent MTN dividend you are beyond that all time high comfortably. Telkom? They too have been on a tear. It depends though where you draw your line in the sand though. Telkom remains a worse investment than either of these mobile companies, we still maintain that MTN is still in the early stages of transition towards becoming a provider of more data to their relatively low (globally) on a ARPU basis customer base. The fact that fixed line infrastructure has been essentially "skipped" across our continent is good news for the mobile providers, the big risks for them is that they become more utility like. But, with mobile money becoming increasingly important for the mobile providers, these businesses are changing and morphing into something different. Just this morning we have another announcement from MTN, teaming up with Bharti:

"The landmark partnership will enable Mobile Money customers of MTN Ivory Coast and Airtel in Burkina Faso to easily transfer money between the neighbouring countries. Until now, moving money between the two countries was mired by high fees, high usage of informal channels and a lack of proximity to withdraw money."

I guess that the channels that normally transfer the funds attract prohibitive fees, so these sorts of innovations are certainly excellent news for the consumers. And as for the likes of Western Union and their peers, this news represents a seismic shift of sorts. This is just another idea that sees the business morph into something else over time, payment solutions are going to continue to grow aggressively. This is great news for regulators, less cash, more transparency, so this will be encouraged and there will be little interference (you would think) from governments. Good news all around.

What happened to Naspers shares? Well, like we tried to point out yesterday, the same things that have happened to LikedIn, Twitter, Facebook, even Google to a lesser extent. Naspers share price peaked near the ides of March (this year) at 1354 ZAR a share. Since then the traffic has been in the wrong direction, if of course you are long the stock. Last evening the share price closed at 1041 ZAR a share, down over 300 Rand from their highs. Forget for a second that over the last year the share price is up 87 percent plus, I can tell you that most people care about what has happened in the last three weeks. For one, the TenCent news has been negative, the results themselves were light of expectations. When a company is priced for growth, the problem is a miss is often met with aggressive selling across the board.

Coupled with the negative news from their home base, TenCent has been sold off as a result of concerns of the valuations of internet stocks. Yes, there are many that fall into the category that the companies share price movements in the broader "internet" sector are not too dissimilar to that of 2000, the tech bubble. I am not too sure that any two times in the market are worth comparing, back then Google was not even a household name. Most of the overvalued stocks, anything with a high multiple, early stage earnings (or none at all) have run into the sellers. And that is understandable, nervousness around what people know and remember (the tech bubble) leads to more caution, if people think that they recognise a pattern again. Humans are excellent at pattern recognition.

Let us use the trusty calculator to determine how much of the Naspers share price is made up of TenCent. First, take the TenCent market cap in Hong Kong, which closed at 948.93 billion Hong Kong Dollars. Naspers owns 34.5 percent of TenCent, that translates to 332.12 billion Hong Kong Dollars. Now one Hong Kong Dollar is equal to 1.35 Rands. So, quite simply, multiply 332.12 billion HKD by 1.35 and that equals 448.36 billion Rand. Naspers had a market cap last evening of 443 Billion Rand.

So effectively, all of us South Africans in our infinite and superior wisdom have decided that the people in Hong Kong are mad, and should not value TenCent on that crazy multiple. But the truth is that you get the rest of the business, the hugely cash generative DSTv business for free. Remember of course that the Russians, Crimea, the Ukraine and Mail.ru must be weighing to a certain extent. Mail.ru however has hardly moved, the share price that is. The gap between what our smarter South African investors afford Naspers relative to TenCent calculation has not changed much over time. So all the movements in Naspers can be attributed to the negative move of TenCent. But I think that you knew that already. As ever, in the short term whilst all these other ecommerce businesses are in ramp up mode, the Naspers share price will be joined at the hip to TenCent, so it almost entirely hinges on what you think in terms of the future of TenCent.

Ha-ha. Check this FT article: Nigeria and South Africa intensify rivalry after GDP figures. Does it really matter though? At the end of the day if you have a reasonable sized economy and your citizens are all richer than before, isn't that the goal, rather than having an absolute size argument. How long will it take for all of us to achieve the per capita GDP of say, Monaco, or Singapore? Or perhaps those examples are not really warranted because after all, those are island states.

South Africa has a GDP of 11500 USD (PPP) on a per capita basis, Norway is somewhere around 54 thousand Dollars. We would need to expand our economy five fold in order to achieve that figure. If we wanted to have the same output on a per capita basis (information from here -> List of countries by GDP (PPP) per capita) as the EU average, then we would have to increase our economy three fold. That would also be roughly the same as say for instance, South Korea, which has a very similar population size to ourselves.

We are the 25th largest country by population on the planet, Nigeria with an estimated 173 million souls comes in at seventh place on the ranking tables -> List of countries by population. The DRC (67.5 million), Egypt (86.25 million) and Ethiopia (86.6 million) are the other three countries on the continent that have bigger population than ourselves, an estimated 53 million people live in Msanzi according to StatsSA. Oh, and just as an aside, our equity market in Dollar terms is ten times the size of Nigeria.

But we needn't feel bad about anything, with Nigeria's economy now 509 billion dollars, that is bigger/equal to Norway. But Norway has only 5.1 million people, a population the fraction of the size of Nigeria. In fact there are 34 Nigerians for every Norwegian. One you associate with snow and reindeers, the other with heat and hectic traffic. The question, the one that really counts however, if a Nigerian had the choice for their child (and they were the average Nigerian) where would they want it to be born? In order for the opportunities to be maximised for that child? Climate aside, the financial answer is still Norway. Opportunities might be easier to come by, from an investment point of view in Nigeria, and there may be a lot of money to be made, but there are also many pitfalls. I guess at the end of the day one must always do the risk versus reward investment case. The other point worth making is that both Nigeria and Norway have economies that are greatly skewed to oil and gas.

Am I off the mark here? I think all I am trying to say is that there is a difference in where you are born and your subsequent standard of living and education, relative to your investment destinations that are available to you. That makes a massive difference to both the outcomes. The big negative here for South Africa, with this Nigerian debasement is that companies looking for investments in Africa's biggest economy, they would enter into Nigeria and not here. But our capital markets are very deep and liquid, I think that is a point well worth making again.

Michael's musings: Keeping it simple for the best returns

I read an interesting article this morning on how school children had better investment returns than their university counterparts. Here it is, Fargo 6th-graders mop up against college investors. That link is via one of my favourite newsletters and websites, Quartz.

The reason that the school children had better returns than their university counterparts (in my opinion at least) is because they didn't get too technical and make things complicated when selecting their stocks. The approach that the school children followed was, "I thought the best idea was to pick a stock that you believe in, a company that you liked, a company that you were interested in, and stay with them". That approach is probably too simple and it is easy to make money when the market is going up, but I think that there are traits to be learnt from their approach.

There is a Buffett quote that ties into the article, "If you have more than 120 or 130 I.Q. points, you can afford to give the rest away. You don't need extraordinary intelligence to succeed as an investor" There is at least one person in our office whose IQ is above 130, in case Buffett is wrong. The article was thought provoking and reinforces my view that investing is about keeping it simple and having patience.

Home again, home again, jiggety-jog. Markets are flat here in Joburg, US futures are a little lower. The Ukraine and Russia and that whole environment are starting to hot up again. Not good.

Sasha Naryshkine, Byron Lotter and Michael Treherne

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Monday, 7 April 2014

Tech chop

"So, stocks that have had a fabulous 12 months are all coming back sharply, Google (the split ones) fell four and two thirds of a percent, even Microsoft did not escape, down 2.78 percent on the day. Facebook fell by nearly the same amount as Google. Stocks that have been unloved in the technology space, IBM and Intel fell modestly, much less than the rest of the index. The divergent valuations on part of high flying internet stocks from Facebook, NetFlix, even Tesla to TenCent (to Naspers) relative to the "old tech" has been most evident in the last year."

To market, to market to buy a fat pig. Friday was jobs day. The number did not have a three in it, heck, it did not even have a two in it and was slightly light of expectations. The revisions northwards (an extra 37 thousand) of the prior numbers were pleasing. I read in the Calculated Risk blog -> March Employment Report: 192,000 Jobs, 6.7% Unemployment Rate that "Private employment is now above the pre-recession peak by 110 thousand and at a new all time high." Wow.

Markets in New York opened higher, but then trended lower on the day with the NASDAQ heading towards their worst single day performance since 2012. Yech. Why? Well, some of what I read said, OK, out of growth and into value. Biotech, one of the high flying sectors over the last year slumped over four percent. Fast flows and fast moves have seen (according to the WSJ -> Stocks Drop Sharply; Nasdaq Leads Market Lower) 526 million dollars into the Biotech ETF in the first two months of 2014, and guess what now? 280 million Dollars out in the last two weeks. How do you spell sheep?

So, stocks that have had a fabulous 12 months are all coming back sharply, Google (the split ones) fell four and two thirds of a percent, even Microsoft did not escape, down 2.78 percent on the day. Facebook fell by nearly the same amount as Google. Stocks that have been unloved in the technology space, IBM and Intel fell modestly, much less than the rest of the index. The divergent valuations on part of high flying internet stocks from Facebook, NetFlix, even Tesla to TenCent (to Naspers) relative to the "old tech" has been most evident in the last year. Over the last year, 12 months, Cisco is up 10.3 percent, IBM is down 7.4 percent, Apple is up 25.6 percent, whilst NetFlix is up 105.9 percent, TenCent is up 102 percent, whilst Tesla is up a whopping 351 percent. And Tesla is not even a tech company, they are essentially an industrial business, a motor vehicle manufacturer. Facebook is up 107 percent. Intel is up by about the same amount as Apple.

So now what? Is new tech a passing fad that will get trounced quickly and rerated back to a whole lot less? Is Apple old tech or new tech? Is Amazon and recently over the weekend Yahoo and their streaming businesses a big threat to NetFlix? One thing is for sure, as was pointed out in his Crossing Wall Street newsletter Friday, Eddy Elfenbein showed that GE trades on a 15 multiple NOW and back in the go-go days of the tech bubble traded on a 42. The message was titled, "Are we in another bubble?" and contains this insightful paragraph:

General Electric is about the bluest blue chip you can find. The stock is currently going for $26.23 per share. That's half of where it was 14 years ago, yet the company is expected to earn $1.70 per share this year. Compare that to 2000, when GE's bottom line was $1.27 per share. So profits are up 34% in 14 years (not so good), while the stock price is down by 50%. GE's Price/Earnings Ratio has dropped from 42 to 15. My point is that people have forgotten what a real bubble looks like.

Whilst GE has under performed in terms of the price, the profits have also been average. But the point is simple, how could the market possibly be in a bubble when one of the pillars of the market, in terms of blue chip measures, trades at around the long term averages? The high flyers of future years, which include newly listed businesses are either pumped up or crushed depending on the mood. The next question is, should Facebook trade on a 86 multiple historic and 49 forward (2014) and further into the future, the 2015 fiscal year, it trades on a 37 multiple? So, is that very expensive for a company that is growing fast, still has a fast user adoption and a relatively low user per revenue basis. But if you believe in the chief, believe that "new internet technology" will finally have decent profits relative to back then (2000) when anything with a dotcom had an infinite multiple i.e. no earnings whatsoever. Google looks expensive on a 31 multiple, but forward around 21 percent and next year 18. Expensive? No.

So what to do? Nothing. If you are a longer term holder of high growth businesses, waiting for them to morph ironically into more mature businesses with earnings that are less "growth" and more sure, then you must roll with the punches. The prices have possibly got ahead of earnings, but the market is still coming to terms with what is the internet era. The happiest people in this equation are the deep value crowd, because you can bet your bottom Dollar that there is a "I told you so" recency bias. The problem is that we have been told so since all these stocks were half of where they are now.

Lynx, I'm reading this, you should too

Sorry, we are now in second place on the continent, with regards to GDP on the continent. The Nigerians started measuring telecoms and financials services. And as such GDP added 89 percent. This rebasing exercise to present day is the first in nearly two decades. Astonishing. Check the FT story -> Nigeria almost doubles GDP in recalculation.

I know you love the stuff. Don't lie to me. Nutella. The business is owned by Ferrero Rocher and via AEI comes the graphic of the global value chain of Nutella. I suppose the only comment that I wanted to make is that even though this company is headquartered in Italy, their products are sourced from around the world for their factories that are around the world. Including Russia, that must be tricky.

I am not sure if this is anything but for interests sake, but when copying nature you can sometimes come up with very efficient models: This Amazing Jumping Kangaroo Robot Can — In Theory — Go Places Wheeled Robots Cannot. Michael said what happens if it falls sideways?

This is obvious, the earlier you start saving, the better, right? With the first line titled: Young people are going about investing all wrong it is pretty self explanatory. Too much cash, not enough equities.

Home again, home again, jiggety-jog. Stocks are coming back off their worst levels. Is this the last full week in a while? I think so.

Sasha Naryshkine, Byron Lotter and Michael Treherne

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Friday, 4 April 2014

GOOG and GOOGL

"Double the shares in issue at half the price means nothing for valuations, the two separate stocks will share the earnings. BHP Billiton with two different country share registers (UK and Australia) where the PLC and Limited shares trade separately have a far more complicated structure than this one. Take the earnings per share projections and simply slice it in half to represent what you would see in front of you now. It is that simple. And let us be very honest here. Who better to have control over the business here than the founders and managers?"

To market, to market to buy a fat pig. Our markets slipped back yesterday, the headlines that I was reading pointed to worries somewhat about the jobs number today. I saw that Joe Weisenthal asked whether or not we would see a three handle. Meaning a number at the beginning of the thousand would have a three, i.e. three hundred thousand. Perhaps the ADP numbers were a little "light" 4000 odd below expectations, but the current expectations are around 200 thousand. The unemployment rate is supposed to drop to around 6.6 percent. This morning there are some German factory order numbers that comfortably beat expectations. For the time being the European data is better. So much so that the ECB president yesterday (the coolest central banker in the world) suggested that there was not too much to do. Read the press conference statement.

Now remember that the ECB has a similar mandate to ours: "to maintain price stability: safeguarding the value of the euro." As simple as that. I guess the deflationary threats that Europe are currently facing are somewhat of a problem. The word deflation was used five times in the Q&A segment of the press conference, all led by journalists and not once in the statement by the ECB. Is it then fair to say that the ECB is not worried just as of yet, or are they (the ECB) reactionary? But, in the statement the ECB suggest that they are worried about long periods of low inflation: "The Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation." But at the same time, the ECB did say that they are not worried right now. So why get your knickers in a knot?

Yesterday we had the AMCU union members here at our workplace visiting Lonmin headquarters (the South African ones) and whilst our hardships might have included battling traffic here, one should feel for the workforce that have been without a job for 10 weeks plus. David McKay has a piece: Anatomy of the platinum strike ... 10 weeks on. The last three lines: "End of Week 10, Employee earnings lost = R5bn, Companies revenue lost = R11bn" Wow. And right now, as we speak, Amplats are talking about shutting some mines and mechanising others. There is a simple interview with Chris Griffiths on CNBCAfrica. Griffiths expect workers to return soon. Amplats is going to reposition themselves. No doubt about it, Michael spoke at length about it yesterday, remember?

The massive issue is as ever, are fewer skilled workers, using mechanised methods going to replace many more lesser skilled workers? Yes. Probably. The prickly issue of remuneration of the upper echelons of the business world, relative to the rank and file worker should always been seen against a relative skill set point of view. Because as equally as it may seem for the unions to say that it is not fair that the big chiefs get paid a big salary, the highest paid employees have skills that very few in South Africa have. It is easy to acquire those skills, if in the words of warren Buffett you "won the ovarian lottery". It means that you were born with better circumstances than the average person and as such had access to quality schools, quality tertiary education and quality opportunities because of your peers and their parents networks. How do you break that cycle for the many that are born into poverty and struggle even to enter the middle classes? Better education and improved skill sets is possibly the key to everything changing in South Africa. We desperately need the political will here.

Nooooooo (slow motion one), what is going on with Google? You saw right, the price halved, but that did not mean that your value halved. Simply, because two years after announcing that, the founders and essentially controllers of the business, Larry Page and Sergey Brin, would split the shares and control the company through their special voting rights B shares, the stock has finally split.

So what you need to know is that as a Google shareholder you now have double the shares and own share code GOOG and share code GOOGL, one each for the old GOOG. Essentially at the same price, the GOOG and GOOGL find themselves, there is something sneaky about that too. They essentially are class A shares, which have one-tenth of a voting right (GOOGL), class C shares which have NO voting rights. And then there are class B shares, which you and I cannot own. According to a WSJ article that I read, Brin and Page through these shares (each one has TEN voting rights) control the course of the company by essentially having 56 percent of the vote, because of their ownership of the B shares. If you are looking for the nitty gritty, goto the Fourth Amended and Restated Certificate of Incorporation of Google Inc. on their investor relations page, and then do a search for the word voting.

Complicated? Not really. Double the shares in issue at half the price means nothing for valuations, the two separate stocks will share the earnings. BHP Billiton with two different country share registers (UK and Australia) where the PLC and Limited shares trade separately have a far more complicated structure than this one. Take the earnings per share projections and simply slice it in half to represent what you would see in front of you now. It is that simple. And let us be very honest here. Who better to have control over the business here than the founders and managers?

The only issue from now on becomes, well, which one do you own from here? From a pricing point of view it makes no difference. The two stocks will trade within a whisker of one another. But I am guessing that if you intend voting your stock on some matter in the future, you must then own the Class A shares, the one with the ticker GOOGL. If you intend not ever voting (because essentially it does not matter now, Page and Brin control the company) then own the GOOG shares. Because the deals will be done using the GOOG shares, with no voting rights. In other words, they will have better liquidity and are more easily tradable over time.

But in order to get this stock split through, the company had to concede to some shareholders who had filed a class action lawsuit against the company in which they would compensate shareholders if there was a significant price difference between the A & C shares. I found a Yahoo finance article (Dissecting Google's unorthodox stock split): "a guarantee to compensate Class C shareholders if their nonvoting status causes the value of their stock to fall well below the Class A stock price during the first year of trading." It continues: "The settlement will require Google to pay Class C shareholders if the average trading price of their stock is at least 1 percent below the Class A shares through April 2, 2015." Perhaps another small reason to own the Class C share? Either way it does very little to sway one away from owning what we still consider a quality business. We continue to accumulate.

Lynx, I'm reading this, you should too

You will no doubt agree with me here, when you look at the data portion of your contract. How many people make as many calls as they used to? Not as many. Check it out via the BusinessInsider: We're Spending A Lot More Time Online Thanks To Smartphones And Tablets

I saw this tweet from Simon Dingle yesterday, it is an amazing info graphic of What happens in a single second online. Be sure to scroll down to the bottom. There are 4051 pictures posted to Facebook every single second. I was surprised to read that 1 edit is made to Wikipedia every second, I would have thought more initially. But then again, it takes effort and time to be able to edit. Nevertheless, Wiki is an amazing human achievement, with the broader community giving up their time for free to make sure that they all trend towards what is accepted as a truth.

When I saw this, I had a fat chuckle: Top broadband speeds in South Africa. See that Cell C’s LTE speeds are absolutely awful. So whilst trying to attract people to their network to call, the others, including Vodacom and MTN (and even Telkom Mobile) have speeds much quicker. And data? well seemingly that is growing at a breakneck speed. So Cell C and their call for less might be attracting a lot of attention, but the future is data. And their data offering is ... how should we say, right down with Neotel and iBurst.

Byron beats the streets

Today I am writing about a very interesting business called Monsanto who released results on Wednesday. Some of you may have heard of this business because it operates in a very controversial industry, generic seed manufacture. There is an ongoing debate about whether this is a good thing or not. Generically modified food scares people. Here is how the company describe their business from the latest annual report.

"Monsanto Company, along with its subsidiaries, is a leading global provider of agricultural products for farmers. Our seeds, biotechnology trait products, and herbicides provide farmers with solutions that improve productivity, reduce the costs of farming, and produce better foods for consumers and better feed for animals.

We manage our business in two segments: Seeds and Genomics and Agricultural Productivity. We view our Seeds and Genomics segment as the driver for future growth for our company."

If you want more info go and explore their website Monsanto

Both the investment story and the environmental story are based on the following premise. Over the past decade 70% of the growing demand for food has been supplied by growth in acres farmed. This is of course unsustainable because land is finite. So are our jungles, forests, fresh water supply and nature reserves. Therefore to be able to keep supply up with demand, farmers need to grow the yield of their current land. That is where Monsanto comes in. They manufacture high-yielding conventional and biotech seeds; advanced traits and technologies that enable more nutritious and durable crops and safe and effective crop protecting solutions.

The business is very profitable. For the quarter, sales came in at $5.8bn which resulted in net income of $1.67bn. It is a massive business with a market cap of $61.5bn. That is bigger than Richemont, Naspers or MTN. Earnings for the full year are expected to come in at $5.24 per share. The stock trades at $117, 22 times forward. Not cheap but they are expected to grow earnings by 16.5% in 2015. As you can imagine earnings can be very unpredictable. Soybeans and Corn are their main products (top selling seeds), depending on the weather and all other things affecting crops, demand is volatile and dependant on many external factors.

As mentioned earlier, this technology is controversial. They have been adopted in the US and South America but it seems like Europe is not convinced. I chatted to a client of ours who is a farmer in the Natal Midlands and he said that commercial farmers have certainly adopted this kind of technology in South Africa. He said that over the last ten years his yield has increased over 50% because of better farming methods and technologies. This applies to the improvement of machinery, seeds, herbicides and technique.

Investment case. Populations are growing and so will the demand for food. Populations are also getting richer so demand per person will increase. Consumer patterns will also change as wealthier populations demand more meat. The feed for these animals will require high yielding crops. I would also see demand growing as farms in developing nations become more sophisticated, especially as subsistence farming shifts to commercial.

Environmental case. I strongly believe that it is fantastic for both the environment and for mankind. We still have hundreds of millions of people starving. Higher yields mean more supply and more importantly, cheaper prices. As far as the environment is concerned the biggest threat to every single endangered animal is habitat. If people are starving, protected reserves would have to make way for farmland. We have to increase the yields of our currently used arable land, especially in Africa. We are buyers of this stock at current levels. If you are on the other side of this argument please feel free to send me your side of the story.

Home again, home again, jiggety-jog. We are about flat here today. Which is not where we want the cricketers to be later on today. Phew. I guess that there have been so many people with their sports hearts shattered so many times before.

Sasha Naryshkine, Byron Lotter and Michael Treherne

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Wednesday, 2 April 2014

J-Louw to go

"To some it may come as a surprise, to others it is expected. The resignation of Dr. Jonathan James Louw as the CEO of Adcock Ingram was announced after market, the good doctor will go "pursue other interests". Which is code for I am not sure what. Think about life in the corporate world and have another go somewhere else. I have no doubt that he will pop up somewhere else, he is only in his mid forties."

To market, to market to buy a fat pig. Ukraine and the Crimean crisis seems so far away now. Hey. I forgot to divulge that not only was my great grandmother born in the Ukraine, but my grandmother (my mother's mother) was born in Sevastopol, the capital of Crimea. So that makes me an expert on both the Crimean region as well as the Ukraine. Lucky for them, they left swiftly around the time of the Russian revolution for greener pastures. They ended up in Algeria and then France, with my mother's family living in Paris. So I guess that makes me an expert on France then, right? Wrong.......

In Jozi yesterday equity markets closed at a record high. Did they? Yes. 48105 points to be exact, the intraday high was 48263. What is in a number though? There are many laggards and many new entrants into the upper echelons of the market capitalisation ranking tables. When the commodity stocks were roaring back in May of 2008, there was no listing of British American Tobacco back then, although arguably it was "there" inside of Richemont and Remgro. No Glencore Xstrata back then. Sasol was NOT bigger than Anglo American by market capitalisation. Yes. This is true now, if only by a whisker, Sasol in Rands is a bigger business than Anglo American. Naspers was not a half a trillion Rand company, by market cap. And Richemont was around one sixth of the price it is now, when it unbundled the cigarette business.

But yet, we only have twenty companies with a market capitalisation in excess of 100 billion Rand, Steinhoff the last on that list in twentieth place, with a market cap of 113 billion Rand. Likely to get bigger, right? More Steinhoff shares going to be issued for acquiring JD Group. Just last evening Steinhoff announced that it had received more acceptances for their offer to JD Group shareholders, and once the swap had been settled, they would own 83.9 percent of the furniture business. Guess who is the uncle now? Sorry, I am not an expert on company law, but read a guide from Bowman Gilfillan (so I must be an expert, right?) which suggests the following: "the compulsory acquisition of minority shareholdings when an offerer acquires 90% of the shares in the target." Watch closely.

Talking of unbundling, the talk that BHP Billiton could let go of their "weaker" performing businesses and focus on the core sent the price in London up 0.35 percent. Oh dear, that is nothing. The two ADR's (BHP and BBL) performed a whole lot better, BBL was up 1.85 percent, whilst BHP was up 2.05 percent in a rising market in New York. This morning the stock in Sydney is up 0.86 percent. Locally the stock added 1.76 percent. As in the old days when the sun never set on the British Empire (all their "territories" on a world map were in pinkish), the sun never really sets on the BHP Billiton share price.

I suspect that a slimmer and more profitable business would be appealing for the majority of shareholders. Bigger is not necessarily better. Talking of bigger, another announcement from BHP Billiton this morning, this time from their coal division: BHP BILLITON DISCUSSES THE GLOBAL OUTLOOK FOR COAL AT CEDA. Interesting, still very committed to their coal businesses. I have seen several broker reports upgrading the outlook for the company, and suggesting that this is a positive.

To some it may come as a surprise, to others it is expected. The resignation of Dr. Jonathan James Louw as the CEO of Adcock Ingram was announced after market, the good doctor will go "pursue other interests". Which is code for I am not sure what. Think about life in the corporate world and have another go somewhere else. I have no doubt that he will pop up somewhere else, he is only in his mid forties.

According to the 2013 Annual report, there were only 2 directors who held a total of 48,450 shares in the business, that represented a negligible amount that did not even register on the 201,128,009 shares in issue. In the two years as per the annual report (where directors remuneration is dangled in the open), Louw made good money, over 8 million Rand. He had however exercised options, the gains on those were 9.3 million Rand. Good work if you can get it. At the end of 2013 Louw held a mere 39300 shares. Loads of options though. But that is the deal. Check out the extent of those share options:

Phew. As well remunerated as one is in the corporate world, the shares and specifically options are the "best" part. Provided of course that the share price does well. Over the last three years the stock has gone sideways. Since they unbundled from Tiger Brands in August of 2008, the stock is up 71 percent. Measure that against the All Share index which is up marginally more than Adcock over the same time frame. But most of that outperformance of the all share index, against Adcock has been in recent times when the share price, post the PIC and Bidvest consortium (with CIH) having control of the business now, has fallen. The Chileans are gone. Poor chaps had a serious earthquake overnight, that is not that great.

So Bidvest essentially get what they want, a new management team with a new vision for the business. The new CEO will be announced in due course. I think that the only reason why I pointed out that he, Louw, had very few shares now, is a) it is not much of a issue in terms of an overhang to an already weak share price, but more importantly b) as a shareholder of any public company, you would want to have your interests aligned with the management.

I would want all the businesses that I won to definitely have management in knee deep in the business, as an equity holder. Management cannot control the share price, most certainly not, but they can control how well the business operates. And if their interests are aligned with yours, then you are in for a better ride. Not always, a lot depends on the business itself of course (you cannot give the best management team in the world a rubbish business to run), but as a shareholder it feels better when interests are aligned, and shares are options are not viewed as remuneration. I think Bidvest think this too, hence the resignation of the CEO.

Lynx, I'm reading this, you should too

These come around every month, the AIR FREIGHT MARKET ANALYSIS. The Middle East Freight market growing like crazy, but that is because Emirates, Etihad and Qatar are growing like crazy. They are collectively know as the MEB3, the Middle East big 3. What is quite interesting is that South Africa was weak, but the African numbers are volatile. Good to see that this is moving in the right direction.

The payment is nothing, really, but the principle is everything. So that is why when dealing with a payment of around 5000 Dollars you would not expect it to set off an international mud slinging match. But it depends if an American bank (JP Morgan) is being asked to pay a Russian bank that is on the "no-no" list. It happened, check it out: Russian threat to retaliate over JPMorgan block. File that in the drawer of unintended consequences to your actions.

Its jobs Friday. Not today, but rather this Friday coming. Today is the ADP report, the private payrolls. But, according to the Business Insider People Are Thinking The Jobs Report Might Be Really Big. More positive data for the markets, which in the US overnight saw the S&P 500 trading at an all time intraday high.

Home again, home again, jiggety-jog. Markets are higher again here. A new record high. Things must be really bad out there.

Sasha Naryshkine, Byron Lotter and Michael Treherne

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Tuesday, 1 April 2014

44 cents, what makes sense?

"So basically MTN and Vodacom will be forced to lower the rates while Icasa is given the time to reevaluate what is fair. What is even more unfair is that MTN and Vodacom have to pay their two smaller competitors more than double, 44c for the same service. That is anti competitive and not business friendly. Sasha makes a good point, Cell C have been around for more than 14 years. They are not exactly new, why the big regulatory helping hand now?"

To market, to market to buy a fat pig. We were at the opposite end of the hill to the Grand Old Duke of York who was up. And when he was up, we were down. A couple of reasons, having to catch up with Wall Street which had a sloppy close on Friday and dealing with a firmer Rand through the day. The news filtering through that the Russians were perhaps withdrawing after their "exercises" had finished on the Ukrainian border. That is good for the regional power (Russia) and the rest of us. I can imagine that the folks in Eastern Europe are petrified of the Russians, they remember and know too well. But the major boost came from the small in stature but colossal on the financial scene, Janet Yellen, the new Fed chair who gave a speech 25 minutes into the market being open yesterday.

If you are looking for the full transcript of the speech, then search no more, here it is: What the Federal Reserve Is Doing to Promote a Stronger Job Market. Much of the speech was translated by the Fedspeak experts that there will be no rate tightening any time soon. I am not too sure why the market always second guesses the Fed and what it is that they are going to do next, rather focus on the now and stock prices if that is your job. Paul nailed it in a tweet the other day:

Exactly. By chopping and changing your "strategy" all you are doing is incurring costs and incurring capital gains along the way. complicating your life. Just keep carrying on, adding to the existing quality, avoiding getting spooked or tempted when times are great or simply unbelievable (you see years of 40 percent up and 25 percent down) and just buy the best companies.

Markets locally lost a third of a percent, resources down around four-fifths of a percent. Just today there is news from China (where) factories struggle, adds to expectations for stimulus. That has been lending support for markets over the last few trading sessions, the Chinese are possibly going to be embarking on stimulus methods.

There were better trade numbers, depending on which way you look at it. These are Trade Statistics for February 2014, where depending on whether you include or exclude Botswana, Lesotho, Swaziland and Namibia, we recorded a trade surplus for the month of February or we recorded a trade deficit.

If Vladimir Putin was faced with this conundrum, perhaps he would just annex these four countries and suggest that they are ours, because the people there want to live here. What is most encouraging from this report is how we continue to export more to the rest of the continent, ironically the "African growth story" could be great for the country that is at the Southern tip of the continent. I always sigh when South African CEO's are asked what their African expansion story is. If you needed reminding, South Africa is part of Africa.

Just to finish off, the Yellen comments sent US markets higher, the S&P 500 added nearly four-fifths of a percent, the Dow Jones about the same amount, whilst the NASDAQ added just over a percent to end the quarter. The S&P closed the quarter out 1.3 percent, the Dow Jones down 0.72 percent whilst the Nasdaq is up just 0.54 percent YTD. Ourselves? Locally the all share index closed at 47,771, starting the year out at 46,256 points. So, up 3.2 percent over the last 3 months. 13 odd percent if you annualise that. Would you take that now? The market would end the year at around 52300 points.

Lynx, I'm reading this, you should too

OK, this is a little old, five days old to be exact, which in the technology world is longer than in the investment world. It makes sense and I am surprised that nobody has thought of it before, like most inventions actually. There is always an element of hey, why didn't I think of that? Apple Files Transparent Texting Patent To Help People Who Walk And Text. Added to that Apple news is that "sources" say that the New iPhone 6 screens to enter production as early as May. Nice.

I am a big fan of Michael Lewis and his books, they are always insightful and really well written. Is the market rigged though? Is Lewis just promoting his new book? Maybe he is just out there to make a splash for his newest book, Flash Boys: A Wall Street Revolt, which I intend to read. High frequency trading? Good luck with that. We are as ever at the opposite end of the market to the machines. See Andrew Ross Sorkin's take: Fault Runs Deep in Ultrafast Trading. Spot on Andrew!

Here we have Nkandla as the latest scandal, 250 odd million Rand equates to around 23 odd million Dollars. Zhou Yongkang and his family laugh (not anymore though) at that amount, this from Reuters: Exclusive: China seizes $14.5 billion assets from family, associates of ex-security chief: sources. Wow. the sheer size and scale. Just remind me, the Peoples republic, right? Socialism at its best here sports lovers. Not everyone however is in agreement, the FT (subscription only): Ex-president Jiang urges Beijing to curb anti-corruption drive.

It is April the first. Which means that if you thought that the Boks were going to turn out in red, then I suppose you were duped. How possibly could they wear Red and Gold against Wales, who have a scarlet jersey? But BHP Billiton are not in the interest of doing that and have released a SENS titled Market Speculation, which suggests that whilst they like there other businesses, they will focus on five segments, Copper, Iron Ore, Coal and Petroleum as well as Potash. Which means that those other businesses could be spun off.

Byron beats the streets: Interconnect rates

Yesterday the Gauteng High Court ruled on the much publicised interconnection battle between MTN, Vodacom (working as a team ironically) versus Icasa who are trying to drop these rates to 20c per minute (what MTN and Vodacom would charge Cell C and Telkom mobile). The ruling was bitter sweet for all parties involved and in my mind makes no sense. The court said that yes the new Icasa installed interconnect rates were unlawful and invalid but the order to stop them will be suspended for 6 months.

So basically MTN and Vodacom will be forced to lower the rates while Icasa is given the time to reevaluate what is fair. What is even more unfair is that MTN and Vodacom have to pay their two smaller competitors more than double, 44c for the same service. That is anti competitive and not business friendly. Sasha makes a good point, Cell C have been around for more than 14 years. They are not exactly new, why the big regulatory helping hand now? Telkom Mobile also have the benefit of a big corporate backer, they aren't exactly starting off from scratch.

As investors in both MTN and Vodacom we find the ruling encouraging but I will be interested to see what Icasa come up with. I am guessing they will have to up the rate a bit and close the gap between what the competitors have to pay. Surely it should be all equal. Eskom don't charge smaller businesses lower electricity rates because they are small compared to their competitors. Competitors need to find an edge and be worthy of their growing market share, that is what keeps the economy ticking. For example Cell C should draw in new clients because they offer a better data service, now that would benefit consumers.

Home again, home again, jiggety-jog. Locally we have crested 48 thousand points again on the All Share index, as stocks are up half a percent. Retail stocks have crept into the green again for the year. Amazing. Sector rotation? Errr... good luck with that.

Sasha Naryshkine, Byron Lotter and Michael Treherne

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