Money with a dash of Funny

Friday, 23 January 2015

Aspen scores again

"The therapy (which sounds like a one trick druid from the Asterix series), is an anti-coagulant and compliments their recent acquisitions in this space. It is currently only available in Germany, Switzerland and Austria. Subject to approval from the German competitions authorities, they will fork out that fairly sizeable sum. The product is pretty small for now, having revenues of only 68 million Euros only."

To market, to market to buy a fat pig. Wow, up, up and away. Not as much here locally, that was due to a weakening Euro relative to the Rand, Dollar strength and that led to general emerging market strength. Flows in equal stronger currencies, that is not necessarily good for the dual listed businesses, even though they would have had a tailwind from their primary listed prices. Why did we get these on fire markets? As the message headline from yesterday suggested "il QE", it was our version of trying to make quantitative easing sound more European. Italian of course. Our Italian is sadly confined to eating Americanised Italian food, the original pizzas do not have cheese on them, they were made for poor people, flatbreads.

The whole idea of the ECB stimulus is not intended to avoid people from eating flatbreads again, rather to inspire confidence, to get the banks lending to businesses and consumers again. OK, so if you need to read the entire statement and the Q&A session, here goes: Introductory statement to the press conference (with Q&A). What you don't get when you read the Q&A is actually how funny the ECB president is, he is truly a genius not only in delivery, rather being able to go toe to toe with folks in English. Bearing in mind that many of the folks present have English as their second languages too. To get a very good idea of what the ECB are trying to achieve, here is an answer from ECB chief Mario Draghi:

This programme should increase the lending capacity of the banks. This programme, the national central banks, the ECB would buy bonds, and then banks will have this money, and this money can be used either to repay some liabilities, or it would be placed in our deposit facility, in which case they would have to pay a negative interest rate, so there is an incentive to lend to the private sector, stronger incentive than there was simply on collateralised borrowing as we used to do in the past, namely out of TLTROs. In this case, there is no limitation. The limitation, the three-year maturity that was present in the TLTROs, in this case isn't there.

As a result of negative interest rates in the Eurozone, banks can keep the money on deposit, they will however "lose" it if they do not lend the money out. At the end of the day too, Draghi is right, governments need to continue to reform. Which is why the Germans have been against this, part worried about the inflationary impact of this bond buying program, and in part worried about that the much needed reforms would not take place. Greece decides this weekend, we will see what transpires, no need to try and make any early predictions based on early polls. Alexis Tsipras, a former communist (yes, this is true) and rabble rouser could "win" the election with his lefty party Syriza.

By win, I mean get the most votes and then get the extra seats, the system is not too different to Italy. 250 seats up for grabs, you need at least 3 percent of the votes to get into parliament, the winner gets an extra 50 seats, that is the simple way of explaining Greek politics. In order to rule, you need at least 151 seats, there is nobody that would get there. I think what you must remember is that Syriza is a badly cobbled together coalition itself of the far left, a splinter group of the Communist party, workers party, active citizens and so on. It is very different when you are in power from being an opposition with one aim, to unseat the incumbents. It is very different to govern, you need to be more conservative and actually show leadership skills. Being a rabble rouser is all fine, being in charge is very different. Anyhow, Greece must make up their own mind.

The upshot for global markets was a positive spin, as you can imagine, this met and beat the expectations (if there is such a thing), the quantum of the program. Markets ended around one and a half percent higher, tech stocks surged even further, over a percent and three quarters higher on the day, it has been an excellent shortened week for stocks across the globe, including here. Of course there have been company results, companies at the end of the day are the most important factor in determining where share prices will go and by extension where the index will end up. Companies, their prospects and results, not central banks set the index price ultimately.

Company corner snippets

C'mon Harry, let us go some place warm, let's go to Aspen is what Lloyd said to his pal in that classic from 1994, Dumb and Dumber. OK, it is not a classic, it was exceptionally funny slapstick humour that I enjoyed. What has been a great investment and a wonderful company has been Aspen Pharmacare. Stephen Saad and Gus Attridge never sit still, they are the founders of this business. The company listed in 1999, there were 367 million shares in issue, the turnover was 522 million Rand. At last June, 15 years on, turnover was 29.5 billion Rands, number of shares in issue 455.9 million. OK, that aside, the company has bought numbers of businesses over the years, businesses from majors that they could sweat harder and "do better" than the big cumbersome majors. The company has announced this morning a transaction in which Aspen International will acquire the rights of a therapy called Mono-Embolex from Novartis, which as per the release is "an injectable anti-coagulant, for a consideration of US$142.3 million." At the ruling exchange rate, that amounts to 1.623 billion Rand.

The therapy (which sounds like a one trick druid from the Asterix series), is an anti-coagulant and compliments their recent acquisitions in this space. It is currently only available in Germany, Switzerland and Austria. Subject to approval from the German competitions authorities, they will fork out that fairly sizeable sum. The product is pretty small for now, having revenues of only 68 million Euros. So the therapy is small, if you require further reading material, be my guest, Wikipedia -> Certoparin sodium and this page -> Certoparin Sodium: Sodium salt of depolymerized heparin obtained by isoamyl nitrite degradation of heparin from pork intestinal mucosa. Pig stomach mucous, to manufacture anticoagulants, which treat blood clotting. That is the simplest way of explaining it. As Byron said from across the table, all you need to know is that the guys at Aspen know exactly what is going on. The stock is up on the news and is in fact, if it closes here, will be at an all time high.

AVI stuck out a trading update this morning. All divisions did pretty well, other than their smallest, the personal care division, as per the release: "revenue declined following the revision of trading terms with Coty". Sales for the six months to end December topped 6 billion Rand, an increase of 11.1 percent. Consolidated headline earnings per share is expected to show an increase of between 8 to 11 percent, 249 to 256 cents per share for the six months. AVI results are expected on the 9th of March. The stock is down over one and one quarter of a percent, relative to a market which is marginally higher.

Whoa, can you read the Anglo American Platinum trading statement? It actually was not posted on the Amplats website, believe it or not, it was nowhere online, only on the SENS service. The first part is pretty basic and self explanatory: headline earnings and headline earnings per share ("HEPS") for the period are likely to decrease to be between R650 million and R875 million and 250 cents and 335 cents per share respectively. The prior year it was 1.451 billion Rand, 556 cents per share. Basic EPS is "likely to increase to be between R495 million and R705 million and 190 cents and 270 cents per share respectively." The upshot of it all is that the stock is down 3.3 percent, not good. I am interested to see in the results (9 February) the further action taken with regards to the unprofitable mines to reflect the reality of lower platinum prices. Phew, we still continue to avoid single commodity stocks, the prospects still look patchy at best.

Byron beats the streets

Last night after hours we received earnings from Starbucks for their first quarter of the financial year. The numbers look good and the share price shot up 5% after hours. Lets look at the numbers.

Revenues increased by 13% but remember this now includes Starbucks Japan which was recently acquired. Global comparable sales increased 5%. Earnings per share increased 83% to $1.30 per share, this also includes Japan for the first time. Highlights for the quarter included, 9 million more customer transactions in the US over the comparable period; the opening of 512 new stores including the first Starbucks Reserve Roastery and Tasting Room (Sasha wrote about this last year); $1.6bn now loaded on Starbucks Cards; 1 in 7 Americans received a Starbucks gift card in Q1 (WOW!); 896 000 new Rewards members in the quarter.

As you can see, its been a busy quarter for a company that never sits still. In fact I was reminded of an Onion headline the other day which gave me a good chuckle. "New Starbucks Opens in Restroom of Existing Starbucks." I've hacked a table from the presentation which sums up the quarter. The decrease on Margins actually comes from the Japanese business. If you exclude that, margins in fact increased by 70 basis points.

From what I read and see in daily life, coffee is growing everywhere. Research has shown (in moderation of course) that it is actually good for you and it's allure as a gourmet product has spiralled it up the list for anyone who claims to be cool. Whats more exciting for Starbucks is that 70% of their sales come from the US. A recent study from Statista suggests that the US is still quite low on the list of coffee drinking nations. Global leading 20 coffee consuming countries in 2013 (average per capita cups per day). Which means there is still plenty room to grow in its country of origin. Other studies I have read suggest that within the US, minority groups are the fastest growing coffee consumers. Thats always a good sign.

The room for expansion outside the US is also huge. Paul said that the presence of Starbucks in China was huge. The brand is strong and the Chinese sure love strong brands (sorry for the generalisation).

Fundamentals? The stock is expensive, it always has been. Earnings expectations for the year are $3.17, trading at $86.26 we have forward earnings of 27 times. But these earnings are expected to grow by 24% in 2016 to $3.93. As far as PEG ratios are concerned, the market is right. We expect Starbucks to beat these lofty expectations and continue to add.

Things we are reading, we think that you should read them too

The one trick pony, Google, keeps adding small but new revenue streams - Google allegedly close to launching its own wireless service using Sprint and T-Mobile. The long term goal here I think is to control the infrastructure linking everyone and everything.

This article highlights how quickly the world changes and by extension how companies have the opportunity to grow (or die if they don't adapt) - 3 ways to fix our broken training system. 65 percent of today's school kids will end up doing jobs that haven't even been invented yet.

Looking at ways of being more efficient and helping feed more people - The Drought Fighter

Home again, home again, jiggety-jog. Markets were higher, now they are lower. Gold, platinum and resource stocks are lower on the whole, the copper price is lower. It is still wall to wall coverage of Davos, I am paying attention to who is there and what is going on, I am not too sure that it is relevant for our business. It is fun however to see journalists from Sandton interviewing business leaders from Sandton in the Snow, what did that all cost? Talking of that, one of my favourite market presenters, Nozipho Mbanjwa asked Telkom CEO, Sipho Maseko why he had to be there, at Davos. He replied that Telkom were always looking for partners, business partners. The last time I remember Telkom talking to someone else, government as the main shareholder rebuffed the advances from a South Korean business, KT Corp. I guess the Davos experience still means that face to face is still the way, millennials must have been absent, they prefer to "hang out".

Sasha Naryshkine, Byron Lotter and Michael Treherne

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Thursday, 22 January 2015

il QE

"I managed to convince him that whilst these events and interventions may have an impact on the markets as a whole in the short term, in the long term central bankers do what they have to do whilst in the background investors continue to hold and maintain quality companies. So what mattered most, I said, was rather that you made sure that the companies that you bought had good prospects rather than what Mario Draghi and the ECB were about to do. I have no way of knowing whether it would be good or bad, the impact of the ECB's bond buying program on the market."

To market, to market to buy a fat pig. It was quite fun, I spoke to a fellow dad at the girls school last evening and we had a chuckle as he said all this volatility, up sharply and down sharply was making his trading mates mad. This is a guy that trades volatility for a living, or used to. So volatility turns out to be OK, too much is not OK. It just goes to prove that once again you cannot please everybody all of the time, it is impossible. Yesterday was another strong day for the local equities markets, perhaps "things" are normalising a little after the Swiss National Bank last week with their "surprise". I remember how shocking it was when they introduced the peg, this was equally shocking I guess on the way out.

I had a conversation with a young professional yesterday that was concerned about European QE and the impact on the markets and in the end I managed to convince him that whilst these events and interventions may have an impact on the markets as a whole in the short term, in the long term central bankers do what they have to do whilst in the background investors continue to hold and maintain quality companies. So what mattered most, I said, was rather that you made sure that the companies that you bought had good prospects rather than what Mario Draghi and the ECB were about to do. I have no way of knowing whether it would be good or bad, the impact of the ECB's bond buying program on the market.

It would not stop Bidvest, or Aspen or MTN or Richemont with their plans. It might be a discussion point around what currencies might or could do, at the end of the day it would be a discussion. Remember when investing, when buying a business, there are things that you can control (what it is that you own) and there are things that you cannot control, like the interest rate cycle, central bank actions, politicians actions and economic policy. Companies work around that, the better the company, the more likely that the same said companies succeed in finding solutions. Makes sense to me. To end off with, yesterday there was a CPI figure here locally, an inflation read for December from StatsSA, which indicated that inflation had eased to 5.3 percent. 0.5 percentage points lower than the prior month, the annual rate of the transport index was now only 1.7 percent higher, dropping from 4.2 percent in November. Excluding petrol interestingly, it came in at 6 percent. As the hyper excitable Rick Santelli says, do not exclude food and transport, I need one to get to work, I need the other to live. Transport is basically responsible for the fall in inflation.

Who to thank for that? Innovation I guess. Innovators and risk takers who enabled and pioneered new drilling techniques, the so called frackers. The fracking community with their newer methodology have reached previously unreachable and too expensive stores of fossil fuels. Whilst we might feel that it is a good idea to be more green, the long and the short of it all is that the economics of gasoline still dictates that we get around using fossil fuels. And whilst Milk, eggs and cheese are more than 12 percent higher over the year, a litre of milk (via the Woolies website), a fat free long life 1 litre of milk costs 11.95 Rand on special. Normal price, 12.95 Rand. A litre of petrol/gasoline? According to the Petrol Price, the basic fuel price (calculated this way -> BASIC FUEL PRICE).

Did you see that you pay a lot in taxes, after all is said and done, you cough up 11.24 Rand for a litre of Petrol on the highveld, including all the taxes, around 342 cents. A litre of fuel is less than a litre of milk. More astonishing is that a half a litre of water costs 7.95 Rand at Woolies, in bulk you can get 6 litres for 34.95 Rand = 5.825 Rand a litre, more than the basic fuel price, which is 5.3325 Rand a litre of 95 Unleaded. How is that possible? Milk is harder to extract, you would think, than water. Fuel needs to be refined, get here from halfway around the world and you demand cheaper. The reason why I compared this to local prices is that I saw this piece in the US, from one of my favourites, Professor Mark J. Perry -> It's something of a miracle that gas is only $2 per gallon and cheaper than any other liquid consumers buy. Check out that Soy milk and most importantly, HP Printer ink at 4500 Dollars a gallon. You knew that already, that the ink itself costs more than the printer.

So, to end the markets piece, US markets ended the session in the green, the broader market up nearly half a percent, whilst both blue chips and nerds could only manage one quarter of a percent. This time of the year is tough, humans are hard wired to the idea of evaluating what they want to or need to do this year, and seeing as humans set the levels of the market (the machines company analysis trading company is not something I have seen yet), it will always be volatile. Even though machines might trade on some sort of algorithm, those numbers were written by humans, mathematicians, for now. The other big thing on the go right now is an imminent ECB announcement and Davos, both of which do not really impact on any of our companies, really. Warren Buffett has never been to Davos. Apparently one of the very few of the wealthy to have never been there, perhaps as a big shareholder in his own business, he cannot justify the cost and whether or not there is anything that transpires out of those conversations.

Company corner snippets

FirstRand and MMI, what happened there yesterday? The companies both issued new shares, a Reuters story titled S.Africa's FirstRand shares fall after new stock issued says that the stock was allocated to staff, an empowerment deal. In the Reuters story, an emailed answer: "Existing shares that were allocated to staff are being sold and new shares are being issued to normalise the NAV (net asset value)." The Business Day story titled FirstRand shareholders cash in R3.4bn. Ownership has been around 10 years since February 2005, is that at a corporate level a long time to be locked in and owning shares? My next question is, this specific windfall, how is it likely to impact on consumer spend, that is not nothing at all, that is a lot of money in the hands of not that many people.

In short, if I understand the Business Day article properly, 12 thousand staff received 171 million shares at 12.28 Rand each. I went back and looked in the original SENS announcement: FirstRand intends to make available 171.4 million shares representing approximately 3.1% of FirstRand to its black South African employees. The total funding required at 12.28 Rand was 2.1 billion rand. That is why the employee scheme had to sell a lot of shares, to settle the associated debt, 64 million shares. At around 50 Rand in December, that equates to 3.2 billion Rand. The balance of the shares, the 107 million odd shares, 66.7 million were sold, leaving 40 odd million shares left, or less than 25 percent of the original staff allocation. How many share options and shares the Black Non-executive Directors Trust has received over the years, the annual report suggests that there can never be more than 62 million shares. Or so I read.

I guess all you need to know in the end is that if you were at FirstRand and had been inside the net, in the empowerment deal, you would a) have 23.7 percent of the original shares left b) own them free and clear and c) have sold 38 percent of your original shares at 3.74 times the original price paid. Sounds simple! If you had 500 shares at the beginning (which many people did), they would have around 5700 Rand in shares left, 118 or so shares, have extracted 8950 Rand from the sale of 194 or so shares. When you put it that way, not nothing at all, as they say in the classics, it is better to have something than nothing.

BHP Billiton production report yesterday, perhaps the biggest focus point for many people was (as anticipated) a strong fall off in the amount of oil spend, with regards to their business. The full operational review can be downloaded from their website. The must knows are that overall group production increased by 9 percent, driven primarily by Met Coal, Iron ore and Petroleum, Copper showed a decline, as a result of lower grades. The sad truth is that whilst we see all of these production ramp ups, they come in the face of a really precipitous fall in iron ore and more especially petroleum prices. Equally copper, albeit by not as much as the others. The company chief, Andrew Mackenzie said that the cost saving initiatives are faster than anticipated and will help against lower prices. Equally however the number of rigs operated across their US onshore business (read Shale) will drop 40 percent (around 10 rigs I think) and that the higher margin Black Hawk acreage will be all the company focus. The cost for the company (and you the shareholder) is 200-250 million Dollars, US.

Guidance? Here goes, a screen grab from the report:

The first thing that you will notice is that the business guidance is given without the South32 business, which will be unbundled during the course of March, around 60 days time. Important in all of this is the ability of BHP Billiton to meet their dividend. I have seen research reports suggest that BHP might see earnings fall to the region of 140 US cents this year and then 130 US cents next year (2016), the dividend of around 120 cents might be met. Normal dividend cover of 2.1 times cover would go out the window, this would be a case of using almost all earnings to payout shareholders, borrowing aggressively to meet the projects that make most sense. So, at current levels of around 250 Rand, with an exchange rate of around 11.50 to the US dollar, Rand earnings and dividend expectations (from what I have read and seen) are around a yield pretax of 5.5 percent (very good) and a price to earnings multiple of 15.5 times, a bit out of whack historically with an earnings plunge. As ever it is very hard to predict where to next, with regards to commodities prices.

Things we are reading, we think that you should read them too

The best way to mine gold may not be going underground - Millions of Dollars Worth of Gold And Silver Lurk in Sewage. The yields are high and it is probably a lot safer than being under the earths crust, "nearly 2 kilograms of gold in every metric ton of ash left from burning sludge, making it more gold-rich than the ore in many mines."

Here is what the richest man in the world thinks about the future - OUR BIG BET FOR THE FUTURE. If you were going to take anyones word for what the future will look like, I would say that Bill and Malinda Gates have one of the clearest views. The one thing they mention is mobile banking which is good news for the likes of MTN, Vodacom and Visa.

This blog piece looks at the Franc trade from both sides - Maybe You Shouldn't Do That. This is trading and not investing but gives some insights on how we can get focussed on price and pat ourselves on our backs when prices move in our direction.

Home again, home again, jiggety-jog. The local market is back over 50 thousand points, still around 2000 points from the highs. Wall to wall coverage of the ECB and Mario Draghi and Davos today, the cricket series is won with two to go, that is pretty astonishing. Sorry East London for the short match, blame Tahir, Steyn and Philander, Amla and du Plessis. AB watched the batting. Wow. I am starting to believe that we can win the world cup cricket, I have held that since 1992, when last we were in Australia for such an event. Remember McMillan and Richardson getting close and then the rain came, how sad, 22 runs to win off 1 ball. Sigh. Please can we exorcise the ghosts of world cups past.

Sasha Naryshkine, Byron Lotter and Michael Treherne

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Wednesday, 21 January 2015

Netflix kicks it!

"Netflix are ramping up their international business aggressively, spending money, making a loss. Content is expensive and will get more expensive, the company will have to spend a whole lot of money on marketing. Expectations are however that once you own both the subscriber and the content, you are the king, Netflix is moving faster and muscling in on the older and more established businesses in the space more than almost anyone would have expected."

To market, to market to buy a fat pig. It could have been better here locally, it was not to be. Resources stocks, except Sasol which slumped along with the oil price, led the charge in a upward direction, again the stand out companies were the gold businesses. Company news on the local front after the retailers having reported sales updates is looking a little thin here. Luckily for us market junkies, there is the small matter of earnings season having started in the US. I wanted to point out a headline that I read, having retrieved a specific company news story via Google alerts in my inbox (try and recite that sentence in 1990 and imagine the reaction), only to point out the mistake that many people make: JSE flat as investors trade cautiously. Investing in my mind is something that requires careful analysis and patience. A trade is shorter dated, anywhere from seconds to months, to me that headline is wrong. Investors would not trade in and out on a single day, their objectives are different from traders, investors own companies whilst traders own share prices. Forgive me for being so precious.

I was asked another question, I am pretty sure that the chap won't mind if I regurgitate (no names!), it went like this: ... do you think gold might have some legs due to deflation and more quantative easing? With the question was an associated article, Gold shares 'a multi-generational opportunity', from our old pal Marc Ashton, who is over at Moneyweb. Not only does Marc write for Moneyweb and Mineweb, he is the chap who runs the place, a young chap in that sort of a position. Marc has the energy required for such a job, of that I have no doubt. Anyhow, Marc is writing the article in which Investec fund manager John Biccard believes that gold shares are the right investment for 2015. He is certainly right so far, the gold shares as a collective are up 34 percent this year so far, following a market out-performance last year (12.2 percent as is to a market that returned 7.6 percent).

As exciting as that sounds, trading in and out of a share price is not something that we do. My explanation to the question was to pull out the old Warren Buffett quotes on gold, why you should not own them at all as an investment, there are three separate quotes:

"Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."

"The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end."

"What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As 'bandwagon' investors join any party, they create their own truth - for a while."

If someone tells you that the gold price should do x or y or z, for historical reasons, well, that is about as good as looking at a graph. I am not bashing the metal as an investment, if it works for you, it works for you. The middle Buffett quote is the part where he says basically that one ounce will never pay you a dividend. Absolutely ever. Whilst I am writing this the gold price has topped 1300 Dollars per fine ounce for the first time since August last year, expect another day of gold stocks to be on fire(ball)!

Stocks eked out a gain towards the end of the session in the US last evening, after having started better and slipping mid session. Of course the biggest talking point throughout the day was the State of the Union address by Barack Obama, his penultimate one. He really is a top orator, he is not for everybody however. His proposals of taxing rich people more was met with heckling (after the speech) from the Republicans. I saw one rather interesting quote from "Tea Party member" Rand Paul which actually resonated with me: "I propose that we cut everyone's taxes, from the richest to the poorest, and we cut spending at the same time". Either I am getting old, or grumpy, or even worse, both! I get what he is trying to say, let people decide what they want to do with their money, less government, more personal choices. That does strike a chord with me.

Company corner snippets

Netflix, the company that you love and can't quite figure out at the same time. I remember reading a T-shirt that said "Beer will change the world, I don't know how, but it will". I found it on an old Twitter photo of mine - > I'm not sure either!, there you go. Netflix is the same, it has to some extent been responsible for chord cutting in the US, people choosing what they want to watch, when they want to watch it. Last evening we saw the Fourth-Quarter 2014 Financial Results from the company, 57 million subscribers in nearly 50 million countries. In the US there are now 39.11 million users, the rest are "international" users.

In their release: "It is increasingly clear that virtually all entertainment video will be Internet video in the future. We believe there is big growth ahead in the US market for Netflix, even if we may not get there in a straight line of 6 million annual net adds." In two years, as they point out (we made this point last week methinks) that they have had 45 Emmy, 10 Golden Globe and 2 Academy award nominations. House of Cards, Game of Thrones, Marco Polo, you would know these Netflix shows. Virunga I have seen advertised. That is all nice, original content, with more coming, what about the company making money though? Well. In their US business revenues for the fourth quarter of 917 million Dollars translated to 257 million Dollars. Their international business loses money. EPS for the quarter was 1.38 Dollars, 4.44 Dollars for the full year, more than double last year. The stock? Traded up 16 percent after-hours to an incredible and eye popping 404 Dollars. I guess you need not be a genius to work out that the market expects great things from this business, really great things.

They (Netflix) are ramping up their international business aggressively, spending money, making a loss. Content is expensive and will get more expensive, the company will have to spend a whole lot of money on marketing. Expectations are however that once you own both the subscriber and the content, you are the king, Netflix is moving faster and muscling in on the older and more established businesses in the space more than almost anyone would have expected. I am going to suggest that if you think that this trend will continue (which I do) then the company will do better and better. Accumulate cautiously over time, do not give yourself too much time however!!!

One of the very biggest Pharma companies on the planet reported earnings before the US market closed last evening, and also guided forward for the current year, Johnson & Johnson. Unfortunately the company has to as a result of being global, deal with a firmer US Dollar, which will shave as much as 4 billion Dollars off their revenue guidance this year. That is around the same amount, four percent in revenue lower, just as a result of the stronger Dollar. The faster and higher rated pharma business is also expected to face headwinds. Here are the results, read them through: Johnson & Johnson Reports 2014 Fourth-Quarter and Full-Year Results. You can see that their very biggest business segment is the US Pharma business, the second biggest segment is their international Medical Devices business. European growth as a whole was stodgy, growing only at 1.9 percent whilst Asia Pacific and Africa grew at only 0.4 percent. The US business was by far and away the biggest growth engine for this company.

Let us look at 2014 first, full year sales were up 4.2 percent to 74.3 billion Dollars, EPS clocked 5.70 Dollars (excluding special items it was 5.97 Dollars) with the quarterly dividend currently 70 cents, or 2.80 Dollars a year, a yield of 2.76 percent at current levels. 2015 looking ahead from the business was as follows: adjusted earnings guidance for full-year 2015 of $6.12 to $6.27 per share. Wow. So what now? The stock traded lower on the guidance being less than anticipated, down to 101.29 (2.64 percent lower) on the basis that the growth is not enough to justify their current 16 plus times valuation. At the top end of the guidance, 6.27 the multiple is still 16 times.

Why own this company? Is it not old and tired and very unexciting? Can you "do better"? All these businesses are looking for the next big therapy, last year JNJ spent 11.4 percent of group revenue on research and development. You have to trust that the brightest and smartest medical scientists on the planet are working on and rolling out cutting edge medical technologies, they certainly have the backing of capitalism, you the shareholder part with large sums of money in order to achieve this outcome. In fact just four days ago they announced that they were part of an NGO tasked with finding an Ebola vaccine. Money finds a way, we should be grateful that shareholders part annually with so much in order to advance medicine and make us healthier for longer.

That is one of the main reasons why you buy Johnson & Johnson. You buy them because there is an unbroken history of over 50 years (I think 52 this year) of higher dividends. Imagine that! Each and every single year, JNJ will pay you more and more. EPS growth is bound to be muted unless there is a second round excitement to some of the newer therapies, as well as of course a stronger looking consumer in Europe and Asia Pacific. The US will continue to be strong. Whilst this is not exactly a screaming buy, it is a quality business, a must own in the portfolio. It will continue to form one of the more important parts of our investments in the medical healthcare/pharma and devices sector. Buy on weakness.

Things we are reading, we think that you should read them too

Cattle numbers in the US are lower than it was in the 1980's - Cattle Inventory. It would seem that this is due to lower consumption numbers and higher beef prices - U.S. beef industry. Our assumption in the office was that people were switching from beef to something cheaper like chicken and pork, turns out that people in the US are just eating less meat all round - Per Capita Consumption of Poultry and Livestock, 1965 to Estimated 2015, in Pounds. The story I have been told is that higher population numbers and a bigger push to consume protein, leads to higher consumption numbers, so higher prices. If you look at the consumption numbers it drops off from 2008, people just didn't have as much money to buy meat anymore.

Amazon are pushing hard into the streaming business - Amazon Original Movies. Given Netflix's solid results so far (beating analysts estimates by 60% last night) this could be a major part of Amazon in the coming years.

QE is not something that we pay too much attention to around here, it has a short term impact on the market - What European QE Will Look Like, and What Happens if It Doesn't Work. This is a quick look at how the EU may implement it so you can sound intelligent at your next cocktail party.

Home again, home again, jiggety-jog. That Klaus Schwab is a genius. He is of course the founder of the World Economic Forum (WEF), all the networks can talk about is Davos each and every year. He invites people, gets different levels of memberships, holds the annual meeting in a very scenic (and cold) setting. Politicians, academics, NGO's join 100 odd billionaires and most importantly for Klaus/Davos and WEF there are reams of journalists. This is the pinnacle in financial journalism, getting a ticket (they are very limited) to such a prestigious event is worth talking about. It is like the ordinary fan being elevated to rub shoulders with all the finest sports folks and administrators in the world, if just only for five days and if just only for looking. For the wealthy? What does it mean? Hobnobbing and a chance to chat more on an informal basis with the rich and famous. Do I care that 1 percent of the world own 50 percent of the wealth? No. Taxing rich people will not help, governments and organisations spend money worse than individuals. Giving middle income people the needs and tools to get rich, i.e. less red tape (which means for the folks who set the laws, lower employment) and more freedom, that is how to narrow the gap, in my opinion.

Sasha Naryshkine, Byron Lotter and Michael Treherne

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Tuesday, 20 January 2015

China GDP slows? Really, slow?

"In short then, the growth that China achieved last year, on top of their already big economy is equal to 2.1 times their entire economy 24 years ago. I would prefer to see that as a headline rather than the slowing references, the phenomenal growth and economic miracle achieved in that time has been incredible. We are humans, we are drawn to bad news, hoping somehow that it would never happen to us. We would love to see quicker GDP growth here, half of the Chinese growth would be welcome."

To market, to market to buy a fat pig. It was a holiday in the US yesterday, the celebration of the life of Martin Luther King, the man who in many folks eyes did more for race relations in the US than any other individual. Indeed, his "I have a dream" speech is not too dissimilar in a South African context as the prepared comments by Nelson Mandela during the Rivonia Trial (in Pretoria), which the final paragraph is the most famous, even if the speech itself was very long: During my lifetime I have dedicated myself to this struggle of the African people. I have fought against white domination, and I have fought against black domination. I have cherished the ideal of a democratic and free society in which all persons live together in harmony and with equal opportunities. It is an ideal which I hope to live for and to achieve. But if needs be, it is an ideal for which I am prepared to die. For the full speech, if you have a moment, you must read it: Mandela's statement from the dock at the opening of his defense in the 1964 trial.

Great people come around only ever so often, we should be so lucky to have lived in his time. Back to the local market here, stocks rose over a percent, industrials ramped up a percent and a half, a big recovery in the Richemont share price (most Swiss stock majors increased), most of the excitement came in the gold companies stock prices, Sibanye continues to do really well as a separately listed entity. I remember the talk was that it was supposed to be the worse of the two companies, Gold Fields with the world class South Deep asset was supposed to be the better one. Perhaps we should just give them all a little more time, as separate businesses they can be masters of their own destinies.

China GDP numbers are out this morning. Give me a break please, when you see headlines suggest that this is the slowest growth rates in China in 24 years (all the majors are going with that) perhaps a little context is needed, be careful of falling into that trap. Sure, 7.4 percent is not 8 or 9 or even close to double digits, it is however the growth rate of the second biggest single economy on the planet. If you grow at a quick rate, the base gets bigger and bigger, it then becomes increasingly harder to grow at the same rate. Nigh impossible, in fact. China could probably accelerate growth rates again with greater economic freedoms and democracy, the truth is that the communist party still pulls the strings and greater economic freedoms have kept the grumpiness away. The perspective that I wanted to draw on is that in 1990 the Indian GDP per capita was bigger than the Chinese GDP per capita. True story, check out this screen grab, which shows you that Chinese and Indian annual economic output were roughly the same:

Last year however, the Chinese economy grew at a whopping 7.4 percent. Check out the official statistics, from the National Bureau of Statistics: China's Economy Realized a New Normal of Stable Growth in 2014. 63,646.3 billion yuan in 2014 at an exchange rate of 6.22 to the Dollar equals 10.238 trillion Dollars. Wow, it has topped 10 trillion Dollars for the first time, I have not as of yet seen that headline, perhaps the exchange rate on Google I am using is wrong. It can't be though, it says 6.2145 on Google Finance, that is close enough to 6.22. Working backwards, 7.4 percent of 10.238 trillion Rand is 757 billion Dollars.

In short then, the growth that China achieved last year, on top of their already big economy is equal to 2.1 times their entire economy 24 years ago. I would prefer to see that as a headline rather than the slowing references, the phenomenal growth and economic miracle achieved in that time has been incredible. We are humans, we are drawn to bad news, hoping somehow that it would never happen to us. We would love to see quicker GDP growth here, half of the Chinese growth would be welcome. When someone gets anxious about Chinese growth having "slowed" tell them that they are missing the point. Anyhow, if consumption continues to accelerate (consumer goods retail sales grew 11.9 percent in 2014), that will be good for everyone.

Oil prices have steadied a little from the levels below 45 Dollars a barrel, the news is starting to filter through that rig counts in the oil and gas market in the US (according to some Baker Hughes numbers) is starting to fall precipitously, oil production from the Bakken field is starting to level off, BHP Billiton has a production report tomorrow in which they will indicate a cut in capex in the exploration report, in particular in their oil and gas segment. They are not alone, there are salary freezes and staff getting cut. That means that eventually the production will fall, the one thing that the fracking crowd have in their favour is the ability to switch on and off at will, inside of 30 days. As Jeff Currie, the chap who penned that Goldman report said, distressed independent new technology businesses need to start being acquired by the majors with the stronger balance sheets and more conservative company profile. That would be a complete 360 though, in the eighties, US oil majors were leaving local in search of major finds in far flung places.

Schlumberger, the oil services business with the biggest exposure to the US is laying off 9000 people, 7 percent of their workforce and have taken a 199 million Dollar pretax charge write down in their biggest area, Eagle Ford Shale. Expected capex is down 1 billion Dollars. So there you go, real companies reporting on what is happening on the ground, the speed of the fall of the price has implications for the folks living around these big "new" oil fields. North America is still the king of shale, the main ones are Bakken (up north, in the middle on the Canadian border), Eagle Ford near the Western Gulf, Barnett in central Texas, Woodford and Fayetteville further north of Texas. Watch it and watch those states for signs of weakness, there has to be, without a doubt. Sometimes the swing producers are the ones that come and go the quickest.

Byron beats the streets

Luxottica reported sales that absolutely smashed expectations. Perhaps sunglasses sold like crazy in the last quarter as a result of being the hottest year on record. 2014 that was. Remember that this company has a strong retail presence selling sunglasses through their Lenscrafters and more well known locally that is, Sunglass Hut. You can download the Q4 results here -> Strong acceleration of Group adjusted net sales in the fourth quarter 2014: +15%. Nice. The fourth quarter was particularly strong when compared to the rest of the year, sales increased 9.3 percent at constant exchange rates. Ray-Ban, an in-house brand recorded double digit growth. Regionally North America was the best performing region, showing 19 percent growth in the wholesale division, emerging markets recorded 14% growth for the period.

I've hacked a couple of tables from the presentation which shows divisional breakdowns between the retail and wholesale divisions.

As you can see, the business is extremely well diversified geographically. It is also benefiting from a weaker Euro to the Dollar which is what Draghi and his team want for businesses in Europe who are big exporters. It's nice to have central banks on your side. Unfortunately though we are slightly hedged against those benefits because our holding is in dollars. Regardless, if the underlying business is doing well then the long term sustainability will benefit.

The more I analyse these retail type businesses the more I realise how important brand power is. I am no brand expert and I know there is plenty research and theories about consumer preferences but the way the world is going, (in my opinion) old established brands are going to outperform. Especially in developing markets where these brands had a previous untouchable aura about them. It's no secret that people with new found wealth, coming from poor back grounds will splurge on luxury brands to announce their arrival. That happens all over the world, regardless of culture, religion or background.

Take a look at the Luxottica list of brands and tell me who you think will dominate sunglass sales worldwide for the foreseeable future. It's actually ridiculous how much market share they own and the amount of branding power they have at their disposal. I also feel that Sunglasses as a consumer good will outperform. They are a huge fashion statement but also preform a practical function. This includes eyewear for many sporting activities.

The medical side of the story is also exciting. Millions of people who have bad eye sight are entering a wealth bracket where they can afford lenses. Eyesight is probably our most important sense, people will always prioritise one of the most sensitive and crucial parts of our body.

The board seems to have a found a solution for the corporate governance issues they had last year. They have gone with a joint CEO structure, Adil Mehboob-Khan is the head of Markets while Massimo Vian (previously suspended by the board during the fall out) is head of Product and Operations. My guess is that they are both "Yes Men" to Chairman and majority shareholder Leonardo Del Vecchio. It is not ideal but his interests are aligned with you as a shareholder. And to have built the business to where it is today, he is certainly no muppet.

The release only covered the sales numbers, we will get earnings data at the beginning of Feb. We will cover the fundamentals when those come out. We continue to buy the stock.

Things we are reading, we think that you should read them too

Google and Space X are teaming up - Google Is About To Make A Major Investment In Elon Musk's SpaceX. Instead of working on their own internet projects, these companies will be teaming up to get internet to all parts of the world. I think this is a win for these companies and then for humanity. Here is a link Elon Musk tweeted this morning, it is a great video showing the vastness of the universe - Gigapixels of Andromeda

Humans keep moving forward - How Yelp, Uber, And Smartphones Unite Consumers Against Crony Capitalism. Two things to note from the article, the first is that due to inefficiency gaps in the market this open up opportunities and makes things more competitive. The second is all the jobs that have been created through the smartphone revolution, so the old industries might loose some jobs but jobs will be created in the new industries.

It takes time for things to change but they are changing - There are about as many solar jobs as coal jobs in the US. If it takes another decade before alternate energy is a real contributor to our energy demands, in the grand scheme of things 10 years is not that long? Most people will live till 70/80 and the globe is millions of years old.

A bit of perspective - Burger Flippers in U.S. Make About as Much as State Bank Chiefs in India. I think that they are underpaid but it is interesting to see how different countries view government employee entitlements.

Home again, home again, jiggety-jog. Markets are marginally better here, not a whole lot, just a little bit. Perhaps the anxiety over the Chinese economy has evaporated somewhat.

Sasha Naryshkine, Byron Lotter and Michael Treherne

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Losers leverage

"The Chinese authorities have decided that margin trading is not good. In other words, borrowing money in order to own securities, using the securities as collateral. You know how it works, you just pay the interest portion and enjoy enhanced upside, of course as highly leveraged currency speculators found out, you can lose your shirt in an instant. The Shanghai stock exchange fell the most in a single day in over six years this morning in the trading session, down over 7.7 percent. Bearing in mind that it is up a lot in that time too, this is a correction of epic proportion, everyone rushes for the exits at the same time. Phew, if anything we have learnt that you should a) not rely on the status quo and b) leverage is not bad, too much is however very bad."

To market, to market to buy a fat pig. What a weekend on the sporting front, on the personal front both my youngest and wife had a birthday on Saturday, we snuck to the fairest Cape of them all to have a couple of days away from Jozi. Joburg is on fire from traffic, size and scale relative to Cape Town, the weather is also better here. The scenery absolutely smashes what passes for scenery here. I always maintain that tourism should and could be our biggest industry, you cannot replicate natural beauty as hard as you may try. We boast some amazing places here, amazing people too, we are mostly friendly and easy. And pretty cheap, ironically that would change if there were a lot of people that came here, it would become more expensive. Personally I do not care who owns all of the properties around, if they cost X or Y and that is a LOT more than what it was before, that means people want to live here and spend their money here. Rich people by extension employ many more people around them, indirectly and directly. We should encourage rich people to come and live here, enjoy the better weather and employ people. Enough about me and my personal observations, back to the small matter of markets.

Markets across the sea and far away, in the US, were much higher on Friday in a volatile week. I read this blog post from Ben Carlson, Observations on the Investment Process, this particular piece struck a chord with me:

"These days I almost find it amusing when people are surprised by short-term market outcomes. Last week after three straight days of big losses, stocks rallied yet again. I saw a few snarky comments like, "Yeah this is totally healthy behavior." People are in constant search of an explainable narrative on the markets. There's never going to be a "normal" or "healthy" market."

I agree, if you want healthy markets, go to the vegetable market and look out for the freshest tomato. In the very short term markets can "do" almost anything. The market is not a beast conspiring to work against you, or "on your side" ever, the equities market is quite simply a collective of company prices. It is what investors are willing to pay for them today, based on all the news that you have at your disposal, for future earnings. You are buying part of a company, based on the news you know, for earnings that you think will be much better than today. And continue to grow and get better.

The local market here saw a monster rebound again for the resource stocks, the stocks as a collective were up nearly three percent, industrials however had a poor day, leading to a market marginally lower. I am still absolutely amazed by the wild moves in the gold companies, how is it possible that as a collective they are nearly 30 percent up on the year? The GLD gold trust is up nearly 8 percent year to date. The GoldFields ADR is around 26.5 percent higher, was it just a case of being priced for being broken, not so much any more? It is still a market that I am going to ignore forever as an investor, the end product might be very exciting for historical investment reasons (it is shiny, our ancestors thought so too, there is just enough of it, not too much of it), it just has no utility.

Reading more about the Swiss National Bank and their decision to drop the 3 year Euro peg, what is interesting is that only the folks that got smashed are being pointed out. In other words, I am only hearing about the fellow from Everest, Marko Dimitrijevic, who has had to close his flagship fund. As a result of the Swiss Franc's violent moves, if you have ever followed the history of this guy, you will know that he specialised his investments in emerging markets. Hmmm... Wait, there is more! The WSJ has an article titled Swiss Franc Bets Turned on a Dime. If you read the story you wonder why anyone trades in currencies at all, private individuals that is. Only 30 percent of folks achieve positive returns. The folks that know what they are doing (it turns out not all the professionals did either) are larger in size and scale. It seems that mom and pop investors suddenly had turned into currency specialists and carried out the back door, as a result of too much leverage.

Adding on from that part, too many little speculators at the fringes in a massive pool of liquidity, the giant swimming pool of 5 trillion Dollars of liquidity, once again it turned out that counter-party risk was most important. In some cases there was no liquidity, even though it was supposed to be provided. Always make sure that there can be a way out, easily in should not mean no exit. And too much leverage really is a very bad thing, I suspect that there are going to be rules changed. This "problem" has now gone mainstream, the West Ham (the Hammers) shirt sponsor Alpari UK is now insolvent. True story. And their clients are lying in the gutter. I might not agree with the types of trading and the allures of riches in the currency markets, I do not think that it requires more regulation however. Let everyone, including the institutions take their chances. Nothing like a good washout to crystallise the thought process.

Leverage has taken another pasting. Or wait, no, that is all wrong. The Chinese authorities have decided that margin trading is not good. In other words, borrowing money in order to own securities, using the securities as collateral. You know how it works, you just pay the interest portion and enjoy enhanced upside, of course as highly leveraged currency speculators found out, you can lose your shirt in an instant. The Shanghai stock exchange fell the most in a single day in over six years this morning in the trading session, down over 7.7 percent. Bearing in mind that it is up a lot in that time too, this is a correction of epic proportion, everyone rushes for the exits at the same time. Phew, if anything we have learnt that you should a) not rely on the status quo and b) leverage is not bad, too much is however very bad. Learn to keep a level that factors in worst case scenario.

Things we are reading, we think that you should read them too

Arguably our generations greatest innovator, Elon Musk keeps pushing the boundaries on many fronts. This time he is trying to make the internet accessible to everyone - Elon Musk wants to spend $10 billion building the internet in space

Having a look at Google's innovations - From driverless cars to pills that sniff out disease, these are Google's biggest moonshots.

Low fuel prices help this trend - Scientific Proof that Americans are Completely Addicted to Trucks. Ford sold more F-series last year than the entire new car market in RSA last year, having a large middle class and low fuel taxes helps (cheap fuel).

These charts are well worth your time - 29 Charts Worth Your Time. The topics range from investing to climate change and a few others.

Home again, home again, jiggety-jog. Markets are marginally higher here, that is possibly a catch up to the US markets there. Remembering however that US markets are closed today, Martin Luther King day today, the third Monday in January each and every year, there are many times that I think that it is much more sensible to have public holidays the day before or after a weekend. It would make life so much easier.

Sasha Naryshkine, Byron Lotter and Michael Treherne

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Friday, 16 January 2015

Swiss jeez, you blew a hole in it!

"If the SNB had telegraphed this to the rest of the world, the unwind would have been more orderly, the only problem would have been that THEY, the Swiss National Bank would have been on the wrong side. And why would they want to "help out" the currency speculators in New Zealand? Perhaps the pictures and adverts of happy smiling people in the currency adverts should include this event."

To market, to market to buy a fat pig. Wow. The Swiss National bank ended their Euro peg at 1.20. And at the same time they lowered interest rates to 0.75, minus. That is right, if you give them 100 Swiss Francs, they will give you back 99.25 Francs in a years time. Not exactly, you would not get that as a retail investor, you would not get much back however. They, being the SNB, stuck out a statement: Swiss National Bank discontinues minimum exchange rate and lowers interest rate to -0.75%. Target range moved further into negative territory. Why? The weakening Euro meant that the Swiss Franc was weakening against the Dollar, as a result of the peg. No more peg (which was put in place for emergency purposes in a time of economic stress) is needed. Goodbye peg.

The goodbye peg meant that many were caught unawares, Paul said that they (the SNB) had indicated that this was going to remain part of policy for a while. In the same way that this was instituted and caught everyone unawares, it was unwound with the same secrecy. This is too difficult and hurts my brain to try and understand why all of this should be so very important for us as equity investors, central bank currency interventions. Nevertheless it has real implications for some of the companies that we own. Richemont was down 2 odd percent as a result of a sloppy trading update, after this exchange rate announcement the stock was down 15 percent plus. At the same time, the Rand price ended down only 4 percent and a bit on the day. Why? Well, there is an opportunity to arbitrage based on the currency. The Rand at the same time was 12.5 percent weaker to the Swiss Franc, which explained why Richemont was only down that amount in Rand terms. We only care about the Rand price, that is the one that we hold for local investors.

Meanwhile there were implications for Mediclinic, which of course has a substantial business in Switzerland, their Rand earnings from that part of the world would be significantly higher, their Rand costs would be higher, of course all things inside of Switzerland would be neutral. If you got paid 100 Francs a day last week, that would be the same next week, what it could buy you however, that is the critical part. Mediclinic closed at 111 on the dot, Nelson as it is known in cricket, Umpire Dickie Bird would have been hopping all evening until the markets opened again. Swiss revenue in the last set of Mediclinic numbers was a little over 51 percent, profits 41.65 percent. So obviously a strong move in the currency would have positive implications for Mediclinic.

Credibility has been questioned of the Swiss national bank, a little like when the Romans discover that the vault has been blasted by Obelix in a Swiss bank, this is the same thing, credibility is key, most especially for the Swiss who are fiercely independent. Asterix in Switzerland, read it, it was my favourite. The FT explains it pretty well, what the implications are for the ordinary Swiss people are, is this pre-empting the ECB's stimulus program -> A poor advertisement for Swiss reliability.

Some of the implications were an implosion by a New Zealand currency trading house and major losses for a US currency broker, FXCM. It is actually a listed business. According to the WSJ in this article, Swiss-Franc Move Cripples Currency Brokers. The situation is manageable for FXCM, the stock tanked 15 percent in ordinary trade and another 12 percent after-hours. According to the article, liquidity became a problem, a huge problem for Global Brokers NZ. Unresponsive and illiquid for hours is a death knell for a company that prides itself on (in the Why choose us section) tight liquid pricing, 7 milli second execution time and client fund protection, it all seems rather ironic now. Poor chaps, it could have happened to anyone.

A former Fed official had a good take, pleased that the SNB did this, suggesting that they could have been more subtle: Rolexes Just Got More Expensive-Or, You Can't Keep A Good Currency Down. As Michael said however, if the SNB had telegraphed this to the rest of the world, the unwind would have been more orderly, the only problem would have been that THEY, the Swiss National Bank would have been on the wrong side. And why would they want to "help out" the currency speculators in New Zealand? Perhaps the pictures and adverts of happy smiling people in the currency adverts should include this event.

Company corner snippets

Mr. Price stuck out a trading update yesterday, this was for their third quarter to end December, rather than the usual half year numbers that we have been seeing mostly. You would say that Mr. Price is a company that likes to offer fashion right now, at affordable prices, more affordable than their peer grouping. Perhaps in large part that has been the beauty of the success of the company, as they say in this release, they target young customers in the mid to upper LSM groups offering fashion at good prices. Against the corresponding quarter from the prior year, Mr. Price managed to grow sales by 14.2 percent, a fabulous achievement. The more I see from all of the clothing retailers (other than the first to report, Truworths), I am starting to get the sense that the average consumer is looking marginally better. What leads me to believe that the nearly three weeks that we have had this year so far (post the hurrah period) sales have been at a similar level from the prior quarter. The stock closed up 2.3 percent, near a record high.

The TFG group, better known to you as Foschini (I heard from someone once that the company prefers TFG), have announced after their cautionary from a couple of days ago that they are buying Phase Eight. Phase Eight? What is that? Follow the link and you will see that it is a UK based retailer mostly, with concessions and stores elsewhere. In total 438 outlets globally with annual sales (to LAST January, 2014) of 140.7 million pounds or 2.573 billion Rand. EBIDTA of 23.8 million pounds or 435.5 million Rand. This compares against the group having annual sales (as at last March, 2014) of 14.159 billion Rand and EBIT of 2.536 billion Rand.

TFG are buying 85 percent of this business, there is the right of TFG (to buy) and of the management (to sell) of Phase Eight at a 9.36x EBITDA multiple. The price? For TFG, as per the release: acquires c.88% of the equity value for a consideration of GBP140m (ZAR 2561m). So 2.561 billion Rand, or 2.91 billion Rand for the equity value. Total enterprise value is 4.353 billion Rand. TFG current market cap is 30.5 billion Rand. So whilst this is a category two transaction not requiring their shareholders approval, the funding is also "not a problem" being financed from the proceeds of the RCS sale and existing resources. South African companies buying companies offshore. After the transaction, 54 percent of group sales will be cash, 20 percent of revenue will be non South Africa, see the associated presentation. Believe it or not, Phase Eight sells products through existing concessions in Australia in David Jones stores. Good for them, at the same time the company released a sales update that was above expectations. Oh, and last thing about Phase Eight, online sales (ecommerce) account for 17 percent of total sales. Richer working women with disposable income, that is the current market, nice! Good work, the market agrees.

Things we are reading, we think that you should read them too

Quality jobs are what count. There are many articles around talking about how the spending power of the middle class is being eroded, the good news is that most of the jobs created last year where in areas that paid higher than the average wage - Jobs Machine in U.S. Created More Than Burger Flippers Last Year. Note though that all these jobs are skilled jobs and the forecast for the coming years is that there will be a global shortage of skilled workers and a surplus of unskilled workers.

More on the jobs front, this time from the impact of the lower oil price - Schlumberger to slash 9,000 jobs as oil prices plunge. Ouch!

Remember when Bitcoin was the craze and the opportunity of a lifetime? - The bitcoin crash is worse than both crude oil and the ruble. We might find that Bitcoin was ahead of its time but for now I think the huge drop in price is its death nail because it has left a really bad taste in people's mouthes. Why buy a currency where you can get wiped out and a currency that not many people accept?

A very cool idea and a good way to spend your time on the daily commute - Beijing opens first underground library

Home again, home again, jiggety-jog. Markets are lower here today, there was a worse looking session in the US, banking stocks were all looking rather weak. US inflation number a little later today, that will be keenly watched and observed. South African retail sales were quite good, a couple of days back, pity that it was for November when all the companies are telling us what happened in December.

Sasha Naryshkine, Byron Lotter and Michael Treherne

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