One trillion sounds like a lot

"So by some measures the SABMiller market cap is over one trillion, if your presumption is that the Treasury shares are not going to be retired and rather used by the business (I mean the shareholders) as remuneration for the top management. But technically, the short answer is that SABMiller did not really cross that mark yesterday, even though I had tweeted it earlier in the day."

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To market, to market to buy a fat pig. Whoa, lift off at around three in the afternoon, I do not have access to the figures that might suggest foreign participation being higher, but I got the sense that a weakening Rand sent industrial stocks firmer. SABMiller was the star that stole the show, up 5.58 percent on the day, sending the all share index up 1.2 percent. I was convinced that the market cap had crested 1 trillion Rand, that of SABMiller.

In the last annual report there are 1.671 million shares, multiply that by the closing price of 615.34 Rand and you get to 1,029 trillion Rand. But, diluted shares (share awards plus basic shares, which is ordinary minus treasury, basically) you get to 1.617 million shares in issue. That then equals 995 billion Rand. So basically another 5 billion in market cap to go, from here. Or a 3 Rand and 9 cent move in the price.

So by some measures the SABMiller market cap is over one trillion, if your presumption is that the Treasury shares are not going to be retired and rather used by the business (I mean the shareholders) as remuneration for the top management. But technically, the short answer is that SABMiller did not really cross that mark yesterday, even though I had tweeted it earlier in the day.

But wait, the last, the very last total number of voting rights SENS release (and I guess by extension the market cap) is 1,607,171,200 ordinary shares and 66,055,947 ordinary shares held in treasury mean that the combined number of ordinary shares is 1,673,227,147. Which means that the market cap is COMFORTABLY over one trillion Rand. But this is a case of when a trillion Rand is not quite a trillion Rand.

A few days ago SABMiller put out a SENS in which "Directors and Persons Discharging Managerial Responsibility" were provisionally allocated nil cost awards. Now a provisional allocation sounds like a seat at the theatre or a sporting event that you need to pay for, but in this case it is remuneration. From Alan Clark, the CEO through to Catherine May, the Corporate affairs director, 376,629 shares were awarded. Not a lot, or it does not sound like a lot, but in Rand that is 231,75 million Rand. Again, not enough to shift the needle in terms of market cap over that mark, but you get the whole picture, for these 12 individuals it is amazing.

But the other point that is worth making is that 1 trillion Rand in a global sense is not that much. Don't get me wrong, it is an enormous amount of money, but when you say, oh, SABMiller has a market cap of 55.78 billion Pound Sterling, it does not have the same impact of saying one trillion.

I guess in the same way that we struggle with South Korean market capitalisations, Samsung Electronics has a market cap of 185.5 trillion Won, it is 206 billion Dollars, that number. Both enormous numbers, but the brain is unable to quantify trillions. The Koreans should chop a few noughts off, for all of us. So should the Japanese, just for us, just so you can be reasonable in terms of the numbers. In the end it all boils down to what you are prepared to pay for the business today.

Some folks are talking about a merger of sorts, between a European company and this British company, SABMiller. This "British" company has an American business and as a result of that deal, Altria is the biggest shareholder. I cannot see a massive business merger, even if they (Anheuser Busch Inbev) at a market cap of 134 billion Dollars do actually have a go. Only real overlaps are the US, and companies know how to deal with that, unbundle! Nah, I would be very surprised if this happened.

OK, now that we have established that 1 trillion Rands is not as many Pounds, and that shares in issue for earnings and market capitalisations exclude treasury shares, that are eventually used either for transactions or remuneration, we can move on. There was another point I wanted to make on the platinum companies yesterday, but I ran out of time. I briefly touched on the supply side and a lack of constraints currently.

How is that possible? On the Platinum Wage Negotiations 2014 website, the lost revenue number is nearly 22 billion Rand and the employees earnings lost is now at 9.773 billion Rand. That other picture, the MINES ON STRIKE ARE UNDER WATER - Wage demand is pretty telling:

The dotted number is the 12,500 wage demand. The diamond represents the current revenue levels. So, either all projects must be put on hold and that will translate through to less production down the line, a bit of a toxic mix, or something needs to be squeezed out of those other costs, even without the mining companies accepting the 12,500 wage demand.

What needs to happen, if that wage demand is going to continue to rise is that the revenue line needs to rise. In other words, the platinum price needs to go upwards from here, and in a hurry. And in-between now and then, companies will also be under pressure. With Lonmin there is a rumour that they are going to have to go back to their shareholders with cap in hand and ask for more money. Wow. The Platinum and Palladium price should/could start moving soon.

I think that this next paragraph is worth highlighting. Like with any business, without any customers for your product or service, you basically have nothing. Then come the shareholders and other funding mechanisms, the debt holders, they provide the capital for the business. No capital = no business. And then come all company employees. No competent people, no proper business. Without all of these people, there would be no revenue to generate and no wages to pay, and as a result no taxation for government.

The reason why government are looking for a swift conclusion now is because I think the longer term implications of higher borrowing costs and lower revenue generated from these businesses is a real problem, not a temporary one. Government of course protects property rights and provides an infrastructure. Government is in the same boat as other investor, they need to borrow money in order to maintain and grow an infrastructure in order to collect more down the line. And if the cost of borrowing rises and you cannot build an infrastructure as effectively as you can, coupled with a downturn in tax receipts, it is tougher.

This is all coming to a head quite quickly, by the end of the week we should have a clearer idea of when ordinary people are going back to work. To get some insight into the lives of the ordinary people, check out this page from the Platinum Wage negotiations and scroll to the "How the strike affects me and my family" part. I am not sure whether all these messages are verified, but they are pretty heartbreaking, real stories of people seemingly wanting to go to work.

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Byron beats the streets

I must say we work in a very interesting industry. Well for us anyhow, everyone at Vestact is very passionate about markets. One of the things that fascinates me the most is watching consumer trends, where the demand is coming from and why these changes are taking place. In fact the way we consume things is being turned on its head by ecommerce and the internet as well as online payments and social networks. Of course we have put our stock selections where we feel these trends are growing. Naspers, Google, Visa, Facebook, Apple and Cisco all sit at the very source of our new consumption habits.

What spurred me to write about this theme was an article I found in the Wall Street Journal titled Global Hunger for Protein Fuels Food-Industry Deals. There are 2 drivers here. Firstly, as developing nations get wealthier they eat more meat because meat is considered a luxury. Makes sense. The irony is that meat was more abundant in the very old days, you just needed to know how to catch it.

The other driver is the shift in what people perceive as healthy. Most of us have heard of Tim Noakes and many people I know follow his protein diet vigourously. But he is not the only one. Diets in the US and in Europe are also very protein intensive and hence there has been big interest in protein manufactures in the market as the demand increases. As you will see from the article grains such as corn and soybeans which are used for feed have also been increased heavily by farmers who are anticipating increases in demand. Producers of eggs, dairy and especially yoghurt have also been doing well thanks to these diets, fascinating stuff.

So how do we benefit from these trends? We are already heavily invested in this theme. Woolworths, Holdsport and Discovery are all strongly involved in a more healthy lifestyle amongst South Africans. Tiger Brands are the number 1 processed meat producer in the country. Globally businesses like Nike, Nestle, Under Armour, Johnson and Johnson and now Apple with their health software, all stand to benefit. We have it covered, it is certainly a trend we see growing over a long period of time. People love to look good and love to be healthy.

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Home again, home again, jiggety-jog Markets are higher here. Mainly due to the weaker currency. Sadly. US futures are marginally lower here, just a bit. And although the S&P 500 registered a negative close, it was around one third of a percent off the lows. The Euro continues to weaken, that will be an interesting period methinks, and let us see if over the next six to nine months that there are slow signs of a European recovery.

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Sasha Naryshkine, Byron Lotter and Michael Treherne

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Posse pulls the plug, platinum impasse prolonged

"...when money was freely available during the go-go times, perhaps wasteful expenditure (and excess return of cash to shareholders) should have been used to make the working conditions a whole lot better for labour, it would have been cheaper and better. But instead you now have a workforce that feels it deserves better, government is essentially in that camp (if not AMCU, definitely their alliance partner) and the economics do not make sense. It is very stuck. And from that perspective makes the platinum industry un-investable in our view. It is all very nice to have the reserves in the ground. The platinum price could be worth 5000 Dollars a fine ounce, but if it costs 5010 Dollars to get an ounce out of the ground, you can't make a business of it."

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To market, to market to buy a fat pig. We saw a surge at the end of the trading day here in Jozi, the good old faithful industrial and resource stocks, taking cue from a weakening Rand sent the overall index to a closing high. Yes, I suppose that is good news if you are an index watcher. I cannot stress enough that the index level should not scare you, nor should you get market vertigo. I saw a simple post from Josh Brown that attracted a lot of attention yesterday, just take a look, it will take you all of thirty seconds, it is titled (in capitals) TURN DOWN FOR WHAT! Possibly all the events and worries over the last five years packed into a list.

And the outcome? Markets trading at all time highs. So what is the moral of the story? I think that those people who are looking for another event like 2008 to either get conviction of their current strategy or justify why they are owning x or y or z. And if the markets fall six or seven percent, or even ten in the next six months, those types will just say told you so. The companies that you hold, because you are not index trackers are more important. The businesses that have better prospects than their peers, those are the ones who's prospects you follow. Ah well, I guess our approach is not everyones cup of tea.

Talking about tea, this time this specific tea has gone cold. Again. Very cold. Last evening the talks between the platinum companies and AMCU have gone cold. Much excitement had been built around the government intervention in the talks. Some seriously irresponsible comments from a person that I didn't expect to say that, seriously? ANC secretary general Gwede Mantashe blamed the EFF and "White foreign nationals" for deliberately trying to destabilise the South African economy. Really? I am presuming that he has proof of this and will present it to all of us to substantiate those comments.

Last I checked, Lonmin's biggest shareholder, Glencore Xstrata (at 24,54 percent) had initiated a secondary listing here in South Africa late last year. Surely not them, right? The best outcome, for Glencore Xstrata would be a resolution. That is what their shareholders want no doubt. The two biggest shareholders of Impala Platinum are the Public Investment Corporation (13,3 percent) and the Royal Bafokeng Nation (13,15 percent). I am pretty sure that these shareholders have engaged positively with the company. And as we all know, these are 100 percent South African. Lastly, Anglo American Platinum (or Amplats) still has Anglo American as the nearly 78 percent shareholder, their shareholders in turn include Coronation (4,97 percent) and the Public Investment Corporation (4,51 percent). So, those are South Africans, even though the majority of Anglo shareholders are not South African. Most of their (Anglo) employees are South African however, as per their last annual report 99,500 folks of the 158,900 workforce work inside of our borders.

But the point I am trying to make is that the shareholders have nothing to gain by having the situation unworkable, Anglo are stuck here. Whether or not you or I think that the salary of everyone needs to be higher, you need to match it with the skill set. Should an underground worker at a mine earn more than a school teacher here in South Africa? Payscale tells me that the average high school teacher in South Africa earns 147,609 Rand a year. If the mine workers at AMCU want 12,500 ZAR a month (I am not sure with or without benefits), then that is more than the average teacher earns.

First things first, to become a teacher, you need a Matric, a school leavers certificate that will get you into University, not just a pass. You will then need a Bachelor of Education, and to specialise in a specific subject you will need to do a post graduate certificate in Education, four years full time. And only then can you become a teacher. So, which one do you think should be remunerated better? Because it is all very nice to say that the CEO earns this or that, but what are their qualifications? What is their pedigree? To presume that the rank and file and the upper echelons of management are exactly the same is the wrong presumption. More to the point, the platinum wage negotiations website have a comparative wage settlement. That is a better comparison to teachers, one can be clear when one says that the skill sets of teachers and mine workers are worlds apart.

I am afraid that the companies will deal with this in a way that is unfavourable for everyone, all stakeholders. The Lonmin release this morning says it all, of what I think is going to happen next: "During this process the producers have sought to arrive at a fair and sustainable settlement that would preserve the future of the platinum industry and limit job losses in the country. While the producers remain committed to a negotiated settlement, they will now review further options available to them."

That is partly cryptic. But I am pretty sure that everyone is interpreting it in exactly the same way that I am. The mines that are unprofitable are going to be sidelined from production. Closed, until the platinum price is much higher. The reason why the platinum price is not higher is because there is more supply in a very small market from physical hoarding and jewellery.

Unfortunately for these companies government views these businesses the same way as parastatals, employment opportunities. And more unfortunately pockets in private enterprise are only so deep. For example, and perhaps using an airline as an example is bad, but SAA clocked a 990 million Rand loss in 2012/2013 (from a loss of 1.3 billion the year prior) but employed more people. A wage bill of 4.8 billion Rand for 11500 staffers. The average salary then at SAA, a business that has lost over 2 billion Rand in two years, is 417 391 Rand per annum. Based on dividing the one by the other. Nice work if you can get it, it seems.

A comparative business, Comair, paid 671 936 000 Rand to their 1912 employees, as per their 2013 annual report. Average wage over at Comair, a business that is actually profitable? 351 431 Rand. Comair does not have a 5 billion Rand government guarantee, they are challenging government and their guarantee, we will see. Their market cap is only 2.135 billion Rand. But they sure do a better longer term job for their shareholders. I would prefer full scale privatisation of SAA, that money can be better used on infrastructure, the government would get far better bang for their buck, we would all feel better about that. Other than SAA of course. I don't know, what are your thoughts on the matter?

There are 15 board members at Comair, 24 at SAA. I can't find the board member remuneration at SAA, at Comair it is easily available. Why do I use the Comair/SAA comparison when talking about platinum mines? Because I get the sense that government view the mines as employment opportunities and that miners ought to be paid more, because historically labour was taken advantage of, there is no escaping that the argument for higher renumeration for past exploitation is not a valid one. There is no denying that. But relative to the skill sets, and separating the idea of a private enterprise relative to a public one is important in my mind. Very important. If you want to read a very, very long analysis of why platinum mining is important to all of us, read Cees Bruggemans piece in Biznews -> Why platinum crisis affects every South African.

Michael makes a good point, when money was freely available during the go-go times, perhaps wasteful expenditure (and excess return of cash to shareholders) should have been used to make the working conditions a whole lot better for labour, it would have been cheaper and better. But instead you now have a workforce that feels it deserves better, government is essentially in that camp (if not AMCU, definitely their alliance partner) and the economics do not make sense. It is very stuck. And from that perspective makes the platinum industry un-investable in our view. It is all very nice to have the reserves in the ground. The platinum price could be worth 5000 Dollars a fine ounce, but if it costs 5010 Dollars to get an ounce out of the ground, you can't make a business of it. No business = no employment, no taxation, no returns for anyone = no investment.

It is a good thing that we have amazing businesses outside of this core industry for South Africa. We really have amazing potential and superb captains of industry. They need reasons to invest here locally. We punch comfortably above our weight. And that is a good thing. Unemployment, the official number might be more than one in four, but that also represents a massive opportunity for many people. It is easy to get down on yourself when thinking deeply about the solution on the platinum belt as being unobtainable. Equally apply your mind to prospects of existing businesses here, businesses that are expanding across the borders and selling South African products to the rest of the continent. Those opportunities are real and many local businesses have pursued them, with mixed successes.

Think, twenty years ago MTN did not exist, today the business is worth 430 billion Rand. Vodacom did not exist 21 years ago, now they are worth 188 billion Rand. Both these businesses have provided an enormous amount to the Treasury coffers and have employed thousands of people. Aspen Pharma has only been listed since 1998 and is worth 129 billion Rand. Discovery is a little over 20 hearts old, covers around 3 million South Africans and is worth nearly 54 billion Rand. So whilst you may feel down in the dumpsters about the situation along the platinum belt, know that the mix of the country has changed, in terms of different parts of the economy. And that we can continue to produce quality in other sectors, that will be profitable and contribute to the state coffers and provide gainful employment for thousands of people.

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Michael's musings: Sasol moving forward

Yesterday Sasol released their trading statement for the first 9 months of their financial year. Below is their operational performance.

The financial details are vague due to this being an interim statement but most of the numbers seem to be pointing in the right direction. Their production numbers are up and the Rand is 20% weaker this year compared to last year. Having the selling price of their goods guided by what the Rand is doing a weaker Rand is a good thing.

The first number to stand out is the 3% drop in their Canadian Shale Gas asset. The Canadian assets consists of Sasol's 50% share in two gas fields. These are the same gas fields that they took big write downs on previously, caused by lower natural gas prices.

The biggest rise in production is in their ORYX GTL plant located in Qatar which they own 49% of. The reason for the big increase in production is due to the plant having been down for maintenance in the previous period. It currently runs at 93.5% capacity and they expect it to be higher in the remaining months of the year.

The most important number though is their synfuels business which accounted for R28.6 billion of their R40.6 billion in operational profits. Comparably the synfuels operation is up 4%, and for the full year they expect to be at the top end of their volume guidance.

A feather in their cap would be "Based on our interactions with Standard and Poor's (S&P), and after having performed a sovereign stress test, S&P revised its outlook on Sasol from negative to stable on 15 May 2014"

There was nothing major in the announcement, which was seen by the share price not moving much. The reason to buy the company is if you think that natural gas is the future for energy generation in the world. As it is from where I sit, natural gas will be the step between fossil fuels and renewable energy.

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Home again, home again, jiggety-jog The Rand is weaker, there is potentially a ratings downgrade coming our way towards the end of the week, as far as I am led to believe. Does it matter? Yes and no, anyone doing their homework on investing in our government bonds will know this news in the same way that everyone else does. Not new. You know what.

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Sasha Naryshkine, Byron Lotter and Michael Treherne

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Apple splits, could get core

"Of all of those companies, Apple (the biggest by market cap) through to JP Morgan, only Apple and Wells Fargo are not Dow Jones Industrial Average components. Wells Fargo I can understand, the definition of Industrial companies is non financial, and whilst Apple might well be considered by some as the largest hedge fund in the world (all that cash 150 billion Dollars of it), the company is a hardware and software one. I suspect that in a matter of months we will see a review and Apple will replace one of the other companies in the Dow, the question is, which one? Intel or IBM? Or Cisco?"

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To market, to market to buy a fat pig. It was a number that the trading people would have hated, the unemployment report was almost dead inline with what expectations were set at. The very biggest data release and nothing for them trading types to do. US markets did however end at an all time high, the S&P 500 printed 1949.44. That is pretty apt, reason being that all the jobs "lost" during the last recession have all been added back. I wonder however if anyone has done a detailed analysis of what jobs were shed (construction is an obvious one, government is another) and what jobs have now been added back. Healthcare is obvious. I am guessing that some jobs do not come back. Ever. Because mechanisation replaces people. Government in the US alone however is 637 thousand jobs off the highs, that is around three months worth of additions at the current run rate.

In advanced societies much of the manual work is replaced by robotics, in Japan I saw Friday that Softbank CEO Masayoshi Son unveiled Pepper, a robot that knows how you feel. No really, see this Mashable article with the headline that says it all: SoftBank's New Robot Knows Exactly How You Feel. (That's Creepy.) Did you see those applications? The last line of the article suggests that robots like Pepper could be unveiled (at a cost of 2000 Dollars each) in some of Softbank's retail outlets. Softbank are of course a mobile service provider, imagine a friendly robot giving you advice on a mobile handset, or tablet, would it be impartial advice or would the robot be exactly that, clinical? All it means however is that if you have a job in a retail outlet at Softbank, the company is looking to replace you with a machine. Which is not good news for that person, but very good news for the company.

Back to these jobs numbers Friday. Those are important I think. The reason why I say I think is twofold, the trend is important, it is better to be adding jobs than to be shedding them and secondly, whilst this may be seen as the single biggest number for traders, this is a reflection of the US economy. But trying to work out whether this report is more important than the prior one, that is too hard. One thing I am glad for is that Bill McBride has decided to shelve his "scariest jobs chart ever", check out his post: U.S. Employment at All Time High. See that table, the 8.7 million jobs lost in 2008 and 2009 have all been wrestled back. And if you explore the nonfarm payroll employment data, you will see a much bigger trend, that we alluded to earlier. Healthcare jobs.

It is only the start, in our opinion that is. Over 20 percent of the populations of Italy and Germany are over the age of 60. Now there are people over the age of 60 that can run the Comrades probably faster than I will ever be able to, but the point is that if your population is ageing, you will need to spend more as a percentage of GDP on healthcare. In the US the number is higher than in any major developed nation in the world. It makes sense however that if you look at a map of Europe (this one specifically -> Ageing of Europe) shows you that all the young people are in the East. So migratory patterns could open up in due course. But of course, there will continue to be greater mechanisation in Europe, to help with manual tasks.

On the same topic of employment, but this time much closer to home. And there is absolutely no way of sticking lipstick on this pig, being the relations between labour and business. Government were somehow seen as power brokers and everyone seemingly got excited about a quick resolution. The new minister, Ngoako Ramatlhodi said on the weekend basically that his work was done -> 'Enough work done' to resolve South Africa mines strike: minister. I cannot see how both sides will suddenly meet in the middle. More especially when I saw a story like this from MiningMX on Friday: Gulf in SA productivity rules out wage hikes. Oh dear.

In fairness to labour in this part of the world, we have the deepest mines in the world. And as such, because in Australia much of the bulk mining is open cast, costs will be lower and productivity will be higher. What is marginally amusing for us South Africans is that the Aussie flag is upside down there, or down under, I wonder why that mistake was made. I am pretty sure that champions of capital will use this report, from Roger Baxter and the Chamber of Mines to further their argument of why the two are connected. Productivity and pay. But then again, the people making the argument do not have to don a pair of overalls and a hardhat, descend over 2000 metres below the surface of the earth (basically below sea level) and work for a pretty ordinary wage.

But then again, companies cannot attract more capital if there is no return. Shareholders of companies cannot be forced to put money to work if the only result is for the "stakeholders" to lose in the medium term. It simply will not happen, because the shareholder register has changed dramatically, many, many times over at the same businesses being asked to readdress the inequalities of the past. Plus the employees at the respective businesses, all the way up and down the corporate structures, how many of those folks are still around in the same position? The more I think about it, the more that I think that the unfortunate truth is that these businesses are not going to attract much more capital. Their risk levels have been elevated. There will be solutions and they will protect capital, that is my feeling. Whether you believe that is the right or wrong thing socially, that is another story altogether and one that is ongoing and evolving in a South African context.

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Do not freak out when you see the Apple share price down 85 percent today, until of course everyone figures out that the company today does their 7 for 1 split. Why seven for one, I am not exactly sure. In the original announcement, in April this year, no reason was given: Board of Directors also Approves Seven-for-One Stock Split. The only people who really care whether or not your share price is "high" or "low" relative to one another are the folks who manufacture the index. If you read the DJ indices website Overview section, I notice something strange about the inclusion mechanism. The 30 stocks now in the Dow Jones Industrial Average are all major factors in their industries, and their stocks are widely held by individuals and institutional investors.

So why would Apple, with their nearly 580 billion Dollar market cap not get a look in? The last reshuffle was done in September last year, with Nike, Goldman Sachs and Visa coming in. But the folks creating the index, that is supposed to represent industrial America, have not included Apple because of their "high" share price. There is a divisor, which takes all 30 share prices, adds them together, and then multiplies by that number by 0.125552709. I don't know about you, but this seems like a made up index that was good a number of years ago, but perhaps not as relevant today. I expect Apple to be included in the index soon, but that may mean nothing but bragging rights.

More important for the average investor is to follow the broader market, the S&P 500. As per the fact sheet, which you download from there, then find Methodology Construction, the quick facts represent something easier, from a level point of view. Biggest company, Apple. Check it out, from the fact sheet.

So. Of all of those companies, Apple (the biggest by market cap) through to JP Morgan, only Apple and Wells Fargo are not Dow Jones Industrial Average components. Wells Fargo I can understand, the definition of Industrial companies is non financial, and whilst Apple might well be considered by some as the largest hedge fund in the world (all that cash 150 billion Dollars of it), the company is a hardware and software one. I suspect that in a matter of months we will see a review and Apple will replace one of the other companies in the Dow, the question is, which one? Intel or IBM? Or Cisco? Or will another non-industry related company exit? Coca-Cola? United Technologies? We will see sooner than one thinks.

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Home again, home again, jiggety-jog So Nadal won 9 French Open titles. Well done to him, that is amazing. Martina Navratilova won 59 Grand Slam Titles, 18 singles (including 9 Wimbledon titles), 31 Doubles titles and 10 Mixed double titles. There are 12 of these a year. That means, she basically shut every single person out of a title for a full 6 years, bar for one. That is more amazing than any other sporting record, and I am talking major sport here. Taking if which, why do India and China not have football teams that compete? Great article sent to us by a client and friend: two halves. Amazing, only 6 million Indian folks watched the 2010 Football World Cup Final.

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Sasha Naryshkine, Byron Lotter and Michael Treherne

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Sasol. Ja, no, well, fine.

"Sasol at the same time are adding value. Much of the concerns when it comes to African countries is the exporting of raw materials without adding value and then having to import the finished goods back at a premium. Yes, Sasol may have been reliant on the state in the past but today they are one of the countries biggest assets. In fact they are one of the biggest contributors to our fiscal system. Last year they paid R30.8bn in direct and indirect taxes. Wow! (They can probably just consider this fine an extra tax and feel good about it.) "

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To market, to market to buy a fat pig. So one of the big stories yesterday locally was that the market closed at a fraction of a few points higher than 50 thousand exactly. If you are a level watcher then you would have seen that the Dax in Germany broker 10 thousand points for the first time, with the ECB standing by and indicating that they would do more after having cut their deposit rate to negative. And in so doing, become the first MAJOR bank to do this. Or so that is what we were told yesterday, I thought to myself, haven't the Swiss done this before? The Danish did it too, but with all due respect to Lurpak butter and Lego, Denmark and their national bank are not exactly major. Sweden have done this too, most recently in 2009, that is now five years ago.

So what exactly is a negative deposit rate? How would it work? The Central Bank allows commercial banks to "keep" their money in overnight facilities, because they are the most trustworthy of all the banks. It is about as safe as you could possibly get, you eliminate counterpart risk. To use an old adage, you are not going to lose any sleep at night worrying if you will get your money back. But in this case, if the rate goes below zero, you are paying the central bank a little, not much, but a little just to park your money. That is right, for the privilege of having your funds safe with the European Central Bank, you pay them a rate of -0,1 percent. Oh bother. But before you say why and what for, know that in real terms you are basically getting a negative rate. Why? Because the deposit rate is below the inflation rate anyhow, that is normally always the case for funds deposited.

Bob McTeer, an ex central banker with the Federal Reserve has a fabulous piece titled The ECB's Negative Interest Rate, where he points out that "minus 1/10 of a percent isn't all that much lower than zero percent" and that "everyone by now is used to earning negative real interest rates on our deposits at banks since the close to zero nominal rates are negative in real terms even if inflation is very low." The point Bob makes at the end is the one Michael and I were debating yesterday. The key of breaking credit for businesses, is this going to motivate banks in the Eurozone to lend to business? And are businesses going to take the risks at these crazy low rates to expand?

In delivering the announcement yesterday, Mario Draghi, the ECB president once again proved that there are many unconventional methods to be used. Along with the negative interest rate, there was a program called targeted longer-term refinancing operations, or TLTRO's. Huh? This program will end in September 2018 and will be designed to encourage banks to borrow more money, of course to lend it out. The explanation: "Counterparties will be entitled to borrow, initially, 7% of the total amount of their loans to the euro area non-financial private sector, excluding loans to households for house purchase, outstanding on 30 April 2014." So this is for the industrial sector. And is designed to "make" credit freely available to businesses that want it.

Mario Draghi actually answered how this is all going to work, in the Q&A portion of the press conference. The question was, why not embark on asset purchases, i.e. QE? To which Mario Draghi answered: Let me say that we've done this. We think it's a significant package. Are we finished? The answer is no, we aren't finished here. If need be, within our mandate, we aren't finished here. So we know that the ECB will basically do whatever it takes and continue to do whatever it takes.

Another question which deserves attention, How long do you expect it will take for the full effect of these measures to develop? was answered by the astonishingly cool Draghi, with his Italian accent (that is ultra cool): The package has basically three parts. The first part is to ease the monetary policy stance. The second part is to enhance the transmission to the real economy. And the third part is the reaffirmation that we'll also use unconventional instruments if needed, if further easing is needed. So it is clear. If these measures do not arrest the current deflationary environment across much of Europe, the ECB will be forced to implement more measures, and ultimately asset purchases, if the Germans eventually agreed to that.

Now, the response just needs to come from the real economy and financial institutions possibly have been nudged in the right direction with these programs. And hopefully it has the desired effect, although it is likely to take months. And as such, many in the short term will question this (as usual), if I was the ECB I would provide frequent and many updates on the progress.

The reaction from markets? Germany closed below that mark, after having breached that. The FTSE was lower. The CAC40 was higher. The FTSE, as a result of heavy resource exposure, is trading further away from their 52 week highs than the other European markets. Meanwhile, Europeans are meeting today. Another sort. I was just thinking, the Americans, French, the English and the Dutch and Belgians, as well all the other Allied nations celebrate the D-Day Normandy landings, what do the Germans think when this day comes up every year? The G7, that is sans Russia, is meeting in Brussels. But Putin is "there" for the D-Day stuff, but not the G7. Not welcome. What is welcome is that the tensions in the Ukraine seem to have dissipated somewhat. Somewhat.

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Byron beats the streets

Yesterday The Competition Tribunal announced a R534 million penalty on Sasol for overcharging within their chemical division between January 2004 and December 2007. Before we go into the details of the fine lets just put that value into perspective. In the 6 months ended December 2013 Sasol's energy cluster alone made R21bn operating profit. The Chemicals cluster made R3.6bn. When this news was announced the share price barely shrugged. The point I am getting at is that the amount is not significant. But it is important to evaluate for the future of Sasol as well as the kind of rhetoric to expect from influential institutions like the Competitions Tribunal.

From the release, this passage is the crux of the argument.

"Much of the Tribunal's judgment focused on the historical context within which Sasol was established, the significant State support and the protection which Sasol received over the years. These measures, the Tribunal found, contributed to Sasol Synfuels becoming one of the lowest cost producers of feedstock propylene, a by-product of Sasol's fuel production. Because of Sasol Synfuels' low feedstock propylene costs, SCI is a low cost producer of purified propylene and one of the lowest cost polypropylene producers in the world. SCI argued in the hearing that the Tribunal should ignore this cost advantage in arriving at its decision while the Commission argued that the cost advantage should be taken into account.

The Tribunal decided to take the cost advantage into account, finding that SCI's market positions in the markets under scrutiny were not the result of risk taking and innovation on its part since it has not engaged in any significant innovation in the production of either purified propylene or polypropylene, but rather due to past exclusive or special rights, in particular very significant historical state support for a considerable period of time."

So basically the tribunal is stating that Sasol's previous state support has resulted in a monopoly type position which they do not deserve to exploit. I guess that makes sense. Monopolies can be dangerous and do need to be regulated to a certain extent. But on the other side of the coin Sasol have very efficiently taken advantage of a fortunate situation. Just like the cement industry takes advantage of the abundance of limestone available or the Chinese have used their massive labour force to their advantage.

Sasol at the same time are adding value. Much of the concerns when it comes to African countries is the exporting of raw materials without adding value and then having to import the finished goods back at a premium. Yes, Sasol may have been reliant on the state in the past but today they are one of the countries biggest assets. In fact they are one of the biggest contributors to our fiscal system. Last year they paid R30.8bn in direct and indirect taxes. Wow! (They can probably just consider this fine an extra tax and feel good about it.)

But that is not all, they provide around 40% of South Africa's petrol requirements. That means that we need to import a whole lot less oil which is great for our trade figures. Sasol is not just important for shareholders (which includes the PIC) but for the whole country.

As you know, capital has choices and Sasol are currently spending billions of Dollars in the US. I wouldn't say it is purely because they are negative about South Africa, there is certainly a potential gap in the US gas to liquids market that only Sasol can fill. But these kind of findings is not helping the cause.

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Home again, home again, jiggety-jog Jobs Friday today. It is going to be an amazing spectacle, an octobox fest! If you do not know what that is, please check out your favourite business news sources at and around 14:25 JHB time, all the way through to the market opening. You will see what I mean about the overhyped and most pumped up number the market sees once a month. But all fun, provided of course that you are not at that end of the market.

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Sasha Naryshkine, Byron Lotter and Michael Treherne

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Richemont. Watch timeless in motion.

"China/Hong Kong accounts for 24.1 percent of total sales. Their next biggest country by sales (and this includes everywhere) is the USA, with 11.8 percent of total sales. Japan is next at 8.3 percent of sales and only then France, which comfortably outsells all other European markets, but only represents just shy of 7 percent of all sales. So whilst Europe as a region represents 37 percent of all sales (Asia is bigger), it is fragmented. But the strong growth, if you look over a five year period has continued to come from Asia. Total sales, for Richemont, have more than doubled (up 105 percent) in five years, Asia Pacific has grown by 143 percent."

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To market, to market to buy a fat pig. Ha, ha, apologies, the ECB meeting announcement is today and not yesterday. But hey, we not really interested in whether the Euro drops 50 bips after the announcement, we are not at that end of the market. Yesterday the Jozi ALSI managed to crack the 50 thousand mark again, and closed within a whisker of that mark. I am sounding obsessive about a number for someone who said that they did not really care. Hey, of course I care, but no level is really key. I wish we rebased back to five thousand points, then the average market commentator would not feel so dizzy anymore.

Across the sea in the US markets were buoyed by better than average economic data, in the form of motor vehicle sales that annualised which were at the best level since 2007, in fact the seasonally adjusted annual rate of 16.7 million represents a 9 percent increase from the previous May. Although it must be said that the last 12 months have produced some volatile numbers in this regard. Perhaps pent up demand after a colder than usual winter (ours arrives later tonight and tomorrow). You would not buy a new car unless you felt safe about your job, your prospects and so on. Also lending a hand in the positive corner was a services read, or the ISM non manufacturing index, which increased to 56.3 for the month of May in the US. New orders and employment moving in the right direction.

Sadly our local manufacturing PMI read on Monday was a shocker, the headline says it all PMI^™ continues to tumble, business and employment indices fall sharply. Most worrying was that single line: the employment index fell sharply to 37.2 index points - the lowest level in five years. Yech.

On the same page as the local PMI, OK not nearly as bad, was a softer than expected ADP employment report from the US. But hey, these reports on labour are volatile, especially when you have a civilian labour force of 155.421 million people. That is pretty big. The US civilian noninstitutional population is 247 million strong. The size and scale is mind-blowing. That measure (civilian noninstitutional population) is if you are 16 or older, living in the 50 US states and not a prison, mental facility or home for the aged, or on active duty in the armed forces. That is a bit rude that when you reach your golden years you are thrown into the same category as someone who is incarcerated, don't you think? But I guess that economists are not using emotion here. Anyhows, consensus for the ADP employment report for the month of May expected somewhere in the region of 210 thousand new jobs, the official report printed at 179 thousand number. It seems that the pace of large businesses hiring held the numbers back, small and medium businesses were responsible for hiring. Which is good news.

The beige book, which represents the current economic conditions for the 12 Federal Reserve Districts was also released last evening our time. Moderate and modest were the words used to describe economic activity, with only the Kansas City District showing slower than before economic growth. OK, so all these measures continue to give a slightly mixed picture and that is why I guess there are many people who are not quite believers yet and are determined to see a pull back in the equities market. And those always come.

But if you spend your life out of the market looking for something that does not happen regularly, you miss all of the best gains. Do not predict what is going to happen in the stock market. Speak to real life people and adapt (and more importantly adopt) a view on which company is best placed. Read as widely as you can, read the glossies, make sure you study the annual reports. We love companies, it is what we do, follow the fortunes of businesses and they have a measure, their returns to shareholders. Be that by way of ever increasing earnings that will see the share price rerate accordingly, or a strong dividend flow, or a combination of all of the above, the market pays today what the balance of the buyers and sellers think is the best price. If you don't like that price, then stay away. But to suggest that the price should be at X or Y does in my opinion smack of a little arrogance. You are basically telling the rest of the market that they are dumb.

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Talking of annual reports, I saw the Richemont one yesterday, it is available to download: Annual Report. On reading the report it cemented the investment thesis, one cannot underestimate the quality of the brands and the enduring qualities that have been built over centuries. The company is essentially a jewellery manufacturer and seller and a specialist watch manufacturer (nearly 80 percent of sales) and seller. These are devices and pieces that can be kept in your family for generations, I was once reminded by a client who rightfully took objection to a remark that I had made about a fancy watch. Montblanc is not necessarily one of their businesses to worry about, it is less than 7 percent of sales (6.85 percent to be "precise"), but that business has been flat for three years, sales wise. I guess the percentage contribution from a sales perspective will look less in time.

Equally, the rest of the business, which represents 14 percent of total sales and comprises of Net-A-Porter (online), Purdey (shotguns, really!), Peter Millar (high end golf essentials), Chloe (bags and accessories), Dunhill and Lancel are in a similar sort of market, whilst Shanghai Tang is a 20 year old clothing and accessories business. Some of these brands are new, some of them are old, accessories and leather goods obviously are affordable luxury. Oh, sorry, forgot shoes, Alaia, named after the Tunisian designer Azzedine Alaia. At Net-A-Porter you can find anything that is branded and is in the luxury space. The Richemont subsidiary touts themselves as The world's premier online luxury fashion destination.

There were rumours earlier in the year that Richemont were looking to sell this business, Bloomberg reported that the business (just the online website) would fetch around 3.4 billion Dollars. Richemont bought out the other shareholders in 2010 (they own 93 percent) for an undisclosed sum, although the WSJ suggested at the time that it was worth 350 million Pounds in total. Which is a lot less than what the business is supposedly now. It is difficult to tell what the annual turnover of this business is, but it is growing like gangbusters. Their call centre fields over 1 million calls a year, their 200 plus call centre agents converse in 23 languages and most importantly (for me) the founder and chairperson, Natalie Massenet is still in charge, to a certain extent. Collectively these "other businesses" made a loss for the year, this is the third loss for this division in a row. Selling other peoples products and high end leather and other accessories is hard work. Selling a very expensive branded necklace and watch, not so much.

The trends are interesting, their own branded stores, i.e. through their own retail channels saw strong growth, up 14 percent in constant exchanges. That means that people wanted to go to the branded stores and buy their products, rather than through the wholesale channels. In other words, if you bought your Cartier in a Cartier store, it counts as a retail sale. A wholesale would be to partners, perhaps wanting to keep stock to a minimum and reflecting some caution in the industry. The other major change to note, and I am sure that this is a conscious thing from the company, is that sales through their retail channels five years ago were 40.7 percent of total sales, in the last financial year that jumped to nearly 55 percent.

This is a global business. China/Hong Kong accounts for 24.1 percent of total sales. Their next biggest country by sales (and this includes everywhere) is the USA, with 11.8 percent of total sales. Japan is next at 8.3 percent of sales and only then France, which comfortably outsells all other European markets, but only represents just shy of 7 percent of all sales. So whilst Europe as a region represents 37 percent of all sales (Asia is bigger), it is fragmented. But the strong growth, if you look over a five year period has continued to come from Asia. Total sales, for Richemont, have more than doubled (up 105 percent) in five years, Asia Pacific has grown by 143 percent. This trend should continue, the crackdown on gifting amongst Chinese government employees has probably put a lid on sales in that region. Currency headwinds from the prior year are likely to unwind and I guess we could see a normalised currency environment, less volatility.

Fine things are enduring. Jewellery and watches, again, the emphasis on not being able to replicate the brands is important. On reading the report, I step away and have the same conviction that this will continue to be a very compelling investment, and one that is a keeper. We continue to keep Richemont on the buy list.

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Home again, home again, jiggety-jog Markets are a little lower here locally, we have not really seen any reaction to the ECB stuff yet. Stand by for later. And then the hyperactivity part of the market is looking for the jobs report tomorrow! Exciting, as ever.

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Sasha Naryshkine, Byron Lotter and Michael Treherne

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You should pay more to fly

"First, it has possibly never been a better time to be a global traveller, provided that you can afford it of course. Air travel is still unaffordable for many people, but is distinctly middle class and above, in terms of affordability nowadays. Secondly, it seems as if from an investment point of view, that this is almost never an industry to be invested in. The first commercial flight in the US carried a single passenger on the 1st of January 1914 (my late grandfathers birth date) from St Petersburg (Florida) to Tampa, all of 23 minutes. And the cost? 400 Dollars, in the open, and on a wooden bench."

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To market, to market to buy a fat pig. Another day of push and pull, markets in New York recovered strongly from their worst points around midday, but still finished lower albeit slightly on the day. Locally the same was about true, a relatively small fall on the day, the Rand still remains weak, which does not really bode well for what was an improving outlook for local inflation. There was seemingly some afterglow in the Apple share price, post the delivery of the new software, which is only really available for us come spring time here, I guess that is in the fall in the US. The fall is seemingly a better way of describing the season where the leaves fall down, the word Autumn originates from the inhabitants of modern Tuscany, they were called Etruscans. Not too much is known about them, seemingly they left little other than a few artefacts here and there. Oh well, thanks for the word! I suppose that means another excuse to visit the region again.

OK, Apple and Autumn aside, this is a big week for jobs data. Today we have the ADP number, which is always the precursor to the big unemployment data from the department of Labour on Friday. The jobs report, where guessing the number is some kind of a sport, the only blood spilt I guess is on the screen where the trading gladiators battle it out. There are also European Services PMI numbers out this morning, the ECB will no doubt cut rates at this next meeting. And that next meeting announcement is today. If you want, you can watch the webcast, if you have no access to a television.

Mario Draghi is an amazing guy, the ECB president. A PhD in economics from MIT in 1976 is about as good as it gets, academically speaking. His credentials speak for themselves, professor at University of Florence for nearly a decade and a half, A brief stint at Goldman Sachs International (as vice chairman), but then central banking, governor of the Bank of Italy and finally the top job at the ECB from 1 November 2011. He is possibly single handedly responsible for the start of the charge at the Euro sceptics, thus reducing the borrowing costs of Spain and Italy and in the process seeing Europe return to growth after a lengthy period of austerity.

Deflation is actually the worry now. Italian inflation was actually zoning in on 4 percent in 2011. Now there are very modest growth rates with plunging inflation. Cheaper prices mean that the soft demand side delays their very necessary purchases and the cycle sometimes can perpetuate. Added to that is the debt issues which have hardly gone away, the wolves however have been booted from the door and it is safe to go outside. There is set to be the unusual reduction of interest rates to a negative rate, which should then spur banks to lend the money out more aggressively, rather than "earn" negative interest parking it at the ECB.

But are bank customers and businesses inside of the Eurozone ready to borrow money? That is more important than any stimulatory response from the central bank. As this WSJ article points out however -> ECB Seen Ready to Tackle Europe's Weak Inflation Problem, QE is not a subject that the Germans are willing to tackle head on, just as of yet. You know, the whole Weimar Republic hyperinflation. But that was as a result of the victors breaking Germany and demanding more, the London Ultimatum, the Germans forced to send 26 percent of export revenue to the allied powers. The original schedule had the World War One reparations at 33 billion US Dollars (that was 1921), that was 132 billion Marks. Germany in the end paid the equivalent of 21 billion marks, I guess a sum roughly equal to 5.2 billion Dollars, in todays Dollars, around 67.1 billion. Not really that big relative to the economy of Europe now, but no doubt massive then, when Europe was also on their knees.

So, is this something that you should get anxious about? No. Because the ECB are on it. And they care more about Europe, quite simply because they live there. We do not. And as such, this should be viewed in the same way as us solving the problems of another country, we all have many obvious solutions, but we do not live there.

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I am subscribed to the IATA news releases, in the hope that there may be something useful there. I think that you cannot ever be accused of reading too much or knowing a little more than someone else. Perhaps in the future we will have advisors that are robotic that will learn human investing better than, well, humans I guess. Until then, we have to do our best to find the most compelling investments for our clients. You can never and will never own all the right stocks. That is just the way that it goes. What I find refreshing about the most famous and talked about investor, Warren Buffett, is that his motivations are almost certainly not material things. He could have everything that money could buy, but he rents jets, admittedly from himself, NetJets is one of their/his investments. But his salary, his annual salary, has remained unchanged for a quarter of a century at 100 thousand Dollars. His security costs however are counted and is around three times more than his annual salary. I guess you want to keep him safe, I can definitely understand that. But not being motivated by money and being the richest investor is kind of ironic, don't you think?

Back to the IATA (International Air Transport Association) releases from their annual shindig in Doha, this year, there were some fascinating facts about human air transportation that I thought were worth sharing. If you think about it, this is one of the most difficult businesses to operate in, there are many and frequent stories about airlines going bust. The quote from Warren Buffet (what, him again?!?) is worth sharing: "The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down." Ha-ha, that is just mean, but the recognition that this is a difficult industry to operate in is well noted.

IATA looks out for 84 percent of all passenger traffic globally, the member of that is. Since 2004 when global oil consumption picked up, jet fuel prices have been high, historically. Industry profits have improved over the last five years, as EBIT margins have stabilised, but somewhere around 3 percent hardly makes it an industry worth investing in, right? Last year we crossed the 3 billion mark of scheduled passenger numbers for the first time, this year the expectations are for 3.304 billion bums on seats in the sky. It is then strange to think that in 2004 there were only 2.067 billion scheduled passengers.

But for all of that, and there is a financial forecast from IATA, the net profit for the entire industry per departing passenger is a mere 5.65 Dollars. So. The next time that you are experiencing the miracle of flight, 10km up in the sky, reaching your destination in a fraction of the time it took your ancestors on a horse, think that all the airline made from you is a red note, and a green note with a lion and rhino respectively printed on them. In 1800 it took four weeks to get from New York to New Orleans by horse, it must have been much shorter by sailing ship. But on an inflation adjusted basis, surely flying is much cheaper today? It is a 3 hour and twenty minute flight and one way can cost around 270 Dollars. 270 Dollars on an inflation adjusted basis in 1800 would have been around 20.31 Dollars, not a small amount of money. A horse would have cost you (if you believe everything you read on the internet) around 10 Dollars in 1800. That is half way there already, forget travelling alone for the better part of 28 days.

I guess this all points to two things. First, it has possibly never been a better time to be a global traveller, provided that you can afford it of course. Air travel is still unaffordable for many people, but is distinctly middle class and above, in terms of affordability nowadays. Secondly, it seems as if from an investment point of view, that this is almost never an industry to be invested in. The first commercial flight in the US carried a single passenger on the 1st of January 1914 (my late grandfathers birth date) from St Petersburg (Florida) to Tampa, all of 23 minutes. And the cost? 400 Dollars, in the open, and on a wooden bench. In 1956 (according to Wiki -> Boeing 377 Operational history) a one way seat in that aircraft in "tourist class" cost 290 Dollars, one way from New York to London. That cost is now, on an inflation adjusted basis, is 2452.48 Dollars by the end of 2013. A return flight, nowadays (giving myself three week breathing room) is less than 1000 Dollars. Return. One way? Not much difference really.

The second point is that this is an industry which is very necessary for the global economy (it represents around 1 percent of global GDP) but is completely a no-no from an investment point of view. Locally we have Comair, who probably are about as good as it is going to get, so credit must be given there. It is not an industry that I ever wanted to work in, nor is it anything that I would want to own, directly. Having said that, SouthWest Airlines stock price is up nearly 92 percent over the last 12 months. But only up 75 percent in the last ten years. Best to avoid the whole industry, too cyclical, too many outside factors that you have little control over.

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Byron beats the streets

I was chatting to a potential client the other day and one of the first questions asked by investors or potential investors is what is our global vs local exposure. That got me thinking, what is the Vestact model portfolio's exposure to the various regions? As you can imagine this has taken me a while. I have read through annual reports and financial results, scoured websites and even contacted a few Investor relations people. I plugged all the numbers into a spreadsheet and came out with the below figures. It must be noted that this is not our exact recommended portfolio, it varies per client but based on the weighting of our overall holdings this is the most accurate assumption I could come up with.

Before we look through the numbers let me explain the spreadsheet in more detail as well as the numbers behind the spreadsheet. Lets use Aspen as an example. 35% of Aspen sales come from SA. Aspen constitute 11% of our portfolio, therefore their revenue in SA contributes 3.85% (35% x 11%) to the overall Vestact portfolio revenue in SA. Make sense? I hope so. The rest is applied in the same manner.

Ok so here are the interesting facts. Firstly the portfolio is nearly 50-50 local vs foreign. That is a good mix in my opinion, especially when you consider that the majority of these businesses are 'South African'. Ironically the biggest contributor to both the local sales and local profits is Sasol (they make R40bn a year here, wow!). That is because their big overseas operations make no money yet. But they will and will soon become very dependant on their US sales. They are also a natural Rand hedge and benefit when the Rand weakens, that is why I say ironically.

The least South African Businesses amongst the mix are Richemont and Billiton. Apart from a couple of luxury stores in Sandton and The Waterfront, Richemont have no exposure here, not nearly big enough to note. Billiton get about 10% of their revenues from their South African operations but only 0.81% of their profits. Wow. That divesting from SA has been real and effective. Because the Naspers share price is so correlated to Tencent at the moment it is also very unSouth African. As its ecommerce assets around the world start becoming more influential the focus on Tencent will decrease in my opinion (as far as the total reliance on that share price is concerned). Woolworths is also about to become a whole lot less South African when they purchase David Jones. Of course that does not yet reflect in the numbers.

As far as The Rest of Africa is concerned MTN is by far our biggest contributor (7.14% of profits). In fact MTN contribute more than half of Vestact's exposure to the rest of the continent. Naspers, through Multichoice, Omnia and Tiger Brands are also decent contributors. You would expect these to grow, all the companies mentioned have big expansion plans in the continent.

All in all it has been a very interesting exercise. Companies like Aspen, Discovery, Famous Brands, Massmart, Naspers, Omnia, Sasol, Tiger Brands and Woolworths all have massive expansion plans outside of South Africa. So I suspect, without us changing a thing, the balance will shift outside of South Africa in time. That is one of the beauties of owning shares, capital follows growth. If we see the South African economy turning the capital flows will certainly come back. Having said that, a big chunk is still reliant on SA and always will be. Our country is still riddled with opportunities.

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Home again, home again, jiggety-jog Markets are higher. We have breached that not so all important 50 thousand mark again. Just a question, why is any level really important. ADP later, ECB later, lots of things to always talk about.

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Sasha Naryshkine, Byron Lotter and Michael Treherne

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Expensive? Cheap? Fair value?

"To the average investor all this mumbo jumbo can be daunting. Even if you are a monthly contributor to buying indices and going about it over decades, buying the index each and every month at the end of the month, you are collectively owning companies. And you are not going to time your monthly contributions based on what the markets are doing. The first question I always get asked amongst my friends and various social groups (school parents and sports parents) is "How are the markets?" I am not ever sure what the correct response is to such a question. Still there? Not going away? Championing capital? Working hard for all of us? The answer that the person is looking for is almost certainly the market levels. I guess I shouldn't be so precious, the question is probably exactly the same as: "How is business?""

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To market, to market to buy a fat pig. Monday! Obviously not that song that U2 wrote, no wait that was Sunday. And in fact if you search (search is now interchangeable with Google I notice) for Bloody Sunday, there are multiple events. Sadly. Friday was far from bloody though, the S&P 500 reaching new highs by the close. Ditto the Dow Jones Industrial Average. The Nasdaq composite index, or more familiarly known over here as the nerds of Nasdaq? Why the nerds of Nasdaq? If you are a Monty Python you will make sense of the reference deriving from the Knights who say Ni scene. Anyhows, getting too cryptic, the Nasdaq is now down 13.68 percent from the closing high on the 10th of March 2000. I think that many people make too many references to market highs and feeling dizzy and was relieved to see loads of literature over the weekend with charts (which humans love, pattern recognition) showing that all time highs are as a result of both record company earnings and improving prospects in the US economy.

For instance, from the Pragmatic Capitalist, Cullen Roche, who writes that Rail Traffic Hits new high as Jobless Claims hit new Lows. Fewer jobless people and higher volumes of goods moved = Good. Or am I getting something wrong? The Quantitative Easing "experiment", as it were, is nearing an end and we should, by the end of the year see an end to this program. Better to call it a program than an experiment, because an experiment takes place in a laboratory.

And for all the people telling you that all the extra liquidity inflated asset prices, why hasn't the Fed winding their necks in by 40 billion Dollars a month, caused a collapse in asset prices? Because the interpretation of QE was all wrong in the first place, again some old posts from Cullen Roche which are worth reading again: Ben Bernanke explains that QE is not inflationary, just an asset swap and then of course The Fed is not monetising debt. I think that I can't fully fathom the full impact of either non-action by the Fed or law makers or the amount of action and new programs, either way this was all unprecedented and new. As such it attracted an enormous amount of attention and clearly many people got it wrong.

So, whether I fret about the impact or the broader economy, that is not our job here. We worry about companies and their prospects. Allocating your hard earned money to businesses that make progress, have enduring qualities and in general, you know the drill. But that is harder than it seems, it really is. Investing requires immense discipline and staying power. The courage to stay the course when seemingly the walls are falling down around you. Many folks are tainted by that period and have applied too much caution, looking for the next crisis.

Jeff Miller had an interesting piece over the weekend, that is always worth reading, titled Weighing the Week Ahead: More Clarity from the Market Message? You can see the conflicting push and pull of the different markets, but that is either presuming that the equities market is wrong or the bond market is wrong, can't they both be right or wrong at the same time? A bit like that Tim Noakes piece last night! Vegetables, potatoes, rice, meat, cream and so on, perhaps the secret is just balance folks, simple plain balance.

Again, if you find the "is the market overvalued or not" stuff interesting, there are a series of earnings projection squiggles that Dr. Ed Yardeni updates each and every week, for his research house, that is named after him. Here they are, again, they are graphs and patterns: Earnings, Revenues, & Valuation for the S&P 500 and the other two (400 and 600). The Forward consensus (rolling 12 months) for the S&P 500 earnings collectively is 125.08 Dollars. The S&P 500 closed at 1923.57 on Friday. 2014 earnings collectively is projected to be 119.64 Dollars, 2015 the number has shifted to 133.12 Dollars.

The growth projection at this stage, from the data that Yardeni has collected, suggests that S&P 500 companies will grow earnings by 11.26 percent from 2014 projection through to 2015. The rolling S&P 500 valuation is 15.37 times (based on 125.08 Dollars worth of earnings over an index level of 1923.57) and the PEG ratio (Price to Earnings divided by growth) is therefore 1.36 times. Now I am guessing that many purists would argue that is too expensive, the earnings growth rates do not justify a market level forward of 16 times plus. Historically (dangerous to compare different periods in time) the long term averages of the S&P is a fraction of fifteen. I do not think that any one market deserves to be compared to another, at any time in history.

To the average investor all this mumbo jumbo can be daunting. Even if you are a monthly contributor to buying indices and going about it over decades, buying the index each and every month at the end of the month, you are collectively owning companies. And you are not going to time your monthly contributions based on what the markets are doing. The first question I always get asked amongst my friends and various social groups (school parents and sports parents) is "How are the markets?" I am not ever sure what the correct response is to such a question. Still there? Not going away? Championing capital? Working hard for all of us? The answer that the person is looking for is almost certainly the market levels. I guess I shouldn't be so precious, the question is probably exactly the same as: "How is business?"

The conclusion is that markets go up, they go down. Markets could fall ten or fifteen percent suddenly and do from time to time. It could be worse. But by trying to sell out in anticipation of the next big fall means that A, you miss out on the next move higher and B you spend valuable time trying to predict what is going to happen anyhow, when that time and effort could be spent looking at a company. I think that is all, always more to follow however.

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Home again, home again, jiggety-jog Stocks are marginally higher here. That is good for everyone who is long, I guess. Sell in May and go away did not work, that is a dumb meme that appears each and every year.

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Sasha Naryshkine, Byron Lotter and Michael Treherne

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