Money with a dash of Funny

Thursday, 10 December 2015

The dust settles, what to do?

"Before one panics and goes for the nuclear option, sell everything and hit the streets, one should think a little harder. Is this another moment in history where we reached an inflexion point. The one of many? We have been there before. I am sure that there will be many others. It has happened at a particularly bad time, bad from the points of view that everyone was catching their breath to think about something else, the December vacation. Bad from the point of view that we were just downgraded, from a credit point of view."

To market to market to buy a fat pig. There was a sense of disbelief yesterday, a sense that whilst common sense had prevailed all along, this was a clear sign that either cracks are emerging, or something else is happening. There was an FT story, that does a good job of trying to tell it like it is: Finance minister sacking undermines South Africa's reputation.

Of course the FT would bat for capital, that is their target market. Kevin Lings, chief economist at Stanlib (and fellow Melrose Arch tenant, seen in Clicks and other such exotic locations) is quoted as saying he thought this was political interference in Treasury. In other words, if you cannot give me what I want, I will take what I want, thanks very much. He also says that the lines are blurred between what is good economic policies that are sound for the country and what appointments meet political objectives.

What those political objectives are however, is not too clear to see. Basically, as the article concludes, the replacement has no experience, that in itself tells you that political objectives are front and centre. As David Shapiro pointed out earlier in the day during an interview on CNBC, the Finance Minister of a country is like a CFO of a business. The CEO's right hand person, the person who knows what is going on as far as the money is concerned. The fact that the CEO gave no reason for the sudden departure and appointment is even more worrying. And it sends a clear signal of how the CEO acts.

Expectations are for hikes in the marginal tax rate, perhaps even in the companies tax rate. At a time when the country is operating on fumes, I am not too sure that is smart. Austerity is one thing, the magic wand of higher revenue by raising taxes and everything continuing as normal, that belongs in fairy tales. To collect more revenue, you need to encourage growth. To encourage more growth, you need greater economic activity. To encourage greater economic activity, you need a sound and clear economic policy, one that is not confused by events such as this. If the two events in Nomura's analysis of it (we pointed to it yesterday), SAA disagreements and the Nuclear deal financing are at the core of it, then those are state owned entities, with their own sets of problems.

Again, let us not get our knickers in a knot, there are "things" that you can do in order to change this. Whether or not the rank and file of the ruling party will stand on this Arnhem or not (history buffs will get the reference, a bridge too far), remains to be seen. The normally inline with the ruling party Shaka Sisulu went on a Twitter tirade, the last two tweets were as follows: "Comrades of the movement are going to have to wipe the facade of their faces and reassert the centrality of the movement in decision making" and then lastly (and no more tweets for a while now) "Or go buy a good suit. And start writing a nice eulogy. To go bury a once proud history. In their lifetime". He has strong political allegiance to the ruling party, his grandfather is Walter Sisulu.

The upshot of it all, from a markets perspective was at face value very little, the market was even up at one stage, slipping by over a percent at the end. Scratch a little under the surface and it revealed a WHOLE lot. A weaker currency leads to imported inflation, which leads to the real scenario of interest rates increasing. Which is a double whammy for consumers, the cost of their imported goods go up and the cost of their financing increases. Coupled with pending rate hikes, a loss of investor confidence, the obvious quarters of the local equities market took a beating. Financials and banks were heaviest hit, financials as a collective were down nearly 9 percent.

At the top of the losers were the likes of FirstRand (-14.84 %), Barclays Africa (-14.53 %), Discovery (-14.27 %), Standard Bank (-13.54 %), RMB Holdings (-12.47 %) and PSG (-12.43 %). At the other end of the spectrum was all the stocks that had a bias to the Rand, either from a production point of view (i.e. their product that they produced, priced in Dollars) or from where the company had a primary listing elsewhere, Richemont, Glencore, Capital and Counties, SABMiller, Intu, British American Tobacco, Naspers (Tencent is listed in Hong Kong), Reinet, Mondi and Mediclinic (soon to get a London listing).

Before one panics and goes for the nuclear option, sell everything and hit the streets, one should think a little harder. Is this another moment in history where we reached an inflexion point? The one of many? We have been there before. I am sure that there will be many others. It has happened at a particularly bad time, bad from the points of view that everyone was catching their breath to think about something else, the December vacation. Bad from the point of view that we were just downgraded, from a credit point of view. Inflationary pressures are borne by the poor, it eats the spending power of the poor the most. Rich and skilled people have options. Which is not good when greener pastures are available elsewhere. We will continue to monitor and advise accordingly.

Linkfest, lap it up

Uber is one of the apps making some of the biggest waves and it is about to make more in the delivery space - Uber's first spinoff app is a food delivery service in Toronto. They are finding more ways to better utilise resources.

One of the stocks that has been on our Radar this year is Priceline. The stock is up 20 000% since the stock's low in 2002! - Priceline is the one big internet comeback attempt that actually worked.

Josh Brown points out that hedge funds were complaining about too little volatility and then that due to too much volatility they were forced out of positions. The market is never going to do what you want it to do, remember that these are some of the smartest people on earth and the market makes them look dumb - I think I'm dumb.

Simpler normally is better, and in this case a $10 tube is working as well as multi million dollar machinery - A radically simple idea may open the door to a new world of antibiotics. Given that antibiotic resistant bacteria is on the rise, these new types of antibiotics will be key going forward. Part of the article looks at the life the Russian scientist who is doing the work and what obstacles he had to overcome after the Soviet Union fell.

Home again, home again, jiggety-jog. Japanese stocks are up a lot, a percent or so, following a good lead on Wall Street overnight. After the carnage here yesterday it is difficult to see clearly, one must definitely keep a cool head in amongst the boiling and fuming many. If that were not enough, on my way home yesterday I encountered multiple car accidents, all serious. In good news, Marisa Mayer, the Yahoo CEO had identical twin girls, well done to her. That hardly helps us down here in Mzansi, a place where the currency has certainly deteriorated to the point where it is a matter of time before inflation starts to filter down. And there are some rumours of an emergency SARB meeting, to hike interest rates to stave off pending inflation. What about growth and demand? Sigh, stand by for more.

Sent to you by Sasha and Michael on behalf of team Vestact.

Email us

Follow Sasha, Michael, Byron and Paul on Twitter

078 533 1063

Nene gets whipped and Nae Nae'd

The removal of a technocratically sound, decent, hardworking, well respected (at home and abroad), fiscally conservative and reform-minded Finance Minister is a serious blow to (Portfolio and corporate FDI) investors for several reasons.

To market to market to buy a fat pig. We often point out that there are many things beyond your control when making investment decisions. I wrote to a client overnight: "In investing there are some things that you can control, i.e. the stocks you own, and there are many things that you cannot control, such as the levels of the currency, interest rates, government economic policies, the global geopolitical environment, and so on." You can position yourself for how you see the future, you can do something about that. You can externalise money and invest offshore, you can do something about that. However, you cannot do anything about the levels of the Rand, who the new finance minister is, what Janet Yellen and the FOMC, or Mario Draghi and the ECB, or Lesetja Kganyago and the MPC are likely to do.

I was feeling under the weather yesterday, summer flu has descended onto our offices here, I slept like a log last evening. And not a baby, as they wake every few hours for sustenance. Sleep when your baby sleeps, they tell new mums, yeah right! As such I only saw a header early this morning about the new finance minister. Actually, it came first on the Vestact WhatsApp group, that is where stories break. Sorry, closed group. OK, so here is the reaction, first from the media, the Mail & Guardian story, an article from Matuma Letsoalo, a senior political reporter at the publication: Nhlanhla Nene removed as finance minister. Either way you look at it, it is not pretty.

This morning well respected politician and former premier of Gauteng (1999-2008), Mbhazima Shilowa, was on Power FM, and these are the tweets that came through. Of course this is associated with the interview that he gave, about the new finance minister. Remember that you must read the tweets from the bottom up, the more recent ones are later in the interview. You can decide for yourself:

And then perhaps the real sign that we are still in a robust democracy, the press statement from the EFF, this was really pushing boundaries: EFF statement on the removal of the Finance Minister. This paragraph was especially scathing: "Zuma has appointed him because he knows that Van Rooyen will not stand up to him when he wants to do wrong things. Van Rooyen will be so eternally grateful, absolutely starstruck that anything Zuma asks for will go. Van Rooyen will be prepared to even approve further upgrades to Zuma's Nkandla home by putting a private zoo that has exotic animals like domesticated tigers."

And then some fellow who has been really involved in South Africa as an outsider for as long as I remember there being business TV in South Africa, a chap by the name of Peter Attard Montalto, his note from overnight is simply titled, South Africa: Finance Minister removed, in listing the points, Peter leads with the following: "The removal of a technocratically sound, decent, hardworking, well respected (at home and abroad), fiscally conservative and reform-minded Finance Minister is a serious blow to (Portfolio and corporate FDI) investors for several reasons.".

And then he lists them, the removal was possibly as everyone agrees on, political rather than performance. The fact that he clashed with the Presidency on areas of the new plane, austerity measures for the Presidency, perhaps more so the nuclear deal (too expensive for the country) and the SAA tongue lashing directed at someone who is close to the president. You can read into it what you want, either way it is not good for fiscal discipline.

The market will dictate to the finances of the economy, by the way of your exchange rate, your borrowing costs, and so on. I would say, don't panic, wait for the dust to settle. This is clearly a negative. Make no mistake it would be better if Nene was still in charge, don't act irrationally however. And rather act in the way that you can, i.e. act along the lines of things that you can control. Bloomberg has a pretty sobering view on it all: Zuma Takes South Africa Economy to Brink as Credit Risks Rise.

Linkfest, lap it up

Machine learning is going to become more prominent as we generate more data that needs to be processed and as we require robots to do more things. The big question that is still being asked is, "what is the best way for robots/ machines to learn?" - Now robots can learn about the world the same way babies do.

Many people have been calling a drop in share prices just due to the fact that there hasn't been a down year since 2009. Going back in history the 80's and 90's were even better years for stocks than the current streak - The S&P 500 Hot Hand Fallacy. There is no doubt that the market will have a down year at some point, that doesn't mean though that we will see the world crash around us.

What do you do when you want a Coke but you are a Soviet General and can't be associated with a core capitalist brand? The solution is to ask Coke to make a clear coke in a bottle with a nice big red star on it - Object of Intrigue: How a Red army general inspired 'white' Coca-Cola.

Home again, home again, jiggety-jog. Anything with a SA inc. bias is getting blasted today, most especially if you are a financial business. FirstRand down over 7 percent, Standard Bank down over 6 percent, Barclays Africa down over 6 percent, Nedbank down 5 percent. Discovery down around 4 and three quarters of a percent. Shoprite down over three and a half percent. These numbers obviously evolve quickly, the market reacting to the news in SA inc. I have only one thing to leave you with, for those younger readers, you watch me whip (of the economic transformation cluster), you watch me Nae Nae (out of the door, or off your chair).

Sent to you by Sasha and Michael on behalf of team Vestact.

Email us

Follow Sasha, Michael, Byron and Paul on Twitter

078 533 1063

Monday, 7 December 2015

Global diversity for the win

"That does not mean that there are no investment opportunities, it means two things however for companies with a completely emerging market business, a) the valuations are likely to be subdued on a weakening growth outlook and b) they are more likely to pay up for opportunities elsewhere, and by that I mean offshore. Companies who in large part have diversified their asset bases are likely to attract higher multiples from the local market, who are searching for higher growth opportunities."

To market to market to buy a fat pig. Whilst the Proteas were trying with all their might to stave off another defeat in the test series in India, in an epic blockathon, the global markets were less dour at face value. Test cricket has a lot in common with investing, it takes a lot of time to execute your plan, there is an enormous amount of planning involved in the first place. It is just as much about tiring the opponent out as it is a test of your own mental stamina. In many instances you feel like you are up against it, it is going to be too tough to be in, you sure as heck don't want to get out though. As they say, and batsmen will tell you this, they only get one chance, whilst bowlers get multiple chances. Not sure, fielders drop catches. I often say that the baseball analogy that Warren Buffett uses is more suited to cricket, it goes like this:

The stock market is a no-called-strike game. You don't have to swing at everything-you can wait for your pitch. The problem when you are a money manager is that your fans keep yelling, 'Swing, you bum!'

See? In cricket you can wait for the ball to come to you, i.e. the bowler to bowl to you, rather than trying to score off each and every single ball. My cricket coach and headmaster was a Geoff Boycott style fan (he would have loved yesterday), he often used to say to the opening batsman, of which I was one for a couple of years, the best shot is no shot at all.

You don't have to swing at everything, in the same way that there will be many companies that you never own that you wished you did. Like PSG, or Capitec or any other such business. Like SABMiller when they were worth a whole lot less, like Old Mutual at the bottom of the financial crisis, why did you not buy that, what is wrong with you? And getting a start is important, no matter what your age. If you are not saving, nobody else is going to do it for you. In other words, if you are not committing more to your long term savings, nobody else is going to do that for you. It is simply like that. Again, the cricket analogy is apt here, each and every person utilising investment platforms is looking for the same thing, how they go about it is another story entirely, take Shivnarine Chanderpaul, nothing pretty about that style, darn effective though, he averages 51 plus in a losing team more often than not.

Enough about cricket, I do realise that it definitely is not everyones cup of tea (and cucumber sandwiches). Markets locally regained some of the losses from the sell off here on Friday, stocks up around a percent and one-fifth here in Jozi, Jozi, the Rand was testing new all time lows to the US dollar, it was hardly prettier to the Euro nor to the Pound. I am afraid that we are stuck in a situation where the perception of emerging markets has soured badly. At the end of the session our market was just below the 50 thousand point market, over 5000 points away from the all time highs now, the end of the year has certainly been tougher than the beginning.

That does not mean that there are no investment opportunities, it means two things however for companies with a completely emerging market business, a) the valuations are likely to be subdued on a weakening growth outlook and b) they are more likely to pay up for opportunities elsewhere, and by that I mean offshore. Companies who in large part have diversified their asset bases are likely to attract higher multiples from the local market, who are searching for higher growth opportunities. So, one will have to continue to look for and invest in diversified global business with a more than even growth rate. Easier said than done, right?

Across the oceans and far away in New York, New York, stocks came off the boil after the marvellous rally Friday, ending comfortably down across all three major indices. The nerds of NASDAQ sank nearly four-fifths of a percent, the S&P 500 sank 0.7 percent whilst blue chips lost two-thirds of a percent. The oil price was caned again, sinking to a seven year low last evening. That is excellent for consumers, provided of course that they are buying in dollars, not like us, right? Oil prices are traded as low as 37.77 Dollars a barrel, some suggesting that the lows could test numbers not seen since the early part of the last decade. Ouch for balancing budgets in some parts of the world, great for Joe Consumer. The reason is clearly OPEC's inability to turn off any taps at any quarters, instead the "drill baby, drill" Sarah Palin mantra comes to mind. And to think that she has more sanity than Trump. Sigh .....

There was another deal brewing, a Luxembourg based group by the name of JAB Holding was busy offering a monster premium for Keurig Green Mountain Inc., wanting to buy the firm for 13.9 billion Dollars. Now the group is becoming serious in the coffee world, having acquired D.E. Master Blenders (Douwe Egberts) in October 2013 for over 10 billion Dollars and Mondelez International Inc.'s coffee unit in May of 2014 for somewhere close to 5 billion Dollars.

Now the company is close to a usual European setup here, there are three highly skilled professionals running the business for four heirs, each of the Reimann offspring are worth four billion Dollars plus, according to Bloomberg. They moved from Germany to Austria, swapped their nationalities and hey presto, cheaper taxes in Austria. Good work, plus, they speak the same language. One of the investors in JAB Holdings is a known entity, Alejandro Santo Domingo, a shareholder over at SABMiller (and #winning on the current deal) is an investor in some of these coffee deals. I like these deals, it means that the coffee space is more interesting, more people willing to pay big premiums on premium coffee. We continue to stay long Starbucks, our most preferred global coffee investment.

Linkfest, lap it up

I doubt this project will get out of the planning phase, I hope that it does though - The World's First Underwater Tennis Court Could Cost $2.5 Billion.

With high growth in China there have been environmental draw downs. The question to ask though, is it worth it? Will the environmental damage be temporary as China gets richer and will they get greener? - Beijing Issues Air Pollution Red Alert for the First Time. The other big problem is the health issues that will arise in the population due to the pollution.

Here is a look at how different sectors have performed for this year. Generally we think that mega companies just plod along with limited share price growth given the huge base. This year that has not been the case - Mega Cap Stocks Driving Market Returns. The blogger also has a look at the returns of value and growth stocks this year, it is no surprise that growth stocks have outperformed by 10%.

Thanks to competition, renewable energy costs are plummeting. Two things are happening in the renewable energy space, the products are getting cheaper and the products are producing more electricity. The result is that on a per Watt basis, solar and wind are starting to be real alternatives - How Solar and Wind Got So Cheap, So Fast

Home again, home again, jiggety-jog. Stocks across Asia are down sharply, Japan down over a percent, in Hong Kong markets are down over one and two-thirds of a percent. Stock futures across in the US are also pointing to a lower opening, no doubt European markets and ourselves in this time zone will start lower too. Part of the reason is another set of smoggy looking Chinese numbers, their trade numbers for November suggested that their trade with the rest of world continued to shrink. The country still runs a pretty mean monthly trade surplus of over 50 billion Dollars, I am guessing the envy of many.

Sent to you by Sasha and Michael on behalf of team Vestact.

Email us

Follow Sasha, Michael, Byron and Paul on Twitter

078 533 1063

Steinhoff goes back to it's Roots

"Talking of a lack of uncertainty, this is crystal clear, the company also announced late Friday that their shares are expected to debut on the Frankfurt exchange today. Management are expected to attend. Talk about a bad start and having to try and convince a very nervous subset of German investors, their confidence is shaken in recent times. The German way is one of compliance, high standards and being conservative. "

To market to market to buy a fat pig. A day of two halves for us, watching markets in two different places isn't normally that different. The timing of the agricultural led idea of daylight savings is not good for Jozi markets during the winter months, we only catch half an hour of trade into the close here, and ten minutes locally is spent in auction. The futures market here locally gets the benefits of around an extra half an hour, in reality however we are really behind. I guess it could be worse, you could be in Asia and not cross over with the US markets ever, so perhaps there shouldn't be any complaining. No, never complain.

Markets locally tumbled Friday, stocks as a collective were thumped over two and one quarter of a percent. Why? There were some big stories that we will deal with in a moment, Steinhoff was one of them, MTN, we spoke about the NCC flip flopping on Thursday and then Friday again, and then Naspers was sold off heavily as a result of raising more cash through an equity issuance. There was a single stock up in the entire ALSI 40, and that was SABMiller, that company of course has the underpin of the pending deal with AB InBev.

The stock as such will trade in-between now and then (when the deal is closed) and will act more as a proxy of time value of money, relative to the certainty (and as such the closing of the gap between current and the offer price) of the deal happening. And what I mean by that is that the certainty of the deal being closed, i.e. all parties able to jump through the relative regulatory and shareholder hoops. Or clear the hurdles, whichever one you prefer. And of course here in Jozi the currency will be a factor. Over the last five trading sessions, in other words last week, SABMiller in London is up 0.17 percent, in South Africa it is not too different, up a little over one-third of a percent. Over the last five years however, SABMiller has advanced 277 percent in Rand terms and nearly 90 percent in Pound Sterling terms, the rest of the Rand movements attributable to the weaker local (and by local I mean Rand) unit.

Talking of which, Fitch downgraded our credit rating as expected on Friday, with a negative outlook, meaning that a further deterioration in our fiscal position might see us edge down to junk status. Junk is a pretty harsh word, that is where Brazil are currently, I prefer non-investment grade. Either way you look at it, you can stick lipstick on a pig, it is still a pig. For most people the processed product is tasty, for some, not eating for religious reasons and for the tiny minority, people who keep pigs as pets (the famous Youtube star Esther the pig is an example), the pig is always beautiful. There is something for everyone. You know what the saying means, as unattractive as the pig is, putting lipstick on hardly helps. There must be a man reference in there somewhere, around pigs, rather than using lipstick.

As far as the company that we keep goes, a BBB- means that we rub shoulders with the likes of Romania, Russia, Turkey, Indonesia, India, Morocco and Brazil, a country which stinks real bad at the moment. For a full list, check this out: South Africa | Credit Rating, from Trading Economics, and then search for the BBB- rating, to see our neighbourhood. It is not the worst, what is interesting is that this measure includes a Trading Economics (see that TE) measure. By their standards we score a 50, out of a possible 100. Mexico for instance scores a 60, Denmark a 99, Venezuela a mere 6. Thailand a 62, China a 79. Greece scores a 9, which is awful, and to be expected currently. There is very little that you and I can do about our credit rating, so being upset about it may very well be energy misdirected. Rather, and we always say this, focus on the stocks that you are likely to own rather. That matters more to us.

Stocks lifted off sharply in the US on Friday evening, all the major indices were up over 2 percent on the day. Why? Finally good news on the employment front can be interpreted as such, good news. Sometimes Mr. Market tries to pre-empt any sort of move from either the Fed, or what earnings are likely to be, or what the budget is going to look like. And so on. In this case the Employment Situation Summary as it is known officially, the non-farm payrolls number, or jobs number, was a beat.

And revisions were higher, average hourly earnings in the US have risen 2.3 percent over the last year, comfortably ahead of inflation, which is basically non existent anywhere in the developed world. Mining, to put this into perspective, has shed 123 thousand jobs in the US over the last 11 months, total job gains have averaged 218 thousand per month for the last three months. In mining it has been tough out there. Talking of commodity prices, the oil price touched year lows Friday after OPEC failed to meet consensus on output targets. Even though the quotas suggest that the maximum must be 30 million barrels of oil a day, the reality is that they regularly go above that, somewhere around 31.5 million barrels. Tell the governments of those territories that they should cut production.

Someone made a good point on Twitter, oil prices are no longer determined by what happens in comfortable and cushy hotel rooms in Vienna, what matters is what happens on the demand side in China, the flow from the oil fields of the Bakken formation. Different times, the quotas are no longer as important as they once were, the fact may be as the Bloomberg article titled OPEC Unity Shattered as Saudi-Led Policy Leads to No Limits, points out, OPEC may well be dead in terms of their influence. It is gone.

That is what happens with monopolies like OPEC, people find other ways to either use alternatives or use less of the same thing, or extract it themselves. And if there is little evolution in terms of your strategy, then this happens. Pump baby until the others fall over. The problem is that you equally have budgets to balance. For the consumer using Dollars, this is wonderful news, an abundance of oil. Sadly for many emerging markets, they have not seen the real benefits as their currencies have been pounded. India are a huge benefactor of lower commodity prices. I wish we were.

Steinhoff stock was slammed Friday, the company put out a SENS early on what must have been one of the best kept secrets in a while. The stock was down seven and one quarter of a percent. Here goes, let me do a copy and paste: "In connection with tax investigations, the Westerstede offices of Steinhoff Europe Group Services GmbH (SEGS), a German subsidiary of SIHL, have been searched on November 26, 2015. The authorities are reviewing the balance sheet treatment of certain transactions involving transfers of participations and intangible assets among SEGS, additional subsidiaries and third parties pursuant to 331 HGB. The investigation focuses on adherence to an arms' length valuation and proper accounting pursuant to German GAAP. SEGS is fully committed to support the authorities, and has begun to take immediate steps, in clarifying and resolving these matters."

Westerstede looks like a nice little town in Lower Saxony, right in the North East of Germany, not too far from the border with the Netherlands. There is a very famous 4 yearly festival called the Rhodo festival, a springtime celebration of the rhododendron. Which as the avid gardeners amongst us know is a beautiful flower. Not such good smells emitting from the SENS announcement, equally a bad looking one at that. The group does state that they are cooperating and clarifying with the German tax authorities, I suspect that we should see some more in a while. Sooner rather than later, there is nobody I have ever met who likes uncertainty.

Talking of a lack of uncertainty, this is crystal clear, the company also announced late Friday that their shares are expected to debut on the Frankfurt exchange today. Management are expected to attend. Talk about a bad start and having to try and convince a very nervous subset of German investors, their confidence is shaken in recent times. The German way is one of compliance, high standards and being conservative. One would hope that there is nothing untoward in Steinhoff's accounting methodologies, this is not something that is not known to the market. Markus Jooste is a driven individual, who wants to conquer the world, he works very hard on the business. And knowing that Christo Wiese has thrown in his lot with Marcus, that is pretty comforting for all shareholders. Christo Wiese just clocked the top of the richest list in South Africa. Whilst one should tread with caution, this is certainly an opportunity.

Naspers sold off sharply on Friday, the stock was down four and a half percent by the close. The first announcement regarding the capital raise was released on Thursday, you can find it here: Launch of an accelerated bookbuild of up to US$2.5bn, the second one was an announcement in no time at all, before the market opened on Friday.

You can find it in the same place, it was the conclusion of the capital raising: "Naspers is pleased to announce that it has successfully priced the Placing, raising gross proceeds of US$2.5bn. A total of 18,167,848 new Naspers N ordinary shares (the "Placing Shares") were successfully placed with qualifying institutional investors at a price of ZAR 1,975 per share. The Placing Shares being issued represent approximately 4.3% of Naspers's issued N ordinary share capital prior to the Capital Raising."

There you go. That was the reason for the share price falling. I think that it is a good and bad thing. Using equity that is expensive, relative to what the markets thinks, feels not that great, being able to get it away in a heartbeat (before the market even opens) is a wonderful thing and represents a certain positive demand. We continue to recommend Naspers, good company making great progress.

Linkfest, lap it up

One of the best performing stocks this year, Amazon are pushing further to grow their distribution network. The Amazon stock is up 116% YTD which is an indication of their underlying growth and future growth expectations - Amazon Buys Thousands of Its Own Truck Trailers as Its Transportation Ambitions Grow

I'm not sure how you would do this practically if you want to watch TV/ movies in a group - The BBC wants to make movies that adapt to your interests. This may be a great market for Oculus virtual reality where people could watch a movie in the same room but have slightly different scenes.

This headline highlights the fate of Postal Services - The United States Postal Service will now email you your mail. The major growth area for postal services is the delivery aspect for online retailers, for the South African postal service it would mean that we have to get quicker, less handling damage and then delivery to your door step.

Home again, home again, jiggety-jog. All is never settled in the world, if you are going to wait for a moment to invest, you never will. I am reminded that recently Berkshire Hathaway in August embarked on a deal to buy Precision Castparts, in a deal valued at 37.2 billion Dollars, their biggest ever. That deal was announced on the 10th of August this year, the S&P 500 is at this level now that is was back then. So if the investment company that Berkshire own embark on their biggest ever (yes, biggest ever) investment at a premium back then, surely this trying to time the market thing is tiring?

Sent to you by Sasha and Michael on behalf of team Vestact.

Email us

Follow Sasha, Michael, Byron and Paul on Twitter

078 533 1063

Friday, 4 December 2015

Super Mario uses a pom-pom gun

"The Pimco fixed income chief, Andrew Ball, was quoted as saying in the FT that the ECB delivered at the low end of expectations. This is hilarious and getting to the point where we are pre-empting Central Banks and also being disappointed by them. What happened next, in the aftermath of the statement and during the press conference was that European markets sold off heavily, and there was a fair amount of short covering on the Euro, which spiked to the Dollar."

To market to market to buy a fat pig. Draghi downs markets, bringing out the pom-pom gun rather than the bazooka. Or so it seems that was the case. It seemed that the efforts of the ECB was to be far greater for Mr. Market. It caught me a little off guard, it caught me a little by surprise, I have to admit. Normally the central bank meetings of the ECB and the Bank of England have been, well, steady as it goes, inflation is this and under control and not a problem, growth rates are muted, we are going to stick to our current programs. It seemed however that the market was in Oliver Twist mode, looking for more. I could not quite understand it, even after reading various commentary.

The Pimco fixed income chief, Andrew Ball, was quoted as saying in the FT that the ECB delivered at the low end of expectations. This is hilarious and getting to the point where we are pre-empting Central Banks and also being disappointed by them. What happened next, in the aftermath of the statement and during the press conference was that European markets sold off heavily, and there was a fair amount of short covering on the Euro, which spiked to the Dollar. You would have naturally expected the disappointment to side with a weaker Euro, in fact I see on my screens this morning that Goldman Sachs are looking for 1.03 Dollars to the Euro, in the near term.

I guess it is a matter of time until we see parity, at least if the ECB "disappoints" the market. Let us be clear, the ECB is not in the job of pandering to the market needs, this is not trying to beat the streets earnings expectations by a penny. Their mandate is to maintain price stability, i.e. make sure that inflation is neither too high or too low, the central bank has certainly been tested in terms of their powers and ability to flex their muscles over the fragmented political landscape in Europe. I am pretty sure that when we look back on this time of central banking in decades, we will be well impressed with the various programs and constructiveness of officials. Unlike in the Great Depression, when the Fed was new, and their hands were tied.

The "I want more brigade" sold the market off heavily, here, there and everywhere, to borrow a phrase from Dr. Seuss. It was pretty ugly after the dust had settled, the French market was off over three and a half percent, the Dax in Germany down by about the same amount, the UK markets were down two and one quarter percent. Obviously we were going to be sucking wind here too, stocks sold off as a collective down 1.43 percent. When I look at the European stocks, I think that we got off fairly lightly. Pending here today are the ratings agencies views on it all, we could be in for a tough time of it on the currency front. I suspect that the falling financials share prices and the weakening local unit over the recent days fear the worst, we are unfortunately getting closer to non-investment grade. We will have to wait for that unfortunately.

Equally, the other event that you will have to wait for is non-farm payrolls. Those are due out at 15:30 local time. I suspect that this number does not matter, the market is expecting the Fed now to raise rates come the December meeting. Janet Yellen and the others have been priming the market for a while now, the expectations have moved towards that being a certainty. Both the broader market and blue chips sold off by nearly a percent and a half in New York, the nerds of NASDAQ down by one and two-thirds of a percent.

I seriously cannot believe it. I was taken to task by a reader for being condescending towards Nigeria in my observations over the weeks. I shall publish it, once I have the permission of the person that wrote the piece back to me. My point to them was that I bat for capital and individuals, not for government, not for organisations. And capital changes lives, for the better. Are normal Chinese peoples lives better as a result of liberalisations in the economy or were they better under the communist great leaps forward? You know the answer. Here comes the part I seriously cannot believe, a day after receiving the first letter:

"Late on 3 December 2015, the day after receipt of the First Letter, the Company received a further letter from the NCC dated 3 December 2015 (the Second Letter). The Second Letter, which was stated to supersede the First Letter, informed the Company that the fine had actually been reduced by 25% to 780 Billion Naira and not by 35% to 674 Billion Naira, as was stated in the First Letter. The payment date remained 31 December 2015."

Michael made a simple point, how would you react if this was a private company? This unfortunately proves my point, this is not really a professional process, it seems borderline like the Goon Show, or Monty Python, flopping around. And what makes it even more interesting is that the release says the following: "Neither the First Letter nor the Second Letter sets out any details on how the reduction was determined." Amazing. I will get permission to publish the interaction, and then you can judge whether or not I am condescending. I love people, I wish them only good things, I wish everyone was rich and had access to the internet, and of course that includes all the citizens of Nigeria. I just cannot see the merit in an overhanded approach, for future capex.

Linkfest, lap it up

One of the biggest questions for economists and politicians is what to do when something is incorrectly priced. When it comes to carbon emissions, it may be cheap to get coal out of the ground and then burn it but it has further costs to society through pollution. What is the cost? What can you do to bring the price you pay inline with the 'true social' cost? One way is through taxes - Elon Musk: Only a Carbon Tax Will Accelerate the World's Exit from Fossil Fuels

Thanks to the summit in Santon this week, it has been grid lock on the streets. Here are some of the fruits to come from the summit - China in Africa: President Xi Signs $6.5 Billion Deals With South Africa's Zuma. To fund some of the deals the ICBC will issue Rand denominated bonds, which is the first time an Asian organisation has issued debt in Rands. It shows a confidence in our financial system and our currency - China's ICBC to sell $696 mln worth of rand bonds to build S.Africa infrastructure

Capitalism is at its best when things are allowed to function freely, thus creating some very wealthy people. Part of their wealth is created by adding value to society by making things more efficient and cutting the cost of doing something. People should be encouraged to make as much money as possible and then to be generous, i think this would solve many problems that the world currently has - Capitalism Needs More Capitalists like Mark Zuckerberg

Home again, home again, jiggety-jog. It is a blood bath out there at the moment, with the All Share down around 2%. One of the biggest losers is Steinhoff, which is down 8% on news that one of their subsidiaries in Germany is under investigation of tax evasion.

Sent to you by Sasha and Michael on behalf of team Vestact.

Email us

Follow Sasha, Michael, Byron and Paul on Twitter

078 533 1063

Wednesday, 2 December 2015

Some MTN Clarity

"Before cell phones in Nigeria the fixed line infrastructure was laughable at best. I remember speaking to a Kenyan fellow who worked for a big multinational years ago, he recalls sticking in an application to get a fixed line on the day after he arrived, when his two odd year contract was up, he left and the fixed line had still not been installed."

To market to market to buy a fat pig. Shout it from the rooftops. That line is used a lot in multiple songs. I recall watching "Fiddler on the Roof" as a child, we watched it outdoors at the "drive in". For those of you younger than 25 or so, this may be a foreign concept, people used to drive into a movie and park a car, plonk and attach a 10kg listening radio on the window, and then watch a movie. How positively romantic! What does fiddler on the roof have to do with shouting it from the rooftops? I almost get the sense that Mr. Market waits for the Fed chair to stand and deliver the news, whilst she is balancing on the roof, belting out her tunes to us. Or delivering them on a fiddle. A fiddle is of course a violin, you can either be as ferocious as Paganini's Caprice No. 5 or as sad and forlorn as Schubert's Der Leiermann in Winterreise. OK, I cannot lie, I looked up the second bit. Being an optimist, strangely I was more aware of Paganini's pieces, I can't say that I wonder why.

Janet Yellen delivered a speech yesterday that suggested it was time, the tennis umpires "time". The US economy is on the road to recovery and therefore strong enough to withstand the first rate hike (insert Paganini). Herewith the whole speech, delivered at the Economic Club of Washington, Washington, D.C.. Notwithstanding the gains made in the labour market, one cannot declare full employment she said (insert Schubert). Inflation is too low (touch of Schubert, a touch of Paganini). Yellen anticipates economic growth in the coming years at a moderate pace (again, mixture of both composers).

The paragraph that I think spooked most people (furious downside Paganini) was the following: "Were the FOMC to delay the start of policy normalization for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession. Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and thus undermine financial stability." Goldilocks! We need her and not the three bears chasing her away from her "just right" scenario.

So Mr. Market sold off, all major indices sold off, the broader market S&P 500 by over a percent, the Dow Jones Industrial down 0.89 percent, with the nerds of NASDAQ the "least bad" of the lot. Bearing the brunt of the selling were the commodity stocks, energy down nearly two and a half percent as the price of oil slipped below 40 Dollars a barrel (that is NYMEX WTI), the gold price this morning is at 1050 Dollars per fine ounce, the copper price is fractionally above the 2 dollars a pound mark. And the Dollar index, the anti-commodities measure as it were? That is above 100, the basket that measures itself against all the other major currencies globally, that flirts with a 52 week high.

I know this won't make you feel better, I am going to tell you anyhow, the Euro is 15 percent weaker to the Dollar over the last 12 months. Yes, diverging policies on interest rates have meant that the Dollar has gained major traction relative to the other major currencies of the world. What is ironic is that the weaker Euro has in large part been really good for industrial giant Germany, just two days ago that unemployment print was a record in a reunified country. That brick, that wall, I know you liked that song, I know that your hairstyle was probably bleached, big and too long and I know that you had tight jeans that were faded. Don't mock the fashion today, yours was certainly not that good either as you strutted your stuff, whilst listening to Pink Floyd on your Sony Walkman. They were so heavy you had to hold them. Cool right, just like your drive ins?

Locally we sold off sharply, from mid morning onwards into the close, the Jozi all share index ended the session down 0.73 percent. PSG group was at the bottom of the pile, down nearly six percent at the close, the company announced that they were raising 1.5 billion Rand through a book build, that amount represents 3 percent of the shares in issue. The proceeds of the sale "will be used to facilitate growth in PSG Group's existing investments and to fund additional investment opportunities."

I am not too sure why the liquidity improvements over five years in the release is relevant, the company points out that over the last three years liquidity has risen to 37 percent from 8 percent. I am presuming that is an annual turnover of shares, i.e. 3.7 out of ten shares in issue swap hands annually, compared to three years ago when it was less than one in ten. Yes there is demand, there are also existing shareholder interests. I suspect that there will be a similar situation to the Brait one, a sell off, they will announce that the funds have been raised and then het presto, the stock (all things being equal) will bounce back.

I guess that PSG is more than just a good financial services business, with that element of entrepreneurship, the decade long returns have been eye popping and are a testament to great deal making and solid management. Over 10 years the stock has been a 20 bagger, in other words, for each Rand invested at the end of 2005, it is now worth 20. Astonishing, not so? Of course there have been other rights issues along the way, I always feel mixed when companies use the equity market to raise funds, are there not other avenues to explore? It tells me on the one hand that the market wants the stock, wants to be a shareholder, it also tells me that the company feels that their share price might be at the top end of relative valuations, hence they can get the shares away. Did you know that PSG Group was a bigger business than Amplats, bigger than Mr. Price and bigger than Netcare? You do now.

MTN have released a SENS announcement this morning, saying that they have received a formal letter from the NCC and it reads as follows:

"MTN has received a formal letter dated 2 December 2015 from the NCC informing the Company that, after considering the Company's request, it has taken the decision to reduce the fine on the MTN Nigerian business from the original N1,040,000,000,000 (One Trillion, Forty Billion Naira) to N674 Billion Naira which has to be paid by 31 December 2015. The fine relates to the late disconnecting of 5.1 million MTN Nigerian subscribers in August and September 2015."

That again is not cut and dried. As the SENS points out: "The Company is carefully considering the NCC's reply, however the Executive Chairman Phuthuma Nhleko will immediately and urgently re-engage with the Nigerian Authorities before responding formally, as it is essential for the Company to follow due process to ensure the best outcome for the Company, its stakeholders and the Nigerian Authorities and accordingly all factors having a bearing on the situation will be thoroughly and carefully considered before the Company arrives at a final decision."

Before cell phones in Nigeria the fixed line infrastructure was laughable at best. I remember speaking to a Kenyan fellow who worked for a big multinational years ago, he recalls sticking in an application to get a fixed line on the day after he arrived, when his two odd year contract was up, he left and the fixed line had still not been installed. As Mark Zuckerberg pointed out yesterday, the internet really does uplift people out of poverty, equally it adds much needed jobs on the ground. Just as important, the economy diversifies away from one avenue, in this case we all know what it is.

What the NCC should really do is demand over and above the current Capex budget in Nigeria, the company should commit to a speedier ramp up of 3G tower roll out, that way the government can use the services provided by a private company to improve their fight against terrorism and corruption. Not look for stop gap measures to plug a hole in a yawning budget deficit. No. I suspect that this is not a closed book, battle hardened CEO Phuthuma Nhleko and the board have shaken up the management structure of the group, he will no doubt be working harder to look for another reduction and a more amicable resolution. We remain watchers of the situation.

Linkfest, lap it up

It is amazing what science is discovering - Researchers find new phase of carbon, make diamond at room temperature.

Population numbers can be a controversial topic. From an economic perspective, population growth translates into economic growth. As populations grow so do the number of customers but as importantly so do the number of employees for companies - How Demographics Rule the Global Economy.

It seems that the trend going into the end of this year is for hedge funds to return all the money to their investors - BlueCrest to Return All Outside Investor Money. The results show how difficult it is to have consistent stella returns, as soon as you miss the mark then money flows out.

Home again, home again, jiggety-jog. After a negative close in the US we will probably see the same. It will be very interesting to see how MTN trades today.

Sent to you by Sasha and Michael on behalf of team Vestact.

Email us

Follow Sasha, Michael, Byron and Paul on Twitter

078 533 1063

Important Internet

' "The internet is so important that for every 10 people who gain internet access, about one person is lifted out of poverty and about one new job is created."

Which is why I guess the Zuck has this goal of getting the internet to everyone, Bill Gates may not think it is that important, this is his way of showing that it is. I am pretty sure that Gates and the Zuckerbergs want the same thing. Less poverty, better access to medicine, better access to education. The Zuck continues:

"Yet still more than half of the world's population -- more than 4 billion people -- don't have access to the internet. If our generation connects them, we can lift hundreds of millions of people out of poverty. We can also help hundreds of millions of children get an education and save millions of lives by helping people avoid disease." '

To market to market to buy a fat pig. Stocks rallied hard on Wall Street yesterday evening, the broader market S&P 500 comfortably over 1 percent on the session, blue chips less than that and the nerds of NASDAQ a fraction less than that. There was weak manufacturing data from the US, perhaps the most surprising news of the day was the lowest German unemployment number in this new chapter, since reunification.

When the Berlin Wall came down, that was a pretty momentous occasion for humanity, this is the lowest since that point in history of the new Germany, as that is when the line was drawn. Allan Gray is running an advert in black and white about a letter being exchanged between two lovers on both sides of the wall. And how waiting for the right returns takes time. I have spoken to many private clients in my time, and if I understand from folks who manage institutional money, their demands are far greater. It has been a tough time for contrarian investing and equally a tougher time for value investors, some of the ideas have been awful. And will they "come to you" if you wait? There are no guarantees in anything, let alone investing, the short answer is that whilst you are waiting for that opportunity, there are many others you are missing.

Quick wrap of US markets, healthcare and financials led the charge, we said yesterday that the last look at the health of the US economy is the non-farm payrolls number on Friday. Tune in, it is always fun to watch. Even if you don't understand it all, know that the US economy is the biggest standalone economy in the world, driven mostly by consumers, meaning that the lower the unemployment rate and higher the number of people employed, the stronger the US economy. The stronger the US economy translates to a stronger currency, in this car the US Dollar has trounced everything in its path. A quick look at the five year Dollar Index reveals that the last year and a half is where all the Dollar strength comes from, I took a screen grab from Marketwatch -> U.S. Dollar Index (DXY).

So whilst yes, there are many reasons to look locally at the lay of the land and point fingers as to why the Rand is weaker, the reality is that the Dollar is strong, their fundamentals look better. When I see headlines like: Mr. President, save the Rand now, I am not too sure what to make of that really. What can the President do? I suppose there are attractions for businesses of investing in places like Ireland, Mauritius and the like, we could position ourself that way, again, we have a unique set of "challenges" down here.

Spare a thought for the Brazilians, they felt like the hair was being extracted from their "sensitive parts", GDP shrank 4.5 percent from last year this time. There are problems and there are challenges, perhaps we have the latter. Mind you, when you look at a Brazilian GDP graph, this is what it looks like, courtesy of TradingEconomics:

Recently for Brazil it looks terrible, that can be mostly attributed to the tanking oil and iron ore prices, the rich resource endowed country has diversified their economy, clearly not enough. The economy clearly stumbled badly in the 90's, it has grown nearly fivefold since 2002, that sounds pretty amazing. I guess it is all about recency bias, Paul will be there in a little bit, hopefully he can come back with some useful insight for us here in the office. Perhaps the labour element, like in neighbouring Argentina (where labour just lost) is on borrowed time too.

On the local front, after spending much of the first part of the day in the green, we fell away, with the Jozi All Share index closing the session down 0.14 percent. Again, it was a sized bag, resources, at least some of them doing better on the day. Naspers feeling a little heat and selling off on the day, the stock has been so strong lately, I don't blame folks with short time frames taking some off the table. Woolies was also amongst some of the biggest losers, I didn't see anything specific. There was not too much on the companies front yesterday, 1 December means that with the new month, the rush of companies reporting at the close of the month (i.e. last month) had come and gone.

Perhaps the biggest news of the day yesterday at a global level was the news that the Zuckerberg family (the most famous one) had a baby, well done the Zuck and Priscilla. We know her through a picture and know her name is Max, excellent. This A letter to our daughter is a must read. It is a little like the annual Bill and Melinda Gates Foundation letter, perhaps with fewer graphics and written with less time. I am going to pick out the juicy bits, the context of the first one is that the world is a better place and improving, medicine has made many advances over 100 years, yet we can continue to do better.

"The internet is so important that for every 10 people who gain internet access, about one person is lifted out of poverty and about one new job is created."

And then the real part, the formation of the Chan Zuckerberg Initiative, which when I read it had over 34 thousand likes already. I was slow, it had jumped the shark. The initiative is to "advance human potential and promote equality for all children in the next generation. Our initial areas of focus will be personalized learning, curing disease, connecting people and building strong communities."

With all foundations, you need money, right? So how to fund it: "We will give 99% of our Facebook shares -- currently about $45 billion -- during our lives to advance this mission. We know this is a small contribution compared to all the resources and talents of those already working on these issues. But we want to do what we can, working alongside many others." Whoa! That is pretty big. So Max and her unborn siblings get a percent from their parents. How will this work, obviously the Zuck is still going to be in charge of Facebook? Earlier in the letter, the Zuck says: "I will continue to serve as Facebook's CEO for many, many years to come." More to come when they get into their normal parenting routines. My eldest in ten and a half and I haven't figured it out yet, good luck Zuck, we will see you in a couple of decades. Kidding!

We like to see this. Good for him, good for his family and of course, great for humanity. This is going to take forever, a long, long time. He will remain in charge, the world needs more people like this.

Linkfest, lap it up

The current pollution in China is not great. There is a smog cloud slightly bigger than Spain floating over the northern parts of China - A Chinese artist vacuumed up Beijing's smog for 100 days and made a brick from what he collected.

The worlds tallest building, due to be completed in 2020 will be 1km tall - Saudi Arabia to build world's tallest tower, reaching 1 kilometre into the sky. It is amazing what technology allows us to do. The only problem would be the time it takes to get to the top floors.

At the heart of the Discovery business model is to give us small incentives to do what is good for us. Discovery already has a vast amount of data which proves that what they are doing works, here is an economic paper talking about incentives in general - Incentives change how we think. The scientists got people to each insects, slightly less appealing than being incentivised to go to gym.

Home again, home again, jiggety-jog. Japanese stocks are down, Chinese stocks are up sharply. Hong Kong stocks are up two-thirds. We are probably going to start better here, in fact as I write this, we have, pretty much a broad based rally. Good work if you can get it.

Sent to you by Sasha and Michael on behalf of team Vestact.

Email us

Follow Sasha, Michael, Byron and Paul on Twitter

078 533 1063