Money with a dash of Funny

Wednesday, 12 August 2015

Yuan crisis, Yawn

"It is simple, the recent weakness, 9 months or so, in all emerging market currencies is due to a strengthening Dollar, the anticipation of a rate rising cycle in the US, relative to lower rates for longer in Europe and intervention in China. We all just have to deal with this, period. Companies with greater exposure and externalised earnings will be "winning" in the short to medium term, that is why companies like Aspen have a premium to Adcock. Bidvest and Remgro relative to Barloworld. Investing mantra, repeat over and over, keep clam, stay the course, invest in quality businesses, ignore the fog."

To market to market to buy a fat pig. Well, sometimes there is stuff beyond your control that has an impact on your portfolio in a way that you didn't expect. The Chinese deciding to weaken their currency to the US Dollar, it is a managed everything, managed economy, managed currency, managed state planning, managed politically with one governing party, you get the point. Yet interesting I read the other day on Quora that someone said that they lived in both the US and China and never felt that their rights were being violated in China.

The Chinese devalued their currency by the most in two decades yesterday, and some more today, an equal move. The upshot of it all? It means that the Chinese would in theory have less money in their pocket to buy Dollar based products, and the stocks that impact on us are Richemont and Apple. It does not take too long to think about why. Although the Rand is significantly weaker to the US Dollar, that does not make people want the latest Apple products less, does it?

Obviously US based manufacturing would be less competitive, if you are paying the workers the same in China in the local currency and the end product is around 4 percent (after a couple of days trading weaker) cheaper to manufacture in Dollar terms, that is good for your exports. Every major global currency has weakened to the Dollar, I saw on the box that the Malaysian Ringgit was plumbing new multi decade lows to the US dollar, at a level last seen in 1998. That was when there was the Asian crisis. 17 years is a long time in all markets.

The relative strength of the US Dollar, the US economy having come back stronger and faster than all their global counterparts leads me to believe two things, and I may be WAY out of line here. One, their systems of extreme bloodletting in all quarters led to a rebalancing of their economy. And two, their stabilisation of the banking systems through unconventional methods (not always popular from either the left or right) adopted have led to a faster recovery.

I recall that a major debate was happening around 3-4 years ago, the stimulus versus austerity debate, at the time our line was that both would work for their respective regions. The Chines, The Europeans and the US, collectively the three biggest economies in the world have all adopted unusual and unconventional methods to stabilise their respective regions from the external shocks created by the financial crisis. We are still dealing with those problems today, as Greece strikes a third bailout deal, their problems can also be attributed to borrowing too easily and not having the mechanisms to evolve and meet their obligations. Structural reforms, labour reforms, those will all come. I do not think that this is can kicking, it is dealing with the problem slower in order to minimise the pain.

The US could have let it all go, they could have let the financial system collapse and be all purist about it. That actually helps nobody. This whole nonsense of life support and unnatural, I can't say that I am a fan of having peoples life savings wiped out by insolvent and inadequately capitalised banks with no depositors backstops. I can't say that I am a fan of one in four people in the workforce being unemployed anywhere in the world, I cannot say that I am a fan of the soup kitchen queues seen during the Great Depression, the heartache and suffering would have been a global event. I for one am grateful for all the efforts and methodology used to stabilise the financial systems, create the necessary trust needed at the time. The cause is one thing, how you deal with it is another.

That aside, the upshot of a stronger US economy has meant that their Dollar has been much stronger relative to a basket of currencies around the world. The strongest part has been felt in the last 9 odd months. A quick look at the Dollar Index which is a basket of currencies reveals that not too much has changed since the Dollar strengthened significantly over a six month period from August 2014 to February 2015.

Take a five year graph of the same index and you can see that all of the "moving" has taken place in an era where expectations of a rate hike have been heightened at any other time over the last half a decade. September are the expectations. Even the Oracle of Omaha, Warren Buffett suggested that the Fed should not hike. Although I have heard him suggest in an interview at the Berkshire AGM that the Fed could hike 50-75 basis points "next week" (at the time) and his view would unchanged on the outlook for the US economy. So here goes, same graph, same wonderful source from MarketWatch U.S. Dollar Index (DXY):

So what can you and I do about it? Well, the real answer is very little, there is rebalancing going on here. The Dollar is getting stronger both as a result of the US economy having outpaced their global counterparts AND in part of anticipation of rates increasing in the US. We have come from a very stable environment by currency standards to a very tumultuous one. And that impacts on global trade. Weaker commodity prices have not been enjoyed by the majority of the population around the world, since their local currencies have not remained stable whilst this happened at the same time. And by this, I mean the graph below that is a commodity price basket, this one courtesy of the folks at Bloomberg, Bloomberg Commodities Index (BCOM), chart still courtesy of MarketWatch, a five year graph:

The constituents and weighting are 31.2 percent energy, 23 percent grains, 16.6 percent industrial metals, 16.2 percent precious metals, 7.7 percent soft commodities (sugar, coffee, cotton) and 5.2 percent livestock. Livestock = hogs and cattle, or pigs and cows! Of course commodities are priced in Dollars, until that changes and it becomes Renminbi (Yuan) or something else, it is not. That tells you the Dollar is still king, you can easily tell me offhand what the Dollar price of oil or gold is, yet you cannot easily tell me off the top of your head what the Euro or Yen price is of the same commodity. There is this correlation between commodities and currencies, there has always been.

It is simple, the recent weakness, 9 months or so, in all emerging market currencies is due to a strengthening Dollar, the anticipation of a rate rising cycle in the US, relative to lower rates for longer in Europe and intervention in China. We all just have to deal with this, period. Companies with greater exposure and externalised earnings will be "winning" in the short to medium term, that is why companies like Aspen have a premium to Adcock. Bidvest and Remgro relative to Barloworld. Investing mantra, repeat over and over, keep clam, stay the course, invest in quality businesses, ignore the fog.

Linkfest, lap it up

Why is Google doing a shuffle? Here is a quick look at what could be some of the main reasons - What Google has to gain by adopting the Alphabet. I have heard rumours that the new structure also makes the company more tax efficient. The hope for me is that this frees them up to do a nice big purchase with all the cash they are sitting on, something or someone in particular being Twitter!

Josh Brown chats about how the market teaches us through the reward of prices continually going up. What happens though when prices stop going up? - The Positive Feedback Loop is Broken

This is a very brief overview on the history of the huge growth seen in China over the last 60 years - A brief history of China's economic growth. Below is a graph of the Real GDP Capita, which would be how the average person in China is experiencing the growth. Note that the Y-axis is in log scale and not a linear scale. If it was in a linear scale the growth line gets very steep very quickly!

The dip starting in 1958 is from the Great Leap Forward, where there was a push to introduce more socialist measures. It resulted in the Great Chinese Famine and in the death of over 18 million people!

Home again, home again, jiggety-jog. It is official, as Paul said this morning, the Chinese currency and policy intervention is now more important than the anxieties related to Greece. There are signs that the Greeks are close, they have wasted 8 months and have seen terrible uncertainty derail their economy. Well done socialists of the world! OK, maybe that is harsh, their lived reality is not mine. Markets have started predictably lower with all the new area of anxiety. Ignore, invest more, buy the same quality, keep saving sports-lovers.

Sent to you by the Vestacters, Sasha, Michael, Byron and Paul.

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Tuesday, 11 August 2015

Alpha-Bet on it

"Larry Page will be running Alphabet, Sergey Brin will be his partner, not much changes there. Sundar Pichai will run Google, he is highly regarded and got tweets of encouragement from the likes of Satya Nadella, the Microsoft CEO, Tim Cook, the Apple CEO and Google Chair, Eric Schmidt. He comes with a top pedigree, is only 43 years old, born in Chennai, I am just guessing that he is a huge MS Dhoni fan."

To market to market to buy a fat pig. Last Friday we had the "jobs" number or the employment situation as the Bureau of Labor Statistics in Washington DC calls it. The BLS. The report was one of those Goldilocks numbers, not too hot, nor too cold, just perfect and the consensus has moved to a rate hike in September now. At least that is what the many talking heads (who should know) have suggested, people like Bill Gross, king of the bonds.

Well, you could argue that there are several kings of the bond world, Jeff Gundlach is another. As recently as the middle of July however, Gundlach said that he thought the Fed should not raise rates this year, a sentiment shared by the International Monetary Fund (IMF) managing director Christine Lagarde. Janet Yellen and her team will do whatever they need to in order to meet their mandate, if this number confirms the launch of rates, then so be it, you personally should not worry about anything. After all was said and done, last evenings session was a cracker for the bulls, the Dow Jones up nearly 1.4 percent, the broader market S&P 500 up nearly one and one-third whilst the nerds of NASDAQ gained the least of the lot, ending up nearly one and one fifth of a percent.

Why the big jump in the "major gauges". Yes! I have always wanted to work that in, "major gauges", finally nailed it. The reason is pretty simple, the Oracle of Omaha, Warren Buffett's business Berkshire Hathaway, is showing the strongest signs ever of faith in US manufacturing by offering 37.2 billion Dollars (including debt) to buy a business called Precision Castparts. The stock jumped nearly 20 percent on the news over the weekend, another elephant gun transaction (in the current environment I think another analogy is in order). The official release from the Berkshire website, you can download it here: Berkshire Hathaway Inc. to Acquire Precision Castparts Corp. Berkshire has an awful website. A really bad one, all you need to know is that it is functional.

The reasoning is simple, Buffett sees more aerospace growth, so does Elon Musk, who has dedicated his life to this. In the release: "For good reasons, it is the supplier of choice for the world's aerospace industry, one of the largest sources of American exports." Yes. It also services many other industries, chemicals, oil and gas, pollution control and power generation. The part that is interesting (several) is that this is the biggest ever deal for Berkshire, eclipsing the 26 billion Dollar railway deal, where the company had a part purchase of Burlington Northern Santa Fe back in 2009. First point, made, biggest deal ever.

Second point, the timing. The S&P 500 is up 87 percent over 5 years, as at close last evening which included the nearly 20 percent gain by Precision Castparts during the day, the stock is up 86 percent. So, with the premium, the stock has basically performed the same as the index. Which, if you needed reminding, is trading only around one and a half percent off the highs reached in the second half of July.

Third point and the most important of the lot, Berkshire is paying 22 times earnings for the company. Buffett obviously believes that this is a fair price for a business of this nature. Remember the Buffett wisdom: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." Exactly that, don't feel afraid that you may be paying too much today for that business, when in five years time you "wish" that you had bought that company.

Buffett is paying nearly two and a half times book value for the company, a metric that deep value disciples use. Two and a half times sales. Before buying a company, ask yourself why you are getting such a discount, if that is the case. Is it a fair business or a wonderful business? I often see people say that a company is really great, I wish I could own it, it is however too expensive. And remember, from his mentor Benjamin Graham: "Price is what you pay, value is what you get." That is also a favourite of the Oracle of Omaha. Third point, do not be afraid to be paying up for a good quality business with better than even prospects.

Company corner

There was an interesting announcement from Google last evening, after the market closed: Google Announces Plans for New Operating Structure. The holding company is Alphabet, the website is abc.xyz. That is pretty cool, and the design is clean, G is for Google. Larry Page will be running Alphabet, Sergey Brin will be his partner, not much changes there. Sundar Pichai will run Google, he is highly regarded and got tweets of encouragement from the likes of Satya Nadella, the Microsoft CEO, Tim Cook, the Apple CEO and Google Chair, Eric Schmidt. He comes with a top pedigree, is only 43 years old, born in Chennai, I am just guessing that he is a huge MS Dhoni fan.

He, being Sundar Pichai, told his bosses (according to this Bloomberg article: Google's Sundar Pichai Is the Most Powerful Man in Mobile) that they had to get into browser wars, with Chrome. And he was prominent in making Android a success. All in all, what this move is supposed to represent is that we may see segmented earnings (and research and development spend too), rather than all of the advertising businesses lumped into one. Whilst there was not too much being fleshed out as of yet, it does provide more clarity.

And more importantly, reveals what we know all along, that whilst the company is currently heavily reliant on one revenue stream, there is plenty of ambitions to grow the business into many others. Hence Alpha-bet. And whilst G stands for Google, there are 25 other letters in the English alphabet. Does this mean that Google can only ever have 26 businesses in total? Perhaps, I remember reading that at any one time there were 40 things on the go there! The stock popped 6 percent plus in after-hours trade to above 700 Dollars in GOOGL, near an all time high. Lovely to be shareholders.

When are you going to get your Mediclinic shares? In two weeks time. Be patient. The N shares will trade for the balance of this week, the shares and cash will swap hands on the 24th of the month, to give you a blended price, remember you are getting the rights at a discount, 90 Rand a share. Relax, we haven't forgotten about you or your rights, we are on top of it.

Linkfest, lap it up

This is an interesting change in the labour force dynamics. Do you think it is a problem that teens are not working as much as they used to? - Why American Teens Aren't Working Summer Jobs Anymore

Dont forget to consider inflation when looking at what your long term (and short term) returns have been. At the end of the day, real returns are what matter not nominal returns - How Inflation Affects Market Returns

Norway is one of the countries that have done the best out of high oil prices, so a drop in the price of oil is putting pressure on the economy - For Norway, Oil at $50 Is Worse Than the Global Financial Crisis. The headline has a negative connotation but note that unemployment is still below the 5% mark (most countries would love that!). Also note that they have nearly $900 billion in a sovereign wealth fund which they have built up from oil revenues. They made hay while the sun was shining. A point to make though is that it took two busts in the oil cycle for them to finally implement setting up the fund. While things were going well there was not political will to set up a fund for the bad times, until the bad times came around twice and the country struggled.

Home again, home again, jiggety-jog. Markets are in catchup mode here today, across my screen there is a green-spread. Green bedspread, all stocks are up. Which is good news for all and sundry, as long as you are long. Across the rest of the globe stocks are marginally lower. Google to watch today, there seems to be some short term excitement about that. Love it!

Sent to you by the Vestacters, Sasha, Michael, Byron and Paul.

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Friday, 7 August 2015

Bezos, Jobs and Musk

"The company is slowly changing, and as they point out, in the coming months there will be more than just the car, the battery too. The so called Powerwall. The products are designed to be beautiful, not too dissimilar to another workaholic and neatness freak who pioneered amazing devices with his design team, one Steve Jobs."

To market to market to buy a fat pig. Ready, set and go. Today is the day that we get the "jobs number", that monthly report of the state of the US employment situation. It is still the most watched and highly anticipated number of the month for global market. It helps that the whole week also leads into this number and that it falls on a Friday. The trend has showed a steadily improving US labour market, more strength today will cement the case for an earlier rather than later rate hike in the US.

As we have maintained over and over again, it does not matter in the medium to long term about the prices of the companies that you hold. What matters is that you own companies that make amazing products or offer amazing services, companies that are gaining more traction in the modern economy. Companies that are run by dynamic and in tune people. That is what you can choose. Things you can't choose include your originally given name, your parents and place of birth, interest rates and global sentiment. So focus on the things you have control over, ok?

Resource stocks took a hammering, the recent graph on resources as a collective must look like a saw blade. Up and down. Sadly the longer picture tells of falling commodity prices as a result of slowing demand and a surge in not only supply, equally extraction techniques of hard to reach deposits earlier. Shale deposits and their extraction methodology changed many, many "things" about the oil market. By letting humans, their ingenuity and market forces take care of supply, we are all benefitting from lower energy prices just at a time when they threatened to get the better of us. It is difficult to believe that when the last oil shock happened in the late 70's and early 80's (when tight jeans were really tight and hairstyles were big and weird), that inflation spiralled out of control. Rates globally were so high but people forget, they really do.

Not too dissimilar to when we had a serious inflation shock here around 25 years ago. The Fed funds rate was 19.1 percent in June of 1981. And it is between 0 and 0.25 percent now, in fact it has been that way since December of 2008. Is this a normal cycle? Who knows. I suspect that the high end of the next range will be lower than the past few cycles, check it out from the St. Louis Federal Reserve, US rates since the 1960's:

So. You can see why people who started their careers in the 70's and 80's would focus on interest rates a little more than people who started their careers in the early 90's through to present day, roughly a generation. If you are between 60 and 70, you have seen it all. An industry peer once told me that the best thing about financial markets was that eager to learn and eager to impress youngsters with clean slates and unparalleled energy (who were intrinsically optimistic) were always there to replace older cynics, battle hardened by the losses and years of boom/bust.

Often the people that tell you that financial markets are ending have had poor experiences themselves, I often point out that personal experiences can (by osmosis) leak into investment decisions. They shouldn't, they can and do, however. Elon Musk for one has no place for the word no, or it cannot be done. Adopt that mantra, don't be horrid about it though, equally 100 plus hours of work a week may mean you have no other life for anything. Life is about experiences and personal gratification, saving hard when times are good gives you the flexibility and more importantly ability to enjoy life. If it makes Musk happy working to make the human species interplanetary and he succeeds, then good for him.

Back to local rates here for a second, that ABSA home loans advert of the family trying to hold onto their home with a rope (remember?) whilst it was floating away like a hot air balloon got me thinking the other day, so here is a representation of the REPO rate here locally in South Africa since 1998, courtesy of TradingEconomics. The highest of 23.99 percent, holy smokes those were dark days for interest repayments my friends.

Without knowing the future any better than you, I suspect that the information age, the internet age, has done more for price stability than any other technological jump in humanity. You can sit at home, or even lie in bed with your "phone" and compare prices of products, air tickets, houses, cars, whatever big ticket (or small product) that you want to buy. That sounds like major progress to me. Equally companies can be more productive as a result of technology, enabling them to manufacture their products a whole lot cheaper than at any time in history. If that means a cap on inflation for a while longer than we may anticipate, then that also means a lower rate environment.

Perhaps the French are on to something by trying to factor in happiness to GDP. Or not, it depends who you are and your outlook on the rawness of data. In other words, do you agree with Paul Krugman, Joseph Stiglitz or Milton Friedman, Friedrich Hayek and Irving Fisher. Or Adam Smith. There is a reason that you follow one or the other, it is circumstance and upbringing. If you are born with loads of money, perhaps you will trumpet the free market economy. If you are born with no money, then the idea of sharing all resources is a lot more appealing, I get it. The myth is that capitalists do not want labour to be rich, not true, at least from my side, I want everyone to have the resources to do what they want. It does come with personal responsibilities of self improvement and rising above the competition. There is nothing like standing out and putting your hand up to be recognised.

Lets finish the markets section with the scoreboard, the Dow dropped 120 points (Down six sessions in a row I think) to 17419 points, the broader market S&P 500 lost 0.78 percent, the nerds of NASDAQ was crushed, down 1.6 percent. The big talk of the town was the downturn in the cable companies, Disney was sold off again, Twenty-First Century Fox sold off 6.4 percent, Viacom an astonishing 14.2 percent. All this as ESPN loses customers. Viacom owns MTV, VH1, Nickelodeon and Comedy Central.

Twenty-First Century Fox, well, one of their channels hosted a debate with 10 Republican hopefuls last night. The Republicans will not nominate Trump. If he runs as an independent then Hilary Clinton has an even easier win. What was that one banner in Simpsons (part of the Fox satellite TV bouquet) that read "We are not racists, but we're no. 1 with racists". Quite, Trump ticks all those boxes that equals "loser" in my world, sadly some people find him appealing. Sigh, if nothing else then it should galvanise us harder in nation building and not dividing us. End of that sad subject, it makes for low level comedy, he does it to himself.

Company corner

Tesla shares sank over 8 percent last evening as the company indicated (after the session prior to yesterday) that they would miss their annual target of delivering 55 thousand motor vehicles for the year. Instead, it would be between 50 and 55 thousand. For a share price that is primed for perfection, this is obviously not the best news in the world. Musk has a plan though, as a shareholder there is going to have to be many lengths of patience during which you are going to feel underwhelmed by the present or the short term outlook. Having read the book about Musk, you get a sense that he thinks as long term as Jeff Bezos of Amazon.

He (Musk and Bezos for that matter) will sacrifice short term shareholder returns for excellence and execution on his masterplan, which is quite simply to rid humanity on their reliance on fossil fuels. Both SolarCity and Tesla will enable us to do exactly this. You have to start somewhere. As such, when you buy either company, you will not see positive returns, let alone dividends for years. Both these companies were on their knees a number of years ago, about to go out of business. It makes the business very hard to judge as an outsider, let alone value. To put that into perspective, just the Ford F Pick up truck series has sold 423 thousand units this year so far in the US. The July number was 66 thousand. One pickup truck sells more in one month than Tesla will sell all year. In fairness to Tesla, for the moment it is one car, a specialised and niche car and definitely in the luxury category.

Whilst the company makes progress with all sorts of things like the Gigafactory, the Model X delay (the SUV with the swing doors) it is definitely weighing profits down. Elon Musk is large and in charge, that is part of what you are buying here when you own the company. If you read the shareholder letter, you will see that the Model S is only three years old. They are selling nearly 50 percent more cars than last year, all pre paid. No dealerships. The Roadster before that was quite frankly not the best looking car. The car is growing quickly in both the US and Europe. They continue to roll out the charging network: ".. drivers in California are on average never more than 42 miles away from a Supercharger, while drivers in Germany are on average never more than 33 miles away from a Supercharger."

Quarterly revenues are only one million Dollars for Tesla, GM has annual revenues of 156 billion Dollars. Ferrari in their recent IPO for comparisons sake, are pushing to sell 9000 vehicles a year in a couple of years time, Tesla are going to struggle to get to 55 thousand this year. The company still makes a loss, a narrower one each quarter, they made a net loss of 184 million Dollars. The company is slowly changing, and as they point out, in the coming months there will be more than just the car, the battery too. The so called Powerwall. The products are designed to be beautiful, not too dissimilar to another workaholic and neatness freak who pioneered amazing devices with his design team, one Steve Jobs. It is a company that you have to own, there may be however long leads and lags between the results around share price performance relative to the results. Buy the stock, forget where it trades in the next three years, this is bound to be a long term success, from which point it is hard to say!

We had a trading statement from Sasol this morning, Trading Statement For The Financial Year Ended 30 June 2015. Given the slide in the oil price their HEPS are expected to be down 14% and 19%, with normalised basic earnings expected to be down 26% to 31%. The numbers are better than the market was expecting, the stock is up 4% this morning. The weaker Rand has been a good hedge for the company helping slow the drop in the Rand cost of oil.

The only concern is that for the last financial period the average price of Brent was $73.46 a barrel. The first month and a bit of this financial year has seen the oil price closer to the $50 a barrel mark currently at $49.89 a barrel. Going forward the forecast is for the oil price to stay in this region if not fall further in the short run. What will the average oil price be next year this time? Where will the Rand be? No one knows but if it is at current levels Sasol's earning will be down again. We will have to wait until the 7 September to see the final results. Chat then folks.

Linkfest, lap it up

Which countries are devoting land to organic farming? Here are the top countries - Which countries have the most organic agricultural land?. Australia makes sense to me given their high living standard and relatively rich population. I didn't expect to see Argentina in second place.

The new concern doing the rounds is what will happen to the bond market when interest rates normalise? Cullen Roche shares his views - Why Are People Worried About Bond Market Liquidity?

Home again, home again, jiggety-jog. We are up ahead of the big jobs number! Later today folks, if you think that the Rand has had a bad time recently (16 percent weaker over the last 12 months), then spare a thought for the Brazilians. They have been more than err ... waxed clean. 36 percent lower over 12 months. True story, with all the problems ahead of the Olympics next year, Petrobras scandals and the like. It is worse in Russia, the Rouble is 44 percent weaker over the last 12 months. Be careful where you draw lines and the like and suggest that it may have to do with internal factors. The Indian Rupee (the Indian economy being net importers of commodities) has fared the best, down only 4.15 percent over the last 12 months, the new Reserve Bank governor there seems to have a handle on inflation. We wait and see!

Sent to you by the Vestacters, Sasha, Michael, Byron and Paul.

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Thursday, 6 August 2015

SportsCenter

"Sports however and having the love/hate relationship with your favourite team is something special. CEO Bob Iger said that US households would watch sport across all platforms and was confident that they could monetise it. He is right. Currently US households are cutting their TV cable services, and many of those include ESPN in the package."

To market to market to buy a fat pig. Sometimes tepid news is interpreted as good news. It is like standing in front of the Nando's menu staring up at the board and wondering whether or not you should have hot (or extra hot), even though you know you may sweat. Yet it will taste good, you know this from past experience, humans are wonderful at recognising and avoiding past mistakes. OK, not all of us. Yesterday the ADP employment number came in lighter than anticipated, a miss (lemon and herb in this case), leading to the market to believe that rates may or may not actually go up in September.

The relationship between the guessing of the market, finding this ever so important and when the Fed will actually act reminds me of paper passing in junior school with the answer to your question awaiting a yes/no box check. The anxiety before the wait, do you remember that? Will you be my girl/boy friend, yes/no? How complicated and simple things were back then. In the case of Mr. Market this has been the longest wait ever for interest rates to be moved. The guessing is certainly in a tighter range than ever before, almost each and every time it has been "later" rather than sooner. As we said yesterday, this is beyond the control of all of us, the professionals are in charge, file it in the drawer of things to pay attention to yet have no control over.

After all was said and done the market in the US was a mixed bag, the Dow Jones lower by a smidgen, the nerds of NASDAQ up two-thirds of a percent and the broader market S&P 500 somewhere in the middle of that, up 0.31 percent. The difference between all of those was the impact of Walt Disney, that stock was down 9.21 percent on the day. Fear not, the stock still sports a 17 percent gain YTD and is up nearly 30 percent over the last 12 months, 228 percent over the last half a decade, with returns of 333 percent over a ten year period. Do I hear the sound of Cinderella again, Snow White communicating with the animals, Ariel under the sea singing a lovely tune? Yes?

It wasn't as a result of the parks, movies like Inside Out were hits, as we have pointed out before, the biggest money spinner for the Walt Disney is actually their stake in ESPN. Sports advert sales fell, the prior comparable period included the World Cup in Brazil. The truth is that sport is the only thing that you have to watch live and in the moment. Live sport or reruns without the anticipation or excitement. You choose, you know that they are not the same.

If you are like my mum and couldn't care too much for the excitement of sport, then I guess it doesn't matter either way. Sports however and having the love/hate relationship with your favourite team is something special. CEO Bob Iger said that US households would watch sport across all platforms and was confident that they could monetise it. He is right. Currently US households are cutting their TV cable services, and many of those include ESPN in the package. Netflix, Amazon and Apple are shaking up the TV industry, the sport is certainly not going to stop. ESPN is 80 percent owned by Disney, the balance is the Hearst Corporation (those of you old enough will remember the drama of family member Patty Hearst in the 70's). If you study the Disney results and look specifically at the segmented results operating income:

See? Dominated by media networks. That is ABC (which includes the history channel), Disney channels and most importantly ESPN. I ran through the Disney report and found that an executive member was Mary Jane Parker. MJ must have married Spiderman and then got a real day job on the board of Disney. Kidding. Anyhow, the company is just fine.

Resource stocks were the main drivers of the overall markets yesterday, up over three and a half percent as a collective with huge moves northwards in the share prices of the diversified miners. The overall market closed two thirds of a percent higher, there were gains across the board. Remember that the big event that attracts Octoboxes (eight inserts on the same screen) is tomorrow, the non-farm payrolls number. Two thirty local time, turn on your favourite business channel to watch it live. There is always anticipation around this number, tomorrow there is the added excitement of trying to preempt the Fed. And what for? Just to say, yip, I called it!

Company corner

As promised, we are looking at the results of Cerner from two days ago. Cerner is a support system to the medical industry, supporting hospitals by providing critical digital solutions all the way through from dispensing of medicines to making sure the accounts are in order. By providing services software to make medical care more about the care, than the admin. Enabling care givers to go about their jobs easier, that is essentially Cerner's job.

18 thousand facilities worldwide are connected via their technologies. There is certainly a load of work to do, recently the company was awarded the job of digitising the US Military health records, 9.5 million in total. The amount of paperwork needed in hospitals is mind-blowing, using existing technologies to minimise mistakes and thereby reduce human error which ultimately saves lives. If the pharmacy dispenses the right medication, if the right medication is administered, and there is an electronic trail all of the time, everyone can be assured that the right thing is being done for the patient.

These results were for the second quarter to end June, revenues were lighter than the company had guided at 1.126 billion Dollars, that was still a 32 percent increase on the corresponding quarter last year. Good work. Bookings however were at an all time high during the quarter, at 1.29 billion Dollars, the backlog is now 13.3 billion Dollars, an increase of 37 percent from a year ago. Even though that was the first number introduced in the second quarter results, it was largely ignored by the market, record bookings that is. Adjusted diluted EPS was also 30 percent higher than the corresponding quarter, clocking 52 cents and inline with consensus.

The company updated their full year guidance to be 4.475 to 4.575 billion Dollars in revenue, lower than the 4.65 to 4.8 billion Dollars, leaving EPS guidance at 2.09 to 2.15 Dollars, the current quarter guided slightly lower, a voluntary separation plan expense impacting. That reflects a 28 percent growth on the prior year at the midpoint. So, forward, at 67.30 Dollars, the stock trades at 31.6 times. With a PEG ratio of 1.11, PEG being price to earnings (in this case 31.6 times) over growth, in this case 28 percent. You would expect high growth companies to have higher valuations.

The company is growing fast and is starting to become the "choice" and go-to business in their field. There is an enormous amount of work to do, and whilst the stock looks expensive, it has the forward growth rates to match the market rating. This moderate fall back in the share price represents an opportunity to buy a few more at these lower levels. We maintain our positive outlook for the company (and the stock) and are still rated a buy!

Last week our favourite beauty company, L'Oreal reported their half year numbers. Given that they are based in Europe and not the US, their earnings got a big boost from the stronger dollar which is a nice change.

Here go the numbers: Sales are up 14.7% (5% at constant exchange rate), operating profit is up 14.5% and EPS is up a solid 18.9%. Below is the breakdown of how each division and region did.

Have a look at the whopping growth in North America, a large chunk due to the stronger dollar. We own the shares in US Dollars though which hurt the share performance a bit. L'Oreal's primary listing in Euro's is up 26% ytd compared to the US based shares which are up 15% over the same time. In Europe where currency fluctuations don't have an impact and GDP growth has been flat, they managed to grow sales by 5%.

In their other regions, particularly in developing countries they have solid double digit growth. They had poor numbers out of Brazil where they said ". . . Brazil where the economic context is very unfavourable. The Brazilian Real is weaker by over 50% over the last 12 months!

The story of why you own this stock is still the same. As the world gets richer and as the large number of young people move toward working age, people will consume more of L'Oreal's products (Discover our Brands). They are a great stock, for whom the market has big expectations. So far they have met those expectations and look well positioned to do so going forward. Buy

Linkfest, lap it up

As a shareholder knowing more about a company is always good - 9 things you didn't know about Starbucks. Here are a few facts to help you sound clever around the braai this weekend.

Renewable energy has been the theme this week in our links. Here is what some of the biggest economies look like in terms of energy demand - How will the Clean Power Plan improve US energy performance? India is an interesting case as they have 26% of their energy produced by alternate sources but they still have a massive Co2 emission. Which explains the poor air quality that we talked about on Monday.

Retailers are making it as easy as possible to spend, with innovations from Amazon like their '1-click' buy option and just the ease of handing over a card as opposed to handing over cash. Apps are popping up to help people keep track of what they spend and where, which is meant to help people spend more wisely resulting in saving more - I Let an App Tell Me What to Spend. The principle that seems to work best is still the "pay yourself first" principle. Who ever has money left over at the end of the month which can go toward savings?

Avoiding the bad investors is probably an easier task than finding the great ones - 20 People You Don't Want to Invest With

Home again, home again, jiggety-jog. Tesla released numbers after market, the sales number disappointed, I think that the story certainly remains intact. Old Mutual, one of the most widely held stocks in the country has reported their half year results this morning. They continue to do a great job, one of the great accumulators of assets. Whoa, funds under management at Old Mutual are up to 335.7 billion Pounds, multiply that by 20 to get Rands. Asian stocks are a mixed bag, up in Japan and down in China, down in Hong Kong. Hopefully it is not up and down in Nottingham today, where the 4th Ashes test starts. This has been the best Ashes in a decade, let this match be no different, although this one looks like the weather may well feature. No, go away.

Sent to you by the Vestacters, Sasha, Michael, Byron and Paul.

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Wednesday, 5 August 2015

Everywhere you Browse

"In Nigeria, where the group has nearly 63 million subscribers (one fourth of the base), data is now 20.5 percent of all revenues. Margins decreased, mostly as a result of the selling of the tower infrastructure and a weakening of the Naira. The Nigerian currency translation is always going to be a problem. As Michael pointed out yesterday, the Rand has actually weakened to the Naira recently."

To market to market to buy a fat pig. Who cares? I mean, if a voting Fed member says that he is going to support a rate increase in September, readying himself for a rates normalisation, then it is going to happen, right? I am not too sure how many times I have seen the equities market act one way or another based on the FOMC statement, or a member saying this or that, or people trying to interpret words. I have shared this with you many times, I read a book called "It was a very good year" which takes the circumstances around why equity markets rallied. And a lot of the time, be in 1950 something or 1960 something or 1980 something, there was a lot of talk about what the Fed was going to do next.

Whilst the cost of funding for business is clearly going to go higher and there are going to be problems with some less quality company issued bonds, that is something that the market "knows", i.e. it has been priced in already. There is a lot of distressed company debt all of the time, based on fundamentals that are not in their favour. Take the onshore oil and gas sector in the US, it looks ugly right now. Those companies are used to the stresses related to volatile markets, their debt investors should know that too. I do not think that there is ever a reason to get freaked out by factors beyond your control. I have seen some pretty amazing reasons for "selling stocks", yet chasing your own tail is a terrible thing to do. We keep repeating over and over again, you are buying and owning real companies with real customers, not share prices.

The BusinessInsider had an interesting piece last evening, confirming that getting anxious about market moves (and acting accordingly) has poor outcomes: Panicking is a horrible investment strategy. It was back dated research from Merrill Lynch's Savita Subramanian, she is a rising star and I see a lot of her on the box. Her assumptions are that people sell on the first sign of volatility and then invariably when nerves have settled, they buy stocks back 20 days later. The massive underperformance of that strategy means that even if you do this once or twice, your chances of catching up are almost impossible. Keep calm and carry on. Stay the course. The Fed will do what they have to, the many more customers and clients of listed companies will do what they have to, we will cover that below with Apple, that share price has sold off lately.

After the dust had settled, once "market participants" had a chance to digest all of this, stocks closed off around one fifth to one quarter of a percent lower for all of the major indices on Wall Street. Locally markets had a "ripper", the Bill Lawry expression of an excellent delivery. From my reading, Bill Lawry was a very dour captain and equally boring as a cricketer, which makes his commentating style even more amusing. Boring as a participant, excitable as a commentator. Pretty much like all the experts around the fire (burning meat) on how Bafana or the Springboks (or the Proteas) can improve, yet their levels of participation does not extend much past Blikkiesdorp High School 3rd team. Possibly reserve for the same said team. The same could be said for armchair Fed critics, their economic prowess is possibly just beyond Economics 101. The Fed will do what they need to, pretty much like Bafana, the Springboks and the Proteas. There is a reason they made the team and we didn't. Except for Farhaan Behardien, that still puzzles me. Ha ha, there goes, right?

Off topic, the local market soared thanks to financials which were 2.5 percent higher as a collective. Sparkling results, no rephrase, better than anticipated results from Nedbank saw sympathy rallies across the sector. Nedbank has seen a LONG road back from the go-go days of involvement in the technology sector, the stock was up 5 percent yesterday. FirstRand participated and added three and one quarter percent, Barclays Africa up 2.8 percent, whilst Standard Bank added two and three quarters of a percent.

And remember the Nedbank slash Standard Bank merger that was rejected by the Finance Minister Trevor Manual, back in 1999. That could have changed things. And it was Nedbank trying to take out Standard Bank. Old Mutual have at points gingerly held onto their stake in Nedbank (a little over 51 percent shareholder) and it certainly has served them well, rumour after rumour (and HSBC was close) about the stake being sold have led to nothing. Current Nedbank CEO Mike Brown reminds one of a good old fashioned banker and certainly inspires confidence.

It wasn't always the case with Nedbank. In the year 2001, the Nedbank share price reached a high of 182.20 Rand. In 2004, the share price traded at a low of 52.40. The number of shares in issue between 2003 and 2005 increased from 293 million to 397 million, the company was forced to shore up funds by way of a rights issue. Tom Boardman took over from Richard Laubscher (who resigned and left on the same day, 8 December 2003), and proceeded to "fix". The company raised 5.152 billion Rand, issuing 114.48 million new shares at 45 Rand per share. In fairness it was oversubscribed. Mike Brown was appointed the CFO in June of 2004, at the time only 38 years old. Mike is a KZN fellow, having done his articles at Deloitte & Touche in Durban. I wonder if he is in that crowd with Stephen Saad and Gus Attridge? Gus went to Northlands Boys high, Stephen went to DHS (he is very active there I am told), Mike Brown went to Maritzburg College. Saad and Attridge were at Cooper & Lybrand, I am sure they knew Mike though, they are around the same age.

I think that the point that I am trying to make about Nedbank is that whilst it seems "amazing" right now, it was not always the case. Prior mistakes made by the management teams, including holding a 8.2 percent stake in Didata plc stock (valued at over five billion Rand in 2000). Those 103 million shares were sold at 3.4 Rand a share (less than 30 pence) by the end of October 2003. And a 20 percent share in the IS (Internet Solutions) was sold back to Didata in 2005. 103 million shares at 120 pence was well below the price Alan Gray and Venfin received in the middle of 2010 when NTT Docomo bought the whole company, Nedbank could have hung on for a fourfold increase from their selling price. I suppose it was a better idea to sell and clean up back in 2005 after the pain of 2001, it is another reminder that "things" do not always go your way. And I guess that is why after the last financial crisis that our banks are back to the basics, which is good for the broader stability of the financial system. Good work Mike Brown, well done.

Company corner

The Apple share price has taken a bit of a pummelling recently. The results themselves were good, the guidance could have been better, perhaps iPhones sold was a miss. Why, is the question? Is it a muted response to the Apple Watch that everyone is "worried" about, is it that the Apple Music rollout has not been that well received? No, can you believe that the main reason the stock sold off three percent yesterday, to sink to a six month low of 114 Dollars a share, is that the price crossed the 200 day moving average?

This Bloomberg article, titled: Apple's Trading Volume Is Exploding Today has this line from technical analyst JC O'Hara, which left me perplexed "When people start to see a stock everybody owns trade down, they don't want to be the last one selling it." That statement is so dumb in so many ways. You can never be the last one to sell. I can bet you that the company is buying back their shares like crazy at these levels, the stock trades on 13.24 times historical earnings, ex the 203 billion cash pile (30 percent of the market cap), it is around 10 times. Buy. Ignore 200 day moving averages. This tweet possibly sums it up the best:

Customers of the product do not care whether the price falls below the 200 day moving average. I don't even care. Whilst the stock price may fall, as it is down and that may mean there are some more forced sellers who may be leveraged (how do I know), do not worry, keep calm and stay invested on one of the most innovative companies I know. Plus their products are damn awesome and amazing. Technical analysis is a bunch of lines drawn on a graph of historical data. It tells you ABSOLUTELY nothing about the future. It would be naive to think that many people do not use technical analysis in their trading strategy. They do, thanks for the liquidity, I am sure that the company is buying back shares.

Cerner released results last evening. Whilst the company managed to meet the "expectations" of the market, the forward guidance was a disappointment. I for one do care what the market thinks in the long run (weighing machine, as Benjamin Graham said) and not the short term (voting machine, as Benjamin Graham said). We will take a closer look at these numbers and revert tomorrow, the stock has acted negatively, down over three percent.

MTN first half results were released this morning. The subscriber base is now 231 million across 22 countries. That subscriber base is bigger than any country in Africa, and as a standalone would be the fifth most populous country in the world. In fact, MTN offers services to 3.1 percent of the population of the globe. That is no mean feat for a company that is less than two and a half decades old. Quick check at the key numbers, group revenue decreased 4.9 percent to 69.2 million Rand (0.7 percent lower on a constant currency basis), EBITDA was down 10.1 percent (down 4.2 percent on a constant currency basis) to 30.2 billion Rand. For the half.

MTN EBITDA for the first half of the year is 89 percent of the Telkom market capitalisation. MTN invested 10.8 billion Rand in their infrastructure, an 18 percent increase from this time last year. HEPS was 10.3 percent lower than the prior corresponding reporting period, 654 cents per share. The dividend was actually hiked to 480 cents, the interim dividend that is (408 cents after paying a 15 percent tax rate). That is more than they paid in 2012 for the whole year, back when there were no interim dividends.

The average minutes spoken across the networks increased 11.2 percent, average billed price per minutes fell 25 percent, in Dollar terms. As we suspected, minutes spoken are still increasing across the board, the real growth driver remains data.

30.1 percent of all revenues in South Africa are from data. Margins expanded here too. The company spent locally, 4.678 billion Rand on their infrastructure. What amazes me is that whilst us urbanites demand LTE where ever they go, MTN is still rolling out 2G towers in South Africa, my reality and your reality is not the reality of other people. My wife renewed her contract in this time and even though it was in the middle of the strike, an awesome person at the store here in Melrose Arch helped me, I had NO PROBLEM. My signal never fell over as a result of the strike, as a consumer I was totally unaffected.

In Nigeria, where the group has nearly 63 million subscribers (one fourth of the base), data is now 20.5 percent of all revenues. Margins decreased, mostly as a result of the selling of the tower infrastructure and a weakening of the Naira. The Nigerian currency translation is always going to be a problem. As Michael pointed out yesterday, the Rand has actually weakened to the Naira recently. The Naira is pegged to the US Dollar, the Rand has weakened to the Dollar. So from a currency roundabouts and swings point of view, these normalise over time. You and I cannot control the currency, the oil price, nor the Nigerian government being reliant on the two. Over time the country will move further away from a commodities based economy to services, 160 million people need access to better telecommunications. The fact that the company is only rolling out 2G and 3G infrastructure means that there is no fast internet connections there. That tells you what you need to know.

Their third really big market, Iran saw data revenue increase by 44 percent, in total data represents 26 percent of all revenue. MTN Irancell is rolling out fibre, PLEASE can I have some here. The next set of businesses is the Large Opco Cluster, as they call it. This includes Ghana, Cameroon, Ivory Coast, Uganda, Syria and Sudan. The last two, as you can imagine, operating in difficult conditions. The rest of the territories, Zambia, Benin, Guinea Bissau, Congo-Brazzaville, South Sudan, Liberia, Yemen and so on, fall under small opco, collectively contributing 33.5 million subscribers.

Why continue to hold MTN? Why buy them at these levels, are they not "ex-growth"? As we pointed out at the year end stage, 84 percent of AT&T's revenues come from data. MTN has ARPU's far lower than the developed world. The countries and territories that the company trades in are high growth, tricky at best from a regulatory point of view, never mind politically speaking. There are very few investments that give you unparalleled focused access to this continent we call home, as well as the middle east. Fixed lines are non existent in the territories that MTN operates in, if Telkom is the best competitor across the lot, you saw the relative size and scale. Data will continue to drive the company, whilst they trend to being more "utility like", the margins are fabulous, the dividend flow should continue to be strong. Hold and accumulate on weakness, there is plenty of room for expansion of services across what is still a very low base.

Linkfest, lap it up

The future is here well at least one of the toys that we have been waiting for - WATCH: Lexus Debuts Working Hoverboard

One of the lessor know company's that Elon Musk is involved with - The Miracle of SolarCity. After reading the article you will want to buy some of the shares. The renewable energy space is a very exciting place to operate in at the moment.

Home again, home again, jiggety-jog. Stocks are up one-third of a percent here. Resources are up over two percent today, that is a welcome bounce. Markets still look pretty oversupplied however, no time of letting up soon from the big producers of bulk commodities. ADP numbers are today, that will be a precursor to the jobs data Friday which no doubt will reflect the timing of a Fed rate hike. Yes. And whilst you can watch with interest, do not let this bother you too much. Other than your coaching plans for the Springboks for this weekend and 7 weeks time, as we all know your plans for that team are sure to make our national team successful.

Sent to you by the Vestacters, Sasha, Michael, Byron and Paul.

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Tuesday, 4 August 2015

Show me the Mondi!

"What is most interesting about all of this is that the Anglo market cap in Joburg is 211 billion Rand, whilst the Mondi Ltd. is 34 billion Rand and Mondi Plc. is 111 billion, collectively the packaging company is worth 68 percent of Anglo currently. Yet, it was worth less than one-tenth back then, in 2007. Jo, jo (pronounced yaw and not Joe), that is certainly a fall from grace."

To market to market to buy a fat pig. I was down with a bout of man flu yesterday, which as half the human population know is much worse than normal flu, the fellas at the office always do a wonderful job, I might as well throw in the towel. Man flu is dreadful. A quick look at the new Iliadin nose spray advert will confirm this, it sums it up. Some poor chap on the couch unable to do anything, as a result of man flu. Men do not give birth and whilst never experiencing the joy of childbirth, luckily for the human species women do, there is continuity.

I noticed something yesterday, that the market capitalisation of Vodacom now eclipsed that of Anglo American. Can you believe that? Here we have a company, Vodacom, that is basically as old as democracy itself in South Africa. And then we have a company, Anglo American, that is basically as old as modern mining is in South Africa, and for many people still synonymous with big business in South Africa. Sayings like, who do you think we are, the Oppenheimers?

Harry, Ernst and Nicky, people feel as if they "know" these people. 70 year old Nicky Oppenheimer moved the large majority of the family wealth out of commodities and into private equity, you have heard of Stockdale Street Capital and Tana Africa Capital, right? Tana is a 50/50 between Oppenheimer and the Singapore Sovereign Wealth Fund, Temasek. It owns investments in Food businesses, from frozen products to milk powder to pasta. Stockdale Street Capital manages the Oppenheimer private equity interests, I guess Tana is the Africa arm. I cannot find too much about it, the firm that is. From LinkedIn I can tell that people like Kevin Amoils and Paul Salomon (and I bet many others) work there. Heard of them?

That is why I love LinkedIn and their ability to continue to attract many people, who will keep their profiles fresh. I can quite quickly see who these people are, without knowing who they are at all. Back to the matter at hand, Anglo American fell heavily yesterday, along with the rest of the sector, down nearly 6 percent to touch a Rand level below 150 Rand, at one stage. Ending 39 cents better than that. I remember in May of 2003 when Anglo fell below 100 Rand shouting that you must load up, as you may never see it at these levels again. Well, stranger things do happen.

What is different between now and then is that Anglo reduced the number of shares you would have owned, and spun out Mondi in the second quarter of 2007. Which was a while ago now. Shares in issue of Anglo reduced from 1.541 billion to 1.402 billion, if I remember for every 100 ordinary Anglo's that you held, you got 91 "new ones" (without the Mondi). You then got Mondi Plc., and Mondi Ltd. shares, as well as a demerger dividend. What is most interesting about all of this is that the Anglo market cap in Joburg is 211 billion Rand, whilst the Mondi Ltd. is 34 billion Rand and Mondi Plc. is 111 billion, collectively the packaging company is worth 68 percent of Anglo currently. Yet, it was worth less than one-tenth back then, in 2007. Jo, jo (pronounced yaw and not Joe), that is certainly a fall from grace.

As we tried to point out a few days ago however using Steinhoff and Harmony as examples, this is not the demise of a company, this is part of a natural cycle both in a company and country/economy. Vodacom being bigger than Anglo is a good thing, Steinhoff being many times bigger than Harmony (it used to be smaller 10 years ago) is a good thing. Many more jobs being created in different parts of the economy, that is also a good thing.

The sell off in commodities stocks (all related to growing pains in China, and more specifically consumption of raw materials) as a collective saw the Jozi all share end down a little over four fifths of a percent, resources as a collective down three and two thirds of a percent. As a collective they are now at a level that we have not seen since the great washout of late 2008. And before that, in the first half of 2006. Yikes, the commodities sell off has been swift and brutal, the index is down 41 percent in 12 months. Who would have thought?

New York, New York. Over the seas and far away, stocks bounced off their worst levels during the session, blue chips closed around half a percent lower. The nerds of NASDAQ and the S&P 500 lost around one quarter of a percent. The other big news that the financial world was fixated with was the guilty verdict and subsequent 14 year sentence handed down in the Libor rigging case of Tom Hayes, a former UBS and Citi trader. This is the harshest penalty since the financial crisis (I guess the Madoff one was different, that was life), all of the jury found him guilty. Hayes argued his bosses knew, what is going to happen next I guess is that the trial of other brokers is about to begin in September, those folks must be feeling worse for wear. The message sent is a good one, integrity and honesty above all.

So Tom Hayes becomes the fall guy, some would argue this is only the beginning. What did Peter Parker's Aunt say, with Great Power come Great Responsibility. The fact that an interbank rate, which sets ordinary folks borrowing costs, could be manipulated by so few is a weird idea. Where were the law makers when all of this was happening, and why did it take so long? Whilst the Financial industry has quite clearly some of the very smartest people that I know, this is hardly a success from an ethics point of view. Greed may be good for Michael Douglas in the first Wall street movie, if only us humans knew how to help ourselves from ourselves. We don't. There will be many more incidents of this nature in our lifetime.

Company corner

Yesterday Tiger Brands's, Dangote Flower Mills (DFM) released their 3Q numbers. Revenue is up 15%, cost of sales is down 13% and gross profit is up 49%, so things in the operating department are moving in the correct direction. That is where the good numbers stop though. Thanks to the weakening currency (Nigerian Niara) their operating loss worsened by 66% compared to the same time last year and the loss per share went from 89.89 to 181.31. Given how big their losses have been they currently have negative cash flow which means that they are having to borrow to keep things going. The only good news from the weaker currency is that it makes it cheaper for Tiger to send funds to the Nigerian operation. I don't see the oil price recovering anytime soon and as such I don't see the Nigerian Naira recovering. What is required now is a stable currency, which is tricky given that there is a black market rate now. Expect DFM to be a loss maker for Tiger for the foreseeable future.

Linkfest, lap it up

With a FED rate hike on the horizon what should your strategy be? Well, nothing carry on as normal - Pay Attention, Ignore the Fed.

This is an interesting read about the banking environment in South Africa. Given our solid banking system there is very little room for Mpesa to succeed - Why South Africa's largest mobile network, Vodacom, failed to grow Mpesa. The graph below shows how key mobile banking is to other African countries; shows why Bill Gates is so excited about mobile banking.

Given that there hasn't been a huge jump in flight technology for the last few decades we are hopefully due for one in the near future - Airbus just patented a jet that could fly from London to New York in 1 hour. Given that some of the flight will be spent in the vertical position I don ot see this being a huge commercial success.

Which city do you think is the most polluted? Most people would go with a Chinese city, probably because of all the attention their pollution received with the hosting of the Olympics. If you thought China you were very wrong - Which is the world's most polluted city?

Home again, home again, jiggety-jog. Asian markets are trading lower, all except for the Shanghai exchange, that is up one and three quarters of a percent. Tencent is trading lower again, I certainly think that we are closing in on opportunity territory for Naspers here. It has been a tough old year for local stocks as a collective, not even up 4 percent, resources are down nearly 17 percent, following the same fall last year. Prior to that it was two flat years for resource stocks, it certainly has not been a happy place to have been invested. The S&P 500 on the other hand has returned less than two percent year to date, the Dollar return of the local market has woefully underperformed. We are certainly not alone, globally emerging market currencies are plumbing 14 year lows to the US Dollar.

Sent to you by the Vestacters, Sasha, Michael, Byron and Paul.

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Monday, 3 August 2015

Oil Spoil

"Two of the big oil companies reported numbers on Friday. The lower oil price has been telling with Exxon Mobil's revenue dropping 33.4% YoY and their EPS dropping 51%! Chevron's revenue dropped to $40 billion from $57 billion the same time last year but their EPS was down a staggering 89.9%!"

To market to market to buy a fat pig. The news all over the financial channels this morning is the reopening of the Athens stock exchange, it has been closed for 5 weeks due to all the uncertainty that surrounded Greece getting and accepting a bailout. Unlike the Lisbon stock exchange that only has a handful of companies (78 to be exact), the Athens exchange has 258 listed companies. As you would imagine there has been a very big sell off, it is currently down 23%! The market pays a premium on listed stocks due to liquidity, the ease of getting your cash out. There are many factors that determine the value of a company but consider that private companies normally trade around 3 - 6 times their earnings, where public companies normally trade around 10 - 20 times their earnings. It makes sense that the market gives a premium to liquidity, how long does it take to get your cash out of a property? In my experience it is between 2 - 3 months and you pay an estate agent around 5%!

This is the sage of Omaha's (Buffett) view on stock markets, "I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for ten years.". With TV, Twitter and news agencies always bombarding us with what the stock market is doing and the ease at which we can see what our portfolio did over the last 30mins, it is very difficult for investors to ignore the short term noise of the market and only focus on the company and its long term prospects. I remember it being a difficult mental shift from short term fixation to being okay with not worrying about the share price fluctuations over the short run. Here is another quote I found, "Stop trying to predict the direction of the stock market, the economy, interest rates, or elections.". Here are a whole bunch more, they make for very interesting reading - 101 "Hand-picked" Warren Buffett Quotes On Investing.

What did all the uncertainty and cash restrictions do to the Greek economy last month? Here is the production report - Markit Greece Manufacturing PMI. The graph below tells the whole story. When people are uncertain about what the future holds, you don't want funds sitting in stock that is not easily converted to cash. Lets hope that this is a blip on the radar and Augusts numbers increase enough to compensate for the poor July figure.

Company corner

Two of the big oil companies reported numbers on Friday. The lower oil price has been telling with Exxon Mobil's revenue dropping 33.4% YoY and their EPS dropping 51%! Chevron's revenue dropped to $40 billion from $57 billion the same time last year but their EPS was down a staggering 89.9%! Their prospects going forward don't look too rosy with oil staying rooted to the $50 a barrel region. The production numbers from OPEC showing record production numbers, with the goal of OPEC being to maintain market share as opposed to maintaining a price. OPEC currently supplies around 32 million barrels of oil a day, where analysts estimate an over supply of 3 million barrels per day. Going forward, with the Iran sanctions being lifted, they are expected to increase their production by a further 1 million barrels of oil a day. I saw a stat this morning that said due to productivity and technology increases in the shale industry, the production costs for many oil fields has dropped 40% over the last 2 years. Thanks to human innovation it would seem that oil (and commodities in general) will not see a sharp increase in their prices any time soon.

On the local front Telkom released their Trading And Operational Update For The Three Months Ended 30 June 2015. The market must have really liked the numbers as the stock ended up over 7%. The number that I think the market was focussing on was the growth in their Mobile net revenue which was up 68.5% to R350 million. The main profit driver is still their fixed line operations which is seeing steady decline in the business, voice revenues were down 13.7% with a drop of 5% in voice lines. There was growth in the ADSL side of the business, with a 4.8% increase in the number of customers there. Going forward the key drivers for them is their mobile offering and fixed line access to the web, coupled with their ICT drive which will be boosted by the Business Connexion purchase which should go through in the coming quarter.

Big news out from one of the smaller JSE players, Ascendis Health - Acquisition Of Initial 49% Of Farmalider S.a A Spanish Pharmaceutical Group. They are paying R210 million for a 49% stake in the Spanish Pharmaceutical Group and have the option to buy the remaining stake in a year to come. The stock is only up 0.4%.

Linkfest, lap it up

Germany is intentionally moving towards greener energy - Germany met 78% of its daily energy needs with renewables. The biggest problem with renewable energy is how the power generated fluctuates.

Here is another casualty from the drop in commodity prices. In the long run the unprofitable companies will go out of business and leave only the most efficient players, it would seem that size and scale are where all the efficiencies are to be found - Three Years Ago This Coal Mine Was Worth $624 Million. Now It Sold for $1

Home again, home again, jiggety-jog. I am seeing more red than green on my screen today, with commodity companies leading the charge lower. Anglo is down 4.4% along with Goldfields and BHP Billiton which is down 1.4%. The Rand has shot over the R/$ 12.70, not great considering that a year ago it was around the R/$10.50 mark. The week ahead is all about jobs, the market will hold its breath to see if strong jobs numbers will result in an interest rate increase in September.

Sent to you by the Vestacters, Sasha, Michael, Byron and Paul.

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