Money with a dash of Funny

Friday, 21 August 2015

Bottoms Up

"It would have served me better to sit on the cash for 4 years, earn interest and then when the market halved in value I could have bought it then and I would have tripled my money today instead of just doubling it. That sounds great in theory except that you have no idea when the next crisis will happen. Also how do you know where the low is?"

To market to market to buy a fat pig. Markets are making headlines for the wrong reasons at the moment. At the close of our market yesterday, we are officially down for the year. Our market was not alone though, the S&P 500 closed down 2.11% to also be in the red for the year and the Dow Jones Industrial Average closed at its lowest value for the year. Why is it that we always look at returns in terms of years? Is it a problem that the market (S&P 500) is down for this year but is up 90% over the last 5 years, if you were lucky and bought in March 2009 right when people felt the world was definitely ending, you would be up 200%.

What do you think the 10 year return has been considering the last two numbers given? If you bought an index tracker 10 years ago and then forgot about it you would be up 67% today. What! That works out to a whopping 5.4% return every year (there we go with the annual returns again). Most investors expect to double their money every 5 - 7 years if they put their money in the market. It is clear from the above numbers that when you invested makes a big difference to your long term performance.

Do we then just sit on cash and wait for the next, 'once in a generation' market pull back? No because what we are not including in the previous number is the impact that dividends make. Buying the index 10 years ago would result in you being up 109% today if we include dividends.

I am sure at least one person has had the following thought. Doubling your money in 10 years is not bad but not great. It would have served me better to sit on the cash for 4 years, earn interest and then when the market halved in value I could have bought it then and I would have tripled my money today instead of just doubling it. That sounds great in theory except that you have no idea when the next crisis will happen. Also how do you know where the low is? What will probably happen is that you will sit on the cash well past the bottom, regret that you missed the bottom and then continue to sit on cash for the next decade. Only buying at bottoms is a great investment strategy if we knew where the bottom is and if you were able to pull the trigger at the height of fear. What is the best way to buy at the bottom then? It is by adding regularly to your investments, that way some of your investments will be near or at the bottom. Also you are less concerned by the short term moves of the market, you are thinking long term, 20 - 30 years out where the effects of compounding really start to show. Think long term!

What is the current reason for all the selling in the markets at the moment? It would seem to be growth concerns from emerging markets, lead by China. The latest manufacturing numbers out of China showed the industry shrunk by more than people expected. So people have been concerned about the growth prospects for emerging markets, resulting in them selling assets situated in those regions and taking money out of them. The result is a weakening of EM currencies and a strengthening of the Dollar, in particular. A weak currency means that EM countries are suddenly more competitive globally because their products are now cheaper and imports are more expensive. Which going forward may boost EM growth levels again.

Company corner

We had numbers from Grindrod this morning, Announcement For The Six Months Ended 30 June 2015. Headline Earnings were up 2% but due to there being extra shares in issue the HEPS are down 16%. Revenues were also down 16% though. The lower oil price helped the liquid shipping division but lower commodity prices hurt the port and rail sides of the business.

Truworths released their Preliminary Report On The Audited Group Annual Results For The 52 Weeks Ended 28 June 2015. Comparable sales were up 1.3%, merchandise sales were up 8% and HEPS were up 3%. The market liked what it saw with the stock jumping 10%. Out of the retailers they are most exposed to interest rates going up given that 70% of sales are on credit. Having said that, over the last year their net bad debt to credit sales improved from 8% to 7.9%.

Yesterday we saw the Rand break the R/$ 13.00 level for the first time since 2008 and it is one of the main reasons that the Sasol share price has been fairly stable in the face of a dropping oil price. Brent crude is currently sitting at $46.33 a barrel and seems like it could go further down due to inventory levels being at record highs. If the Rand recovers from these levels it could get very ugly for the Sasol share price over the short run. Here is what the Demand and Supply situation looks like at the moment, courtesy of WSJ:

Linkfest, lap it up

As organisations ascribe more and more value to their employees and as employees want more work and life balance, we are seeing traditional working hours getting shaken up - Uniqlo says it will test out a four-day work week

Deez Nuts highlights the problem with stats in general, people lie! When being polled, people don't want to look stupid or they give you the answer that they think you want to hear. It probably also points to a problem with the current political system, where people vote for a party just because they always do. It doesn't matter what the persons credentials are - The success of Deez Nuts shows why you shouldn't trust US election polls

I wonder if you will get a sensation of flying while floating in the water looking down? I'm sure that there are many people who would not trust swimming in a pool with a glass bottom - A suspended, all-glass "sky pool" is coming to London-and it looks awesome.

A reminder that my reality is not your reality. Depending where you work and where you stay, your view of what the world looks like is very different. In South Africa we have a dual economy so my reality is definitely not the same as someone who works in the mines and lives in the rural areas of the platinum belt - Your view of the economy is coloured by where you live

Home again, home again, jiggety-jog. The downward direction set last week has continued today, the Top 40 is now down over 10% from its highs. The only sector that is absolutely flying at the moment is the Gold miners, up another 5.8% today. They are still down 8% for the year, so they will need another two days like this to break even.

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

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Thursday, 20 August 2015

Will they, Won't they

"Over the last few weeks, I have seen an increase in the number of people saying that September might not be the date for an increase. What happens if they raise rates and there is an economic hiccup? Dropping rates again will probably do very little to smooth over the hiccup, for this reason and the low inflation, I think rates will stay down until there is an overwhelming amount of data to say that the economy is resilient."

To market to market to buy a fat pig. Ouch! It was another red day on the market yesterday with the All Share down 1.6%, for the year the market is up less than a percent. If our markets follow the trend set by Asian markets this morning we may find that by the close today, our market will be down for the year. Last year our market was only up 7% with most of the gains coming in the last 2 months of the year. If you consider that inflation last year was at the 6% mark, the market only had a real return of 1%. The inflation rate over the last 10 years has ranged between 3% and 11%, with the average being around the 6-7% range.

Market returns have ranged from 45% increase in 2005 and a 25% drop in 2008, with the average over that time period being around 17%. The result being that the average real returns of the market have been 10% a year. It is clear though that almost no year is the average year! Sometimes you get lucky and buy in a year where the market has a flyer. You then pat yourself on the back for your investment prowess. Other years you invest your money and the market goes nowhere or worse it drops! The timing that is involved when buying shares is all luck, the more regularly you are buying the less luck is a factor in your returns. That is the meaning behind the very true saying, "It is time in the market that matters, not timing the market".

Lonmin dropped a staggering 19.6% yesterday! There are concerns that they won't be able to refinance debt that comes due next year or if they do the terms will be far more stringent than they currently are. Given that the company is currently running at a loss and that the Platinum price is firmly rooted to $/oz 1000, you can understand why debt will become more expensive. The other idea that was doing the rounds, was to do a rights issue to raise capital. The problem with doing a rights issue to keep the lights on instead of using capital to buy new assets (like Woolworths or Mediclinic) is that current shareholders get diluted without the benefit of new earnings being bolted on. The next problem is that the more the share price drops, the more rights would need to be issued to raise the capital, which means more dilution for current shareholders. If you are going to see less of the future profits your current shares are worth less and so the cycle continues! From one precious metal to another, gold shares had a better day, up 5.2%. It would seem that their safe haven status is attracting funds, which is weird considering that the industry is more than likely going to have a prolonged strike on their hands. That does not sound very safe to me.

The big news out of the US last night was the FED minutes from the last meeting. Surprise surprise, they are not sure if a September rate hike is the correct time. Some of the key data that they monitor in order to make the decision is in the territory to justify a rate raise. The one big number which is a concern is the inflation figure, it is still too low. Increasing interest rates won't help it rise to the 2% target. Over the last few weeks, I have seen an increase in the number of people saying that September might not be the date for an increase. What happens if they raise rates and there is an economic hiccup? Dropping rates again will probably do very little to smooth over the hiccup, for this reason and the low inflation, I think rates will stay down until there is an overwhelming amount of data to say that the economy is resilient. We have 4 weeks to wait until we find out the answer to one of the most asked questions on Wall Street.

Company corner

Another of the gold producers with their results this morning, Gold Fields Limited - Q2 Ended 30 June 2015 Unaudited Results. Their All-in sustaining costs are in line with the rest of the industry, theirs sitting at $/oz 1029. They have swung to a small profit this quarter after having a small loss last quarter. They have the same problem as all the commodity producers, they don't control the price of the product that they sell. One separating factor for them compared to their peers is that they already have a wage deal signed.

We had the Interim Financial Results For The Six-month Period Ended 30 June 2015, for Exxaro this morning. As expected their earrings are down along with their dividend. HEPS are down 62% and the interim dividend is down 75%. One of their main assets is their 19.98% stake in Sishen. The market already received a clear view that this was under pressure from the Kumba results a few weeks ago. The stock currently trades on a P/E ratio of 5, which tells you people don't think the commodity glut is going to resolve itself anytime soon.

Blue Label and Edcon are going to work together to roll out retail technology stores called Edgars Connect - Blue Label, Edgars in retail JV. Selling cellphone services in retail stores has proved to be successful in the past, so this looks like a good deal for both partners. The big thing for Blue label is that they get access to Edcons account holders, they can sell the products on account but don't have to go through all the leg work of having to open accounts.

Linkfest, lap it up

I found this letter interesting, it is blow back from the Amazon debacle - Dear Jeff Bezos: My husband needed therapy after working for Amazon. The point made at the end, probably sums it up nicely. "Ironic, isn't it, that we were able to afford such a good therapist because of Amazon?".

This decision by the UK will have far reaching effects for many people, good or bad effects we do not know yet. The aim is to get people to stop smoking by changing to e-cigarettes and then moving onto stopping. What are the long term side effects of vaping though? We are not sure because the product has not been around long enough - UK approves e-cigarettes as healthier alternative

Now that it is viable to move to solar, more people are. Given the momentum gained, economies of scale will kick in which will drive down the cost of solar even more. The market might move slower than people like but it normally gets it right after an adjustment period - India reveals world's first 100 percent solar-powered airport

Home again, home again, jiggety-jog. Wow! It's tough out there at the moment. Our market is currently down 0.8% meaning that we are down for the year. Twitter notified me that the Rand has just broken through the R/$ 13.00 level, which is the first time since 2001. I think people are hoping that there will be a repeat of 2001 and 2008 where the Rand weakened very rapidly to the dollar but then recovered to well below the R/$ 10 level. I don't think that will be the case this time because it has been a steady depreciation. The previous two times it was a case of "sell now and ask questions later". Have a look at the graph below, you can clearly see the difference between now and then.

Woolworths, the one retail stock that has been resilient over the last two weeks is down 2.6% and Naspers is down 2.2% .The one bright (or shiny) spot are the gold miners, currently up 12% today. Lonmin has had a huge bounce back today, up 22% at the moment! Stay calm, carry on and add if you have the funds to do so. Don't let a market pull back go to waste.

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

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Wednesday, 19 August 2015

Massfart

"You will remember that something similar happened last year when they released a trading statement that was also heavily impacted by currency moves. I think the company missed a trick by not giving more information on the impact of the currency, the SENS leaves a lot to the imagination which makes the share price move today understandable."

To market to market to buy a fat pig. Yesterday China was the topic that 'everyone' was talking about again. The Shanghai Index was down 6% and is down a further 1% today. The best reasons that I can find online for the drop are because of Yuan fears (again) and the bomb blast in Thailand. Both reasons don't sound like real reasons to be selling a stock, here is a graph of the Yuan over the last month. You can see that it has been very stable over the last few days:

Found on XE.com

A more likely reason in my opinion, are the sales from insurance companies who are going to have to fork out large sums to cover the damage from the blast earlier in the week - China's Tianjin blasts will cost billions. Here's the tally so far. The problem in Chinese markets at the moment is that people are still operating under a state of fear, so as soon as the market starts to fall, traders continue to sell. The result is that the market falls further than it should. We saw a similar, albeit smaller impact on markets from the Japanese tsunami and earthquake in 2011 where the Nikkei dropped as well as US stocks. Why the US stocks? Probably a mix of traders just selling on negative news but also because the insurance companies operating in Japan had assets in the US that needed to be liquidated in order to pay out claims.

Company corner

Lower commodity prices have come through in the Glencore Plc - 2015 Half Year Report. The lower prices resulted in their revenue dropping 25% and last years net gain of $728 million swung to a net loss of $676 million. Over the period they managed to pay down debt and are keeping their dividend inline with last year's, both signs that management are putting on a brave face. If you read about Ivan Glasenberg and his team running the company, they are all tough as nails. The results highlight the perils of operating in the mining sector, you have no say about the price that you sell your product at. The stock is currently down 5%.

Massmart at the moment is down 11% due to a negative Trading Statement For The 26 Weeks To 28 June 2015. HEPS are likely to be down 29.8% to 22.4% but if you strip out the negative impact of currency moves Earnings may be up by 0.9%. You will remember that something similar happened last year when they released a trading statement that was also heavily impacted by currency moves. I think the company missed a trick by not giving more information on the impact of the currency, the SENS leaves a lot to the imagination which makes the share price move today understandable.

Linkfest, lap it up

Given how much spending power Millennials have you defiantly need to be giving them attention when it comes to making investment decisions - How trillion-dollar millennials are spending their cash

Given the strengthening of the US Dollar and the weakening of the Brazilian Real luxury products in Brazil are looking cheap - Luxe for Sale as Cartier, Prada Become Bargains in Brazil. Maybe this will spur a new type of tourist to Brazil. Why not go have a holiday and then add to your watch collection at the same time?

Building more cognitive style competing chips will makes computers more useful in the future, with the ability for computers to 'think' for themselves. The offshoot of the technology is to better understand how brains work, so significant resources are going into this technology which will no doubt have medical benefits as a byproduct. - IBM has built a digital rat brain that could power tomorrow's smartphones

Changing Energy

There is no doubt that information is power, which allows us to make rational decisions and decisions that maximise the benefit for ourselves. Google have set up a website to help tell you if your roof is conducive to solar, how much you can save and then connect you with someone who can help out - About Project Sunroof. If people are able to reliably see what they can save by using solar there is a higher chance that they will use it. At some point critical mass will be reached and putting solar on your roof is just something that is done in sunny areas. No one wants to be that odd one out who isn't saving the environment and who isn't saving themselves money. - Google's 'Project Sunroof' Aims To Put Solar Panels On Top Of Everything. . . Eventually

I didn't realise the impact of being more efficient has been so big. Lessons that can be learned for the power problems in RSA. There has already been a big push in the light bulb arena but a bigger push probably needs to be made in the appliances department. "Americans' energy-conservation efforts, from switching bulbs to upgrading washing machines and air conditioners, have done more to reduce carbon emissions than the increased use of solar, wind and natural gas. . ." - The Lowly Lightbulb Outshines Solar and Wind on U.S. Power Grids

Buying renewable energy companies can be risky given that the barriers to entry are low and it relies on other sources of energy become more expensive than solar - Solar is having a great year, except on Wall Street. While oil looks like it will remain at these levels for the foreseeable future, shares of companies linked to alternate energy have had a tough time. This might be a buying opportunity if your time horizon is long enough.

Home again, home again, jiggety-jog. Our market is currently down by over 1% lead by the commodity linked stocks. Our Rand has strengthened slightly today, trading under the R/$ 12.90 mark. The big data out today was our CPI coming at the 5% mark, which falls nicely in the target range from the SARB of 3-6%. With the fuel price probably going down next month lets hope that the result is not another rate hike from the SARB. The market moving data out of the US later is their CPI data and then the FED minutes from their last meeting. You can be sure that interns all over the place will be tasked with going over the minutes to find "key" words or phrases about when the next rate hike will come. I don't even think the FED themselves know when exactly they will be raising rates, so not sure how much value scrutinising the minutes will result in.

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

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Tuesday, 18 August 2015

Interested in Interest Rates?

"Looking back there has not been hyper inflation, barely any inflation for that matter. When monetary policy is out of sink with the real economy, the normal effect is high inflation. The argument can be made that this lack of inflation points to the FED and interest rate being inline with the fundamental forces of Investment and Savings in the real economy."

To market to market to buy a fat pig. Yesterday our market ended in the red come closing time. Telkom ended down 6.4% after a deal with MTN was scrapped due to opposition from the competition commission, we cover the details in the company corner below. Despite opening lower both the Dow and the S&P 500 finished in the green, with the most interesting news coming from Morgan Stanley and their price target for Tesla. The 12 month price target was upgraded from $280 to $465. What! The current share price of just over $240 isn't even at their first price target of $280. (Morgan Stanley really, really loves Tesla) The reason for the huge upgrade is based on the hypothesis that Tesla will be a leader in the self driving car market, with the forecast being that the self driving market could triple the currently forecast 2029 revenues (forecasts 2 years out are sketchy, 14 years out will definitely be wrong). The market liked the upgrade, the shares popped 4.9%.

I was listening to this podcast, Scott Sumner on Interest Rates, yesterday while on a run. Running is not near the top of my list of enjoyable things to do, listening to economic talks, now that I enjoy (for most people it is the other way around).

Interest rates are a hot topic at the moment given that the FED is expected to raise rates soon and with rates already rising here in South Africa. The first question to answer is if interest rates are low because of the FED or are they a reaction to something else?

The answer seems to point to interest rate lows being as a reaction to increased savings. Higher savings means that interest rates need to drop for the market to clear. There are two reasons for higher savings rates, the one is due to a lack of confidence in the future. Given the huge drop in asset prices in 2008 and the uncertainty about what would happen in the economy, keeping your cash 'under the mattress' seemed like a good thing to do. The other reason for higher savings rates is due to a lack of places to invest your capital.

This is what the savings rate has looked like recently - Here's a $1.2 trillion pile of cash, and it's not on corporate or government balance sheets and then How Much Cash Are Corporations Really Hoarding?

Why would there be a lack of places to invest your cash? One hypothesis is due to the computer age. It is far easier now to create a company with just a computer and your know how. Where in days gone by there was a need for a larger capital out lay. The one fact that we do know is that the gross fixed capital formation in the US at the moment, as a percentage of GDP is still below the 2006 number.

Looking back there has not been hyper inflation, barely any inflation for that matter. When monetary policy is out of sink with the real economy, the normal effect is high inflation. The argument can be made that this lack of inflation points to the FED and interest rate being inline with the fundamental forces of Investment and Savings in the real economy. Also remember that low inflation leads to low nominal interest rates, if inflation was high you would demand a higher return on your cash to offset the inflation impact.

Here is my thought process.

Low inflation = low interest rate = lower nominal returns on safe assets = short period of abnormal returns on equities = higher equity prices (above average P/E multiples) = lower long term nominal returns on equities.

What happens when the FED raises rates? Well it depends how high and how quickly they raise those rates. Quick and sharp increases will result in a train wreck in the economy and the market. I think inflation will remain relatively low, meaning that interest rates will stay low compared to historical averages. Also I think the FED will raise rates as slowly as they can. Markets will probably remain at multiples higher than histories average and you won't see big double digit returns that we have seen over the last 5 years.

Remember if your time frame is that you will live until 90, flat markets going forward is great and a market that goes down is even better! Regular adding to a flat or declining market means that when you do need the money in a couple decades time, it will be a far larger amount than if you were adding in a rising market. Perspective and timeframes matter, as an investor don't lose sight either.

Company corner

Yesterday MTN and Telkom decided not to pursue a deal that would see MTN operate and control part of Telkoms radio frequency - Telkom, MTN walk away from deal. The Competition commission decided that the deal would be a bad idea for consumers. Here is part of their statement, "MTN would be able to gain a significant competitive and time advantage, offering network and services that cannot be significantly constrained by rivals, particularly given the market position of Cell C and Telkom Mobile". Surely faster, more reliable internet is better for the consumer? Especially since being competitive on the global stage requires an internet connection. To put things into perspective, MTN invested the equivalent of 18% of Telkom's current market cap in infrastructure upgrades last year alone and will spend billions more this year, to continue to add and upgrade towers. There is a reason that Telkom is struggling and that MTN and Vodacom dominate the telecommunications landscape. I'm not a fan of regulation, I'm of the school of thought "Let the consumer decide where they want to spend their money".

Another gold producer released results this morning. Harmony released their Results For The Fourth Quarter And Year Ended 30 June 2015. At first glance it seemed to be a contrast between the last quarter that looked on the up and the full year results which looked poor. The major concern would be their all-in sustaining cost of $/oz 1 233, which is currently higher than the global gold price of $/oz 1 118. The market seemed to like the numbers, the share is up 3.4%.

There were some ugly numbers out of the construction sector this morning, from Aveng - Annual Financial Statements For The Year Ended 30 June 2015. It is tough out there given their exposure to mining and construction. The stock is down around 8% this morning.

Linkfest, lap it up

This sounds great in concept except it means that all the other roads will have more cars on them, it will take us twice as long to get to the JSE for TV and I would imagine that you will have to pay for the park and ride services? Have officials considered the economic costs of closing the roads to our continents business hub? - October is car-free month for Sandton

Another major trend in society is healthy eating and what is good and what isn't. In our office we try avoid sugar as best we can, none of us have sugar in our coffee anymore and Sasha gave up sugar for lent and then just continued with it as best he can. Have you noticed how many things have sugar in them? Trying to find something as simple as unsweetened yogurt can be a tough job. - This is what happens to your brain when you stop eating sugar

Home again, home again, jiggety-jog. We are down again today. Chinese jitters are still impacting global markets, the Shanghai closed down over 6%. The Rand has been volatile today, reaching a low of R/$ 12.94 and then making a bit of a come back to the R/$ 12.88 level. We are happy to hold the quality and ride the wave.

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

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Monday, 17 August 2015

Invest while others are fearful

"Is the company going to be bigger and more profitable in 2, 5 or 10 years time? Yes? Then how much are you willing to pay for that growth? It is a fools errand to think you can know exactly what the growth/ profit number will be in the future. All you can do is have an assumption of what the future will look like and then pick a management team to get the most of the opportunities coming their way."

To market to market to buy a fat pig. The news all over my screen this morning is how economists surveyed by Bloomberg are of the opinion that China's GDP 'only' grew by 6.3% in the first quarter as opposed to the official data which indicated growth of 7%. While the growth numbers from China have always been questioned, this is the biggest gap I have seen between the official number and people's view of what it is. While you would like the number to be as accurate as possible, the problem with stats is that there are always assumptions and data collection errors in the final results. The other argument being made at the moment is that GDP is a poor measure of the growth in wealth of an economy. Luckily for us there are numbers further down stream that are easier to capture, like the record sales of iPhones in China or the record volumes of iron ore being exported at the moment.

The point I am trying to make is that even if the Chinese GDP number is wrong, there is nothing you can do about it and it won't matter in a weeks time. Market prices of commodities or equities may change to reflect the new assumptions but with a long time frame to your investments it doesn't matter because there will be many many, many more adjustments to assumptions about the future. Prices will reflect the assumptions, there will be volatility as there is a mass change in assumptions and then a new trajectory will be set for the market.

Remember that the short term share price moves are all based on emotions, where the long term share price moves is based on the fundamentals of the company evolving. If I feel great about a company today, I start buying it and so does the rest of the market, it's share price goes up as a result. I feel even better about the company now because the share price move 'confirms' my views. In two years time, if the company shows poor fundamental data the share price will be based around that as opposed to the warm feeling I got when myself and the rest of the market was buying the shares. Is the company going to be bigger and more profitable in 2, 5 or 10 years time? Yes? Then how much are you willing to pay for that growth? It is a fools errand to think you can know exactly what the growth/ profit number will be in the future. All you can do is have an assumption of what the future will look like and then pick a management team to get the most of the opportunities coming their way. If the future looks very different from what you anticipated it to look like then sell the share because things have fundamentally changed for it.

What to do about the market's emotions? Well nothing, accept that you can not predict the future and that the market is even less predictable. The key is to be adding regularly! There will be times that you buy at inflated prices and there will be times you get a great discount but most of the time you are probably getting fair value. By adding regularly you remove the luck factor which impacts once off lump sum investments, where timing matters to your long term performance. Remember that most of us will probably get to around the 90 mark given the rapid advancement in healthcare, long enough to ride out any market slump but also if you plan to retire at 60, you will need a sizeable asset base to live off of. Get investing and saving - Why Save?

Company corner

Looking at SENS this morning we had Anglogold Ashanti Limited - Report For The Quarter And Six Months Ended 30 June 2015. The numbers look solid enough given the tough environment for gold and gold producers. The shares are up 7.8% at the moment. The company unfortunately still made a loss given high interest costs but on an adjusted basis made a small profit. The other good news is that they brought their all-in costs down from $/oz 1 155 to $/oz 1021. If all the different costs reported confuses you as much as me, here is how they are calculated - Gold companies' cash costs and all-in sustaining cash costs.

Linkfest, lap it up

This is a very interesting video from the Business Insider. The book captures the economic environment felt in the US when it was written - Here's the real, forgotten meaning of 'The Wizard Of Oz'

Here is another way technology and apps are helping people to save - Digit automated savings plan adds cash rewards for hanging on to your money. Having small amounts of cash come off your account every few days means most people do not even notice that they are saving. The small amounts add up over time.

This ties in nicely with the savings discussion above, note his NAV at retirement age - How Much Warren Buffet Was Worth At Your Age

Is this proof that we are more 'caveman' than we would like to admit? - Why Do Deep-Voiced Politicians Get More Votes?

Home again, home again, jiggety-jog. Our market is up 0.5% this morning with Naspers up 1.2% and MTN up 1.6% (just below that phycological R200 mark). The Rand unfortunately is looking a bit battered dropping to R/$ 12.87 with R/$ 13.00 looking more likely. I see that Morgan Stanley has a 'Troubled 10' currency list and the Rand is one of them. The Malaysian Ringgit has had a worse time though, down about 5% to the USD over the last week.

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

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Friday, 14 August 2015

Take a break, Buy Nestle shares

"The stock trades on a 16 multiple and is hardly expensive for a global business of this size and scale, the company has a market capitalisation of 236 billion Swiss Francs, around 242 billion Dollars. I guess with the growth rates relatively muted, the stock will trade at this sort of level. Also remember that the Swiss government gobbles up around one-third of the dividend, taxes that you cannot avoid, the pre tax yield is around three percent. Compare that to the Swiss government bond rate of nothing, then it is pretty good, in that context."

To market to market to buy a fat pig. I can think of twenty reasons to never buy stocks, I can think of very many more to own companies for the long haul. I have great admiration for the stock investors over the years that are able to shut out the noise and basically stick to the basics. Right now however, and we have been discussing this in the office at length, what are deep value investors thinking of the recent Buffett slash Berkshire acquisition of an industrial and manufacturing business based in the US at no less than 22 times earnings. If I remember correctly, anything around that area was a no go for Buffett. The analyst consensus on earnings for the stock sees a current year PE unwind to 18.4 times and then next year to 14.2 times. Certainly the companies earnings, even at the current premium to be paid on the stock price by Berkshire is growing fast, fast enough to justify them paying that multiple.

The price of any security that appears in front of you today is the traded price. We have options, either you own the stock, or you do not own the stock. Either you buy the company as you see it, provided that the stock price is NOT overpriced relative to your expectations, or you do not. That is why I think that a neutral or hold rating is a cop out. Over here at Vestact, we do not have a 12 month holding period. Guessing what the stock price could be in 12 months time and setting a price target accordingly, relative to enormously detailed work is always going to be hard to meet or nigh impossible to predict. How? If I told you that Richemont was going to be at 120 Rand a share in 6 months time I would be setting myself up for failure. If it stays at these levels I will be wrong, if it goes to 135 for any number of reasons, I will be wrong too.

Why would some of the smartest and most insightful people in the industry set themselves up for failure by suggesting that they know where the price is likely to go, by writing detailed research and brilliantly analysed reports? Is their job merely to generate trade ideas for their firm? If it is, then it sounds like a whole lot of wasted talent to me. Rather tell me what you think earnings, revenues, margins, investments in their own business, borrowings, growth prospects are likely to be, then we can decide whether or not that business is any good. Anyhow, at the end of the day one must always make up ones own mind, no matter how much detail you can absorb or read from a research report.

Securities analysis will always have a very significant and very important role to play in our industry, I just wish that less emphasis was placed on the 12 month price target. Recently, as the Google share price has rocketed ahead as a result of both a very good set of recent numbers, and a reorganisation of the business, there has been a whole host of price target upgrades. What happens if the price falls now 20 percent, will the same said analysts upgrading their price targets then have to back down again and lower them? That would be embarrassing.

Save yourself the embarrassment, most analysts out there who write huge detailed reports are really smart, make up your mind based on the price today and what their long term prospects are likely to be. Is it cheap today? Yes, buy it. Is it expensive today? If the answer is yes, then don't buy it. Period. If something changes with the business model, the future prospects look less exciting, sell it. Simple. Of course, as this is a market, not everyone will agree with everyone all of the time. If everyone agreed on which companies were champions of the future there would not be a single one to buy, as there would be NO sellers.

Quick markets update, here in Jozi yesterday we were in catch up mode to the session prior on Wall Street, stocks were up 1.6 percent as a collective. Industrials were up nearly two and a half percent, Naspers the large driver there, that stock was up sharply, 7.7 percent higher on the day, clawing back all the losses from the session prior. So whilst we have seen two days in a row of that order of magnitude, seven percent swings, the share price as it opens up on Friday morning is about at the same level as it closed on Tuesday evening. The intraday moves Wednesday were startling, down four percent, back flat to marginally higher again, and then down 7 percent on the day. The next day, Tencent is up like crazy, the stock ramps up seven percent. That is swings of nearly one fifth of the market cap in all directions in two days. Hardly comforting for anyone, if you caught all of the volatility then hang up your trading ice skates for the year, lest you fall on the hard ice.

Mind you, that is nothing. The 5 day action on some of the gold producers share prices is mind boggling, more specifically their ADR share prices. Last evening the ADR share price of GoldFields was down 11 percent plus, the stock was up 20 percent in three sessions from Monday through to the close Wednesday. All in all, the stock is down 2 percent in the last five trading days, yet the stock has had the most wild of gyrations that I have seen in a while. As ever, it depends where you draw your line in the sand. All the Chinese currency ructions, which are really non events have had everything to do with this. Another insightful post from a former Fed insider, Bob McTeer: The Yuan and the Dollar in which the conclusion sums it up:

Also, we must remember that in recent years China has allowed its currency to strengthen against the dollar, so its recent rise with the dollar was additional strengthening on top that. There are many things one might criticize China for these days, but I don't think their currency policy is one of them.

Equally, Cullen Roche puts it into perspective in a post The China Slowdown in Perspective

It's extremely odd to be getting worried about an economy that is growing at 7% per year. Most countries would love to have that "problem". China's growing even if it's not growing at the same rate. So, it's still positively impacting global growth even though the rate of change is slowing. Now, I wouldn't be shocked if that growth rate were a bit lower since the numbers are almost certainly massaged, but it's still useful to keep things in perspective. So far, we haven't seen big changes in the macro data in the USA. This doesn't mean China will have no impact on US growth, but it's likely far smaller than the media would have you think.

It was a big up and down session yesterday in the US, markets opened up fractionally, went lower, went higher and closed lower, losing all the gains in the last hour. The end. The S&P closed the session down over one tenth of a percent, the Dow Jones was marginally ever so fractionally higher, the nerds of NASDAQ sank over one-fifth of a percent. Over the seas in a North Easterly direction Chinese stocks are falling and off their highs in the session, Japanese stocks are down and Down Under stocks are under water. Let us hope that the Boks can win this weekend, it is pretty amazing how fickle sports fans can be.

Company corner

Tesla announced that they were going to be raising 500 million Dollars, Elon Musk is going to stick in 20 million of his own money to buy more shares at these levels. What for? I mean, what are they going to be using the money for is the better question? In the press release, titled Tesla Announces $500 Million Common Stock Offering: Tesla intends to use the net proceeds from this offering to accelerate the growth of its business in the United States and internationally, including the growth of its stores, service centers, Supercharger network and the Tesla Energy business, and for the development and production of Model 3, the development of the Tesla Gigafactory, and other general corporate purposes. So there you go, making progress and never sitting still.

Nestle released 2015 Half-year results yesterday, at the same time an Indian court dismissed charges of a noodle scandal in that country, further testing of the product is underway, an independent body will test whether or not the product is harmful. Maggi Noodles. As they say in the English release: In India, our withdrawal of Maggi noodles resulted in negative organic growth which will continue into the second half. We are engaging fully with the authorities as we work to relaunch the product. Do you eat boxed or packaged noodles?

Whilst sales growth has been muted, this is against a backdrop of struggling markets everywhere, developed and emerging. Yet, the company still maintained their growth trajectory across all of those markets, the strongest being in the Americas where pet-care products, coffee and creamers were the drivers. My dogs must be dumb, the excitement they get is the same day in and day out when I feed them, at least the two male dogs. The female husky must be smarter, if there are no "added extras" in her bowl she gives me "the look". EPS for the first half clocked 1.43 Swiss Francs, the Swiss Franc share price is 74.15, the ADR Dollar price is 76 (the stock was up 2 percent last evening). That is about spot on, 1 US Dollar is around 0.98 Swiss Francs.

The stock trades on a 16 multiple and is hardly expensive for a global business of this size and scale, the company has a market capitalisation of 236 billion Swiss Francs, around 242 billion Dollars. I guess with the growth rates relatively muted, the stock will trade at this sort of level. Also remember that the Swiss government gobbles up around one-third of the dividend, taxes that you cannot avoid, the pre tax yield is around three percent. Compare that to the Swiss government bond rate of nothing, then it is pretty good, in that context.

Why own this company? They are the gold standard (Maggi Noodle scandal aside) of food production globally, their infant care and coffee brands are solid, strong, in fact all of their brands are pretty amazing. Quality, definitely not quantity is the name of their 110 year old business. Yet global sales are expected to be in the coming years approaching 100 billion Dollars. At the current growth rates expected of around 5 percent per annum, you could easily see it there before the decade is out, 2019. We continue to believe that this business is well poised to continue to attract more customers over time, with their well known and quality brands. Buy.

Linkfest, lap it up

Eventually at some level certain "new" services become indispensable to you. This new study suggests Facebook, Messenger (is) Replacing Email, Phone, Text in Southeast Asia. The networks of course still supply the data and ability to send messages, the places that people are meeting in order to use the wifi is increasingly becoming public places, coffee shops and the like.

This is what we were saying yesterday, there are always head winds - a new "headwind" is born. Here are some of the major headwinds in each decade and how the market did:

It is nice to be reminded of human innovation - The 8 busiest airports in the world. The Chicago airport handled a staggering 888 000 flights in one year! That works out to 101 flights an hour or more than one a minute.

As cars become more efficient, the cost of traveling comes down. Oil prices haven't been playing ball though, until recently - Driving costs the same as it did in the '50s. Note how costs have been coming down over the last 15 years, even though oil prices have been going up.

Home again, home again, jiggety-jog. Markets are a little mixed here to start with, we are marginally higher on the day. German GDP was a beat, French GDP was not, both pretty anaemic however. Still, they are growing, that is what matters the most. Have fun out there!

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

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Thursday, 13 August 2015

As you were!

'"It's hardly what you might call a "devaluation," or a "collapse," as some of the more breathless headlines read."'

To market to market to buy a fat pig. My spell checker does not like rude words on my phone, my texting is autocorrected to holy spitballs. Which in itself is borderline PG13 for language, perhaps the real word is another 3 years on that! That phrase, the real one, could be used to describe market movements yesterday. Personally I think that it is stupid that the market reacts negatively to a very modest move in currencies. It seems like the same old thing over and over, over-reacting to a market current topic de jour.

As Paul pointed out, last week it was Greece, a few months ago it was Ebola, there will always be something to worry about, currently it is Chinese currency moves. Know that the most successful investor of all time (if absolute money and wealth was a marker), Warren Buffett just closed the single biggest deal ever in the history of his company Berkshire Hathaway. Ever. In the 50 years that this business has been controlled by him, and for 50 years that he has leaned on his business partner Charlie Munger, they have never done a deal of this scale and magnitude. EVER! If two of the best investors of all time were doing a deal last weekend, depleting half of their cash reserves, you should probably know that they think it is OK to pay 22 times earnings for a company with growth prospects.

The blog posts that started going around showing everyone that this was not really a big deal included this classic from Scott Grannis: China's currency move not a big deal. That sentence in the first paragraph sums it up: "It's hardly what you might call a "devaluation," or a "collapse," as some of the more breathless headlines read." EXACTLY! As you know however, stocks tend to move on emotion, a little trigger can cause a massive move. Markets are twitchy by nature, participants are glued to screens looking at price moves as if their lives depend on it. I suppose in many instances their livelihoods do actually depend on the price moves. As Benjamin Graham tried to explain at the beginning in his Intelligent Investor, there is a distinct difference between speculators and investors, they are all market participants, different time frames and same objective.

Our market was absolutely crushed. Mashed. Down a whopping 3.16 percent, banks and financials fell around four percent. Wow. Industrials took nearly as bad a caning. Resources however were nearly flat relatively speaking, down 0.22 percent by the close, spurred on by the gold miners, and wait for it, as a collective they were nearly up 11 percent on a day. If I got an 11 percent move per annum I would double my money every six and a half years. Platinum miners were up a less impressive 2 percent. Both sets of stocks as a collective are down a quarter for the year in the case of the gold companies and a little over one-third for the platinum producers. And whilst people may talk about gold as an inflation hedge, protection to use against pending armageddon (trading with cockroaches and ants a good idea?), the World Gold Council suggested that demand is at a 6 year low. Here goes the first two stories in my inbox this morning:

Seems like it is jewellery demand that drives the prices. As we have often said here at Vestact, we would rather be invested in the business that we have access to that will benefit from gold demand in the form of jewellery and watches, Richemont is that very business. Own that, rather than physical gold or gold producers, better margins, less problems.

To finish off, the US market had a heroic comeback, and whilst the scoreboard reveals very little, stocks flat to slightly higher. At the worst point after stocks had been trading for just half an hour, collectively down one and three quarters of a percent. Wow. The comeback kid, perhaps as a result of the JOLTS report. Job openings dropped more than expected. Yes, what does that mean (say it slowly). The annualised number still looks amazing, in terms of number of hires, the recent number points to a little slowing. So the whole debate on whether the Fed will or won't raise rates in September starts again. File in the drawer of things to watch yet they are not important in terms of what you are trying to achieve, OK? Stay calm and sensible, share prices go up and down as a result of the current mood, nothing changes at the companies other than their respective share prices may get cheaper. Something that is cheaper is worth buying, right? Right!

Company corner

Tencent released numbers yesterday, after the market closed in Hong Kong. And that was during our market. First of all, why does this matter to us? Naspers owns 33.85 percent of Tencent, it is their principal asset in size and scale, and has been for a long time their share price driver. Time to whip out the maths to see how many Rands Tencent is relative to the Naspers market capitalisation.

Tencent market cap in Hong Kong, which right now is 1.38 trillion HKD. Naspers owns 33.85 percent of TenCent, that translates to 467 billion Hong Kong Dollars. One Hong Kong Dollar at the current exchange rate is around 1.64 Rand. So, quite simply, multiply 467 billion HKD by the prevailing rate and that equals 766.49 billion Rand. Naspers had a market capitalisation of 681 billion Rand at the close last evening. Huh? That doesn't even make sense. Well, you must bear in mind that yesterdays close was awful, horrible and no good with the Naspers price sinking six and a quarter percent. Wow. The selling was aggressive yesterday.

The current gap between the value of the Tencent stake that Naspers holds and the entire market capitalisation of Naspers is minus 85 billion Rand. Or minus 6.68 billion Dollars. That is the size of a company like Discovery. Missing from the market valuation, in our infinite wisdom here in South Africa we somehow know the "real" value of Tencent, somehow our arrogance suggests that Tencent is completely overvalued. Yet, the PE unwind on Tencent is happening in front of our eyes. And the stock is up over five percent currently, which is how the market has perceived these results.

You can take a quick look at the numbers, I went through them yesterday and they all look pretty good to me: Tencent Q2 numbers. Revenues up 20 percent year on year, profits up 17 percent, Basic EPS clocked 1.528 Renminbi, that translates to 1.91 Hong Kong Dollars of basic earnings per share, that is for the first half. If you annualise that and apply a forward multiple to Tencent, you get to 36 times at the elevated shares price (up 5 percent this morning). So whilst growth of 20 percent might not be enough for locals here, the stock still trades at a premium. A growing business that attracts a higher multiple, we remain positive on Tencent and their prospects, equally we believe that Naspers has plenty more legs!

We had numbers from Curro this morning, interim results for the six months ended 30 June 2015.

Here are a quick overview of the numbers. Headline Earnings are up 82% to 51 million but due to the extra shares in issue the HEPS are only up 68% to 14.8c. Revenue is up 45% to R705 million and learners are up 26%. The number of schools has grown from 80 at the end of 2014 to 101 at the end of June. The advantage of a growing school network is that their overhead costs of running the group drop on a per learner basis. So the company gets relatively more profitable as they grow, the wonders of economies of scale. EBITDA margins improved from 20% to 23%.

The stock has been the market's preferred entrant into the private education space in South Africa, where the view is for 'blue sky' growth opportunities. There is a graphic from our post a year and a half ago, Curro full year results 2013, which shows that if the number of learners triples from here they will occupy still less than 1% of the education market in South Africa. So there is definitely scope for huge growth and continued growth at current eye watering levels. With the nice boost in HEPS the P/E ration moves from around 190 to around 120, so not cheap by any means! Looking forward the stock probably wont double in 3 years again with earnings growing into the share price. When at some point in the distant future where there are no longer growth opportunities, the huge amounts of cash generated from the company will then result in a very rosy dividend yield. For those with an already diversified portfolio this is a buy in our books

Linkfest, lap it up

I can't remember if we have posted this before even if we have it is worth reading again - How South Africa's Discovery became one of Africa's most innovative companies.

This is not new news and Dstv already does this through box office and catch up - Naspers to launch Netflix 'competitor'. The key to a successful streaming service is having a reliable fast internet connection and then the content that is offered. Getting quality content is expensive which is why the likes of Netflix and Amazon have started making their own shows, I wonder if Naspers will do the same?

Being financially independent is the goal for just about everyone that I have met - Your salary shouldn't be your only source of income. Some of the interesting finds in the article were that the majority of US woman feel adverse to discussing financial planning and investing but 3 out of 4 woman would like to learn more about investing.

Home again, home again, jiggety-jog. Stocks should bounce back hard today, most Asian markets are trading much higher after the global slam dunk yesterday. All markets across Europe traded three percent lower here yesterday. Oh, and the Greeks vote on their third bailout today. so much for no austerity and breaking those shackles, as we said, when the money moment arrived, we would see.

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

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