Money with a dash of Funny

Tuesday, 18 September 2012

Sell 1 Apple share. Get 3 iPhones.

Sell 1 Apple share. Get 3 iPhones. "Apple shares reached a record high yesterday crossing $700 for the first time ever. The scariest thing about this company is on an earnings basis it doesn't even look expensive. The company has just grown so fast and made so much money that earnings have always justified the rise in share price. We started buying the stock for clients "at all time highs" in April 2010 at around $250 a share."

Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E. There were a couple of events outside of the normal markets that were important I guess for our country, the first was the COSATU 11th national congress, in which all the incumbents hung onto their posts. Re-election must in some instances feel like you are "winning" again. The president at the COSATU congress acknowledged that the problems in the sector were impacting on the economy. Because he knows that the money does not come from thin air, Treasury has obviously been leaning on him to be a little more proactive. But the "damage" has been done. Anyone watching the impatience of European bond investors will know that money does not have time, and time waits for nobody.

As these two articles show me already, this one from the FT (subscription only sorry) Investors offload South African miners. And then this one from Bloomberg: Rand Weakens as Yields Rise to September High on Mining Unrest. The consequences of a weaker currency is that imported inflation becomes more of a problem. And if you needed reminding, inflation is a scourge that impacts on the lives of the poor, not the rich.

Talking about issues of the rich (how?) and the poor, the second event that made many shudder was when Julius Malema was blocked from giving a speech to the Marikana miners. Forget for a second the fancy cars, house in Sandton, watch and see what happened here. Police prevented someone from talking. The army chased that someone away. That is not altogether a good outcome and a defeat for democracy. The Daily Maverick has this take: Marikana: Malema's police-sponsored exit. You can't do that in my opinion. Now if I were the organisers, I would do this. I would get the man who was told to get on his bike to deliver a YouTube address and then play it back to the folks who had turned up to see him.

Unfortunately however, the questions about his wealth and the origins of the money still remain unanswered. Today there is a news conference under the banner "Economic Freedom Fighters" later today. And rumours of the man's arrest as a result of his recent statements, but more importantly around that acquired wealth, which continue to circulate. Political battles are starting to have real impacts on the economy, as they almost always do. To the detriment of all of us. There you go, my two cents worth. Which does not exist as a coin anymore, as a direct result of inflation.

Bart Simpson's shorts, digest this. Wow. I did not realise this. I know loads of guys who like to look after themselves, but perhaps for me this seems to be taking it a bit too far. Or not, each to their own I say. South Korean men see makeup as new face of success. Make up for men. You might think that is a small market, but as the article points out, Men in South Korea spend nearly half a billion Dollars a year on makeup. And a relatively small population, 19 million men in total, account for just over 1 in five Dollars spent on men's skincare products worldwide. But that does not really surprise me, I read a day or two ago that one in five Seoul women have gone under the knife. Looking good must be very serious business. A bit like PSY and Gangnam Style! And if you do not know who, or what that is, I cannot help you with get up to speed with your trendiness. Find out about it before it "jumps the shark".

I have showed this to you before, but it continues to show a sharp decline. Check out this piece from Mark J. Perry: Free-fall: Adjusted for Inflation, Print Newspaper Advertising Will be Lower This Year Than in 1950. I hacked the graphic from the piece, a picture is all you need. Expect to pay in the coming years for your favourite publications that used to be free. That is going to be a huge jump in mindsets of the consumer, and I guess people are going to get pickier in what they choose to read.

Come on Spain, do something already! The FT reports Investor impatience lifts Spanish yields. As I mentioned above in the first part of this message, investors are about as patient as a five year old. Or perhaps investors and impatience should not go in the same sentence. In the endless search for yield in this low interest rate environment, there has also been a class of riskier Mediterranean bonds. When the PIIGS sovereign debt problems first reared their ugly heads after the financial crisis, everyone was shocked, dismayed and outraged that the yields were rising. Well, do not worry too much about what has happened in the last year and a half. Check out this long term graph, which I found via this ancient (by Internet standards) post titled PIIGS Yields Up, Maybe Permanently. This graph is going to make you dizzy, courtesy of MarketMinder. See how everyone gets anxious about five, six and seven percent yields in Spain. They must have been having a thrombosis at 20 percent plus. But that was back then.

Still confused about what the Fed is "doing" in their new program? Don't worry, you are not alone. I have read an extraordinary amount about the new measures and the open ended purchases. Everything that suggests that banks are scrambling to get new loan officers. Remember that the armies of old ones were fired as banks kept the bare minimum when the crisis hit. Loan officers working on a commission basis were giving loans to all sorts. I kid you not that Michael Lewis, in his book "The Big Short" documented a special case, something that Michael Burry (a weird-ish fellow) had discovered. A Mexican strawberry picker, who spoke no English, and had an annual income of 14 thousand Dollars, managed to get a loan. To buy a house worth 724,000 Dollars. Yes. Get your head around that. But read up, from Bloomberg: Defining Bernanke's New Fed Target. Trying to interpret Fedspeak will drive you nuts.

New York, New York. 40^o 43' 0" N, 74^o 0' 0" W Stocks slid away the whole session, and then in the last half an hour suddenly went higher. Perhaps that coincided with a fall in oil prices, inflationary outlook improves, that is good for stocks, not so? There was a New York manufacturing read that suggested that the Fed was right to make people feel richer, manufacturing in that region is at a two year low. There were a couple of issues dominating markets, first was an oil price plunge, which we look at lower and then Byron has a look at perhaps the most exciting news of the ~~year~~, ~~month~~, ~~week~~, day! Apple heading towards 700 bucks a share.

Byron's beats

Apple shares reached a record high yesterday crossing $700 for the first time ever. The scariest thing about this company is on an earnings basis it doesn't even look expensive. The company has just grown so fast and made so much money that earnings have always justified the rise in share price. We started buying the stock for clients "at all time highs" in April 2010 at around $250 a share. I'm telling you this to emphasise that you should not avoid a stock because it is trading at all time highs.

The reason for the recent surge has to be the news that the iPhone 5 has already sold 2 million units in 24 hrs. That is 23.15 phones per second, 1389 per minute and 83 333 per hour. This is double the take up speed of the iPhone 4S and lines Apple up with their target of selling 10 million in the first week. And people still get surprised that Apple products exceed expectations when they launch. To be honest I wanted one before I even saw it. There were so many rumours and supposed leaks that Apple didn't even need to market the launch.

A recent survey showed that 1/3 of US citizens want an iPhone. This included 56% of Blackberry users and 32% of Android users who want to switch. As big shareholders of Apple we are very happy with this launch. The iPhone remains its biggest profit driver so this was vital. Analysts expects 26 million phones to be sold this quarter and 58 million sold by the end of the year.

For 2013 these projections look even more impressive. Expectations of 165 million phones bringing in $186bn in revenues and earnings per share of $53 are what analysts have come up with. This means that if you exclude all of Apple's other businesses which includes iPads, Macs, iPods, iTunes and the app store and just look at the iPhone business you get a 2013 forward earnings multiple of 13. Conviction buy.

On another note iPhone's use much more data than any other phone. Not in a bad way. It is because their phones are more efficient. This creates opportunities elsewhere especially for the companies who provide the data. The likes of MTN and Vodacom should benefit handsomely from higher data consumption. Yes they operate in Africa where iPhone penetration is low but by raising the standards all smartphones are going to head that way. Take a look at this article titled The Mobile Browser Dominates in Emerging Markets and you will see why we are still happy accumulators of MTN and Vodacom.

Currencies and commodities corner. Wow, what happened to crude oil prices? Oil prices last evening had fallen as much as five percent at one stage, but recovered a little to pare half of those losses. I suppose the strong gains from the end of last week are juicy enough for the short termers to take some money off the table. The actual reason as to why it fell all of a sudden? It turns out that some people have no idea. Crude Oil's Quick Fall Leaves Trail of Queries. Currently the oil price is trading at 96.18 Dollars per barrel, that is for NYMEX WTI.

The gold price last is at 1756 Dollars per fine ounce, the platinum price is way off the best levels, last at 1658 Dollars per fine ounce. Dr. Copper is also trading lower at 373 US cents per pound. The Rand is weaker at 13.41 to the Pound Sterling, 8.25 to the US Dollar and 10.77 to the Euro. We are about flat here today. Treading water. Looking for something "new". Sasha Naryshkine and Byron LotterEmail us Follow Sasha and Byron on Twitter011 022 5440

Friday, 14 September 2012

Big bang Ben

"So then, why are the Federal Reserve then doing this new round of asset purchases? Well, I listened to the press conference with Ben Bernanke answering questions in the same patient way that parents answer their toddlers questions. Ben Bernanke said simply, if they were to lower rates and keep rates low and see asset prices then rise, both house prices and equity prices, then that would mean households would spend more."

Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E. The wait was on all day. For the announcement that would be the next big thing since, well, the last big thing. Markets are seemingly event driven, looking for the next big thing. This week it has been two events, the German constitutional court ruling on the countries participation in the European Stability Mechanism and then perhaps bigger, the FOMC announcement from yesterday. Which we will deal with in detail later. Stocks in Jozi edged higher the whole day long from a weaker start, retailers bounced hard whilst the banks were sold down heavily, resources contributed a little to a rally that saw the Jozi all share index end just a little over four tenths of a percent better. Expect the all share index to crash through the 36 thousand point market at the start of trade.

I thought that this was quite an admission from Gold Fields. Although Byron said to me, come on, we are all on the same side here, whether it is gold or platinum, we need our companies to do well and we want the underlying metal prices to go up, to support the companies. But when I saw this article from MiningMX titled Holland: 'We're not making that much money', I thought, but we knew that already. The key parts from that piece is as follows: "Holland said part of the problem was that despite the industry’s intentions to grow, production among the world's top eight producers has declined by 2% per year over the last six years, while operating costs have increased by 12% per annum on average. At the same time, grade has declined by around 5% over the same period." At the same time, the ADR price (New York price) of Gold Fields is up a mere 3.78 percent since the beginning of 2005. Gold stocks have been a wretched investment, at least the ones we follow locally. And still, people continue to think that they make investment grade. No. No thanks.

There was a strange comment from Mike Schussler on the telly the other day, I don't remember the exact quote, but it had to do with pay demands of the platinum sector workers. What Mike said was basically that should the mining companies in South Africa become a whole lot less profitable that would mean that they would pay less taxes. Less profitable because their cost base of course was rising as a result of increased labour costs. Mike said that would put money in the hands of the workers and less money in the hands of government. Mike's contention was that it was going to be spent better by the individuals rather than wasted by the government. That is how he put it. BUT, and this is where it is a compelling argument for some, money in the hands of individuals would be more likely to grow jobs in the segment of our economy that has been growing, retail and finance jobs. The only place that this of course would backfire would be that shareholders would be less likely to allocate new resources to these business to grow. And lower growth rates means that eventually the cost base needs to be reduced. As ever, the balance is the trickiest part of the lot.

Meanwhile, and we are jumping around here, but the Gold Fields story ties up nicely with the fact that Lonmin have made an offer to all their workers. The company have offered the striking miners an increase of 1000 Rands a month, which translates to 121 US Dollars more, 75 Pound Sterling more or 93.5 Euros more per month. Roughly 1461 Dollars per annum more. Which, as per this Wikipedia table, titled List of minimum wages by country, is roughly the total annual minimum wage in Kazakhstan. The increase that Lonmin have tabled is the total minimum wage in Kazakhstan. The country forever tainted by one movie, at least in the mind of the man in the lift. I mean on the street. And at the risk of being chacharag (I am sure that is not how it is spelt), Kazakhstan has an adult literacy rate of 99.5 percent. And they are a huge mining destination too. Just saying.

I agree however that the living conditions have to change. The responsibility of building housing, should that not be both a government and mines project, bearing in mind that much of the migrant labour does not call the areas where they work home? Read this transcript from the Moneyweb show last night -> Business news headlines, the interaction between David and Alec. We actually watched the president yesterday take questions in parliament. Read the BusinessDay piece for more: Zuma vows crackdown on platinum 'instigators'. This is going to be a long and tough road, and as Nick Holland will attest to, it is hard to be profitable. Which makes the businesses less attractive to investors for a longer time.

Bart Simpson's shorts, digest this.

There are always people who are not convinced. And it is true, just like I have an opinion, they are like posteriors. Everyone has one. But there are the Euro sceptics and then I get the sense that there are those that are miffed that their base case of an exiting of the Euro zone by some of the members has not taken place. So excuse me for being a little cynical when reading this: Has 'Super Mario' really saved the euro? Well written, well thought out, great conclusions, don't get me wrong. But when you read all the articles in the archive of the author, Marshall Auerback, you see the same bearish headlines: The euro zone can still blow up even after unlimited purchases and The eurozone's architects have created a doomsday machine and a gift for speculative capital. Same bearish, well written stuff. Meh.

I was trumpeting the fact that the TARP had worked, because the government had been there as a backstop at the time. This was needed at the time of course, because without government there would have been an ugly and deeper hole to climb out of. But these two guys suggest that the liberal view is completely wrong: The Bailout: By The Actual Numbers. And then a more eye popping number: Financial Crisis Cost U.S. $12.8 Trillion Or More: Study. Not great. Hey, make up your own mind, I often say that the chances are nobody ever thinks, "what would have happened if the government did nothing?"

I was fascinated by the graph that Scotty Barber tweeted: Italian equity price and earnings. Check it out, forward earnings multiple of 8.5 times. Surely by historic standards that is way cheap? 16 times was too much in 2003. Surely then, if you have five to ten years time frame the equities trade in Europe could be an opportunity of a generation. No? Yes?

Staying with the Europeans, all the finance ministers of the zone meet in the lovely location of Cyprus, which has a bigger economy than Estonia, Iceland, Macedonia and Malta. But still, it is small, one tenth of the size of Portugal. From Reuters: Euro zone finance ministers meet in Cyprus. Do you think that they all speak English at these get togethers? Oh, and in perhaps the most exciting news of the day, the Italian borrowing costs have fallen again, the yield on the ten year has fallen below five percent. It has a four in front of it. That is the best news of the day, and there may be some back slapping going on in Cyprus. I am guessing that they are in Lefkosia. That is what the locals call Nicosia.

Byron's beats

If you have been following the iPhone 5 news closely you will have seen talk about the success of the product being vital for the US economy. in fact J.P Morgan released the following research note which looked at the impact of iPhone sales on US GDP. Here are some extracts from the note.

"We believe the release of iPhone 5 could potentially add between 1/4 to 1/2%-point to fourth quarter annualized GDP growth. Our equity analysts believe around 8 million iPhone 5's will be sold in the US in Q4, even while sales of previous generation iPhones are maintained at a solid pace.

Though past iPhone releases don't bear a visible impact on the relevant CPI components. The third of a percentage point lift would limit the downside risk to our Q4 GDP growth projection, which remains 2.0%.

Over half of the 0.8% increase in core retail sales last October occurred in two categories: on-line sales and computer and software sales, which combined had their largest monthly increase on record. The incremental growth of Q4 sales at those stores over Q3, if due to the iPhone, would have added between 0.1% to 0.2%-point to Q4 growth, after subtracting the import drag."

Very interesting analysis, especially where retail growth is coming from. There has however been a lot of backlash from critics who make some valid points. Paul Krugman says that this analysis is wrong because it underestimates the second hand sales of iPhone 4's to fund the purchases of the new phones. He also says that because Apple hoard so much cash, once these sales are made, a big portion of this money will not be put back into the economy but rather sit in cash or US treasuries.

Personally I do not think that 1 company, even though it is the biggest in the world can have a significant influence on GDP. What I do believe however is that the productivity that the new iPhone, as well as any other smartphones who have to raise their game to compete, brings to it users. I as an avid iPhone fan and user I feel it is helped my productivity exceptionally. I use it all the time to access information regarding the markets. If I am travelling around i use the GPS to get me there quickly, without getting lost. Siri has improved, we don't experience it here in SA but people use it a lot more in the States. It makes us more efficient and productive. That effect is immeasurable but I reckon we all underestimate it.

Washington. DC. 38^o 53' 42.4" N, 77^o 02' 12.0" W, home of the Bernank. Or helicopter Ben. Whatever you like to call him. I even saw an animated .gif titled Photo of the Day: Ben Bernanke As a Child Preparing for His Future Role as Fed Chair. Of course that is not Ben Bernanke. The .gif suggests that Bernanke is just throwing money at the problem.

First, before we get onto why, what are the Fed doing? Like Byron and I laughed this morning, there are more than enough explanations as to what they are doing and what they are hoping to achieve. First, read the official release from their website, Press Release. The last paragraph is key there:

"To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015."

There has been one subtle change, super low rates have been extended through to the middle of 2015, extended by six months. Or, from the original starting point by 18 months. Bob McTeer says Hello QE3. That basically tells you everything you need to know about what they intend doing now.

So then, why are the Federal Reserve then doing this new round of asset purchases? Well, I listened to the press conference with Ben Bernanke answering questions in the same patient way that parents answer their toddlers questions. Ben Bernanke said simply, if they were to lower rates and keep rates low and see asset prices then rise, both house prices and equity prices, then that would mean households would spend more. If households spent more, then businesses would hire more. That would help the economy twofold, both with new jobs and new demand. Which is weak.

Markets then rocked in New York, New York. 40^o 43' 0" N, 74^o 0' 0" W, touching levels not seen since December of 2007, which seems like a rather long time ago now. We are now around 100 points (and a bit) away from the all time highs of the S&P 500, which added a whopping 23 points to close at 1459.99. Basic materials were the real winners, clocking gains of nearly two and a half percent, energy stocks added two percent, even utilities ramped up 1.37 percent on the day. Broad based and across a wide spectrum of stocks.

Currencies and commodities corner. Dr. Copper is last at 380 US cents per pound. Much higher. The gold price is off the best levels, last at 1772 Dollars per fine ounce. The platinum price is much better at 1696 Dollars per fine ounce. The oil price is last at 99.89 Dollars per barrel. The Rand is strangely a little weaker as Mr. Risk on visits in a huge way here today. Last at 8.26 to the US Dollar, 13.38 to the Pound Sterling and 10.76 to the Euro. We are much higher, at record highs. Thanks Ben.

Sasha Naryshkine and Byron Lotter

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Thursday, 13 September 2012

Aspen continues to look hot

"But this is all going to change, the group suggests that there is going to be a ramp up in their Asia Pacific business, which will become the biggest revenue contributors. Aspen in the Philippines has commenced trading. There are obviously (because of population sizes and economic growth rates) many opportunities in the region with their South East Asia expansion. Think Vietnam and Indonesia, Malaysia and Thailand. Nice beaches, healthy looking people, generally speaking."

Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E. Hmmm.... stocks rocked across the board. There is no doubt that there was a huge sigh of relief as the German constitutional court gave the ESM the go ahead, but they did attach conditions, which no doubt need to be looked at. It was pretty much a broad based rally, industrials and resources contributing to a 0.82 percent uptick in the all share index, but banks sank half a percent. Platinum miners took another punch in the guts with the news coming through that Amplats had basically shut nearly one quarter of their production, to not compromise the safety of their labourers. Who Amplats are adamant want to work, but are being intimidated by outside parties with vested interests elsewhere, how bizarre is that suggestion? So if the employees want to work, but are being intimidated by outside forces, who are those people and what is their agenda? Amplats fell over four percent, the platinum price rose to multi month highs. We will have a detailed piece on the platinum stocks later.

Aspen Pharma released their full year numbers yesterday, not in time for us to catch them and put them in the message. We first added this to the recommended list as a core part of our clients portfolios, back in 2005 Adding Aspen Pharmacare to the A-list. I laughed when I saw that last line from Paul, who writes much better than us, but does so not as often: "Perhaps more importantly, we believe that Aspen is a company which could double its earnings repeatedly in the years ahead, producing outstanding returns for its shareholders." Well, I would guess that has been about right. Over the last five years, compounded annual revenue growth of 36.5 percent, whilst profits on the same basis have increased 36.6 percent. The market actually has afforded the company a higher valuation, as the size and scale has increased, in part due to their geographic diversity and in part due to their Glaxo tie up.

Aspen are a far more global business than when we first recommended the stock, and they supply medicines to more than 150 countries, as per the Aspen Pharmacare 2012 year end results presentation. Group revenue clocked in at 15.3 billion Rands, normalised headline earnings (from continuing operations) increased 22 percent to 2.9 billion Rands. Normalised diluted headline earnings per share clocked 636 cents per share with the capital distribution to shareholders up 50 percent to 157 cents. At 142 Rands a share that means the stock trades at a very demanding 22.3 times earnings and a pretty poor yield of just over a percent. More on the valuations a little later.

This is no longer a South African business. South African revenues only represent 38 percent of group sales, lower than the 40 percent last year. Asia Pacific is breathing down their neck, with 37 percent of group sales. Sub-Saharan Africa sales (we somehow always exclude ourselves from the region) represent 10 percent of total sales. South Africa is however the most profitable region, accounting for 40 percent of EBITA. Group margins are steady at 27 percent, the same rate that they have been for the last five reporting periods.

But this is all going to change, the group suggests that there is going to be a ramp up in their Asia Pacific business, which will become the biggest revenue contributors. Aspen in the Philippines has commenced trading. There are obviously (because of population sizes and economic growth rates) many opportunities in the region with their South East Asia expansion. Think Vietnam and Indonesia, Malaysia and Thailand. Nice beaches, healthy looking people, generally speaking. I saw someone in the region on my twitter stream suggest that he hadn't seen a single overweight person. Hah-hah! And you thought that the Latin America businesses were exciting, this is better. Much better.

The group continues to invest heavily in capex, and boasts that they have spent 3 billion Rands in capex over the last 6 years. Whilst net debt has risen to just above 7 billion Rands (debt taken on to finance key deals), operating cash flows have quadrupled over the last six years. Two deals done recently are both deals done with GSK. The OTC and Classic brands (two separate deals) amounted to 4.3 billion Rands, both deals are set to close soon from a regulatory point of view. There was also a smaller deal with Novartis with two key products worth 442 million Rands concluded on the first of August. Bloomberg projects revenue growth for the current financial year to be comfortably ahead of their peer group. This should translate into the highest profits amongst their peer group, which includes Sun Pharma, Dr. Reddy's and Ranbaxy. Those are all Indian generic giants.

Never sitting still are the management team, who we regard as amongst the best in the country. Which, dare I say it might well mean that they are amongst the finest on this continent of ours. Based on the slides from the presentation, Aspen has collected data from Bloomberg via JP Morgan to illustrate that they are in fact still a compelling investment. Based on 2013 earnings numbers, at current valuations Aspen trades 15 times forward. We continue to acquire the stock. It is still a very important part of our portfolios in one of our key themes that we invest in, healthcare.

Platinum miners woes I think the stirring of the pot needs to be understood at all levels, I think that the ex president of the youth league (Berets. You wear it like this guy -> President Chavez) has political agendas here. But I also think that the miners concerns are valid. But economically speaking, the mines cannot afford it. The most difficult and bitter pill in all of this to swallow is actually that there is not a shortage of labour, there are many in the labour force who would work for that amount of money in a flash. There are brutal economic realities. Every business and indeed the country itself has limitations. I worked out that over the last four financial years that the big three platinum producers (Amplats, Implats and Lonmin) paid around 21 billion Rands worth of taxes. Lonmin actually contributed only half a billion Rands to the national fiscus. Capex spend by these three, that was trickier, but I found it.

In 2010 and 2011, Impala Platinum, the company, ratified by the board and shareholders shelled out over ten billion Rands in capital expenditure. Check it out, here in their annual report, I have hacked a table too for a visual.

And then Amplats, via their Online annual report, key indicators, the company in those two years invested nearly 15.5 billion Rands in the South African economy by way of Capex. Check it out, hacked from the online report:

And then Lonmin, the sister that doesn't get the dates (sorry), invested 410 million Dollars in 2011 and 268 million Dollars in 2010 in their business. Again, I stress this, the board and the shareholders authorised this capital expenditure that no doubt would have created many jobs. Be they contract jobs, I am not even going to go there, that is a separate argument altogether. That Capex amounts to roughly 5.6 billion Rands when I use the ruling exchange rate. So, the point that I am trying to make is that these three companies invested over thirty billion Rands in their respective 2010 and 2011 financial years.

My point is not so much that the companies have invested vast sums of money in South Africa and that they have paid vast sums of taxes to the government (who arguably have not spent it as well as we would want), but rather that boards made these decisions based on the agreement of shareholders. Money is fickle. Money has choices. And the shareholders are sometimes fund managers making decisions on behalf of their retirees, and pensioners, who are looking for reliable and steady returns. After all, they saved the money and bestowed the responsibility to someone else to give them an acceptable return in their golden years.

That is how it works. If the fund managers decide that they no longer want to be shareholders, they sell. And then the buyer (there is obviously always one for each seller) is making their capital available to fund the business for their growth, you are expecting dividends, and you are expecting the market price to rise to compensate you for the risk taken. No risk willing to be taken, no allocation of new capital. No capital expenditure. No new jobs created. Fewer ounces produced, customers get irritated and look for more ways for substitution. Like this: Honda develops catalyst that reduces use of precious metals by 50%. Like Byron said when I tweeted that link (that was sent to me from our old mate Gareth), this is good for the world, bad for South Africa.

Bart Simpson's shorts, digest this.

Now that the Germans have saved the day, the Dutch electorate seemed have to voted in favour of pro European parties, what is the next thing that is going to get everyones knickers in a knot? Well, Jeff Miller in this blog post kind of told us: THE FISCAL CLIFF: WHAT NOW AND WHAT TO EXPECT. Yay! Time for more dithering politicians. I suspect that after the elections, the US ones, hopefully they will get it done soon!

Oh? Remember the end of the European Union? Well, not so fast. I think that we should compile a list of all the Euro sceptics. Look, it could have been terrible. It could have been worse. But we always thought that "they would get the job done". A Setback for Germany's Euroskeptics. As Paul said in his mad markets piece on 702 with Bruce Whitfield on Friday evening, all those people that he has 100 ZAR bets with around town about the Greek exit by year end, you might as well pay now!

Whilst everyone else is gearing themselves up for the FOMC announcement today, and the potential for more monetary stimulus from the Fed, I thought that this was at the core of what I had been talking about for a long time. Chart of the Day: We're missing out on low rates Agreed, they should borrow more. But then there is the whole issue of the fiscal cliff and borrowing too much. Lucky it is not me who has to deal with these issues. What to expect today from the FOMC? The WSJ has a great piece: Four Things to Watch at Fed Meeting.

Staying with low rates, the Fed and debt, we have seen several sides talking about how housing is improving. That Ritzholtz piece from a message or two ago was suggesting not so fast. But you cannot ignore it, via one of my favourite bloggers, which is strange for me, he is an academic comes the news: 2012: The year of the housing recovery. Who cares how it happens, for what reasons, as long as the resulting impact is that people feel better. More confident.

Byron's beats

The last update we got from Cashbuild was a sales update for the 53 week period which suggested revenues will grow 11% on the back of some margin growth. We used the figure of 24% to estimate growth in headline earnings. This was based on the figures we saw in the first half of the year, giving us an estimate of 1313c headline earnings for the year.

It turns out we were fairly accurate because yesterday Cashbuild gave us an earnings update which suggests "that when comparing the June 2012 results adjusted for 52 weeks trading, to the comparative figures for the June 2011 year that exclude the effects of the BEE repurchase of shares and subsequent distribution to Trust beneficiaries, the adjusted headline earnings per share and adjusted earnings per share for the year ended 30 June 2012 are expected to be 20% to 30% higher than the prior financial year's adjusted figures."

This means we should be expecting around 1300c for the full year. The share price has pulled back in the last 2 weeks from R168 to R158 today. The company is also a good dividend payer so expect a fat increase from last year where a big BEE deal was done. In fact, in the interim report they mentioned an improvement from their usual 3 times cover to 2 times. That means more or less 650c should be distributed. At current prices this affords us a historic multiple of 12.15 and a dividend yield of 4.1%. For a retailer which is showing strong signs of growth this looks very compelling. We continue to add at these levels and take advantage of the recent pull back. We will cover the full year numbers in the next few weeks which will give us the operational details and some forward looking guidance.

New York, New York. 40^o 43' 0" N, 74^o 0' 0" W. Stocks ended the day flat. It was not great. The most amazing thing, before the FOMC meeting of course was the big release! Is the new iPhone 5 all wow and worth the excitement that some associate with the product? I "watched" the release of the phone by drifting through my Twitter stream and by following live blogging from cnet, this link is what you need to follow to compare the specs of the last version, and the new one: So, what's new? Comparing the iPhone 4S and iPhone 5. You can also check out the Apple iPhone 5 on the producers website.

The phone is bigger in size, but still thinner and lighter than previous models. It has a speedier processor, better camera, new connector integrated with old ones, faster connectivity, the phone certainly seems better at face value. But there is not too much different that we have associated with the new model launches. Or so it seems at face value. Someone actually said, this almost seems like the iPad presentation, everyone not completely wowed. With regards to sales, well, this is the very quickest roll out.

The features that stood out for me were the speed, the new maps (which Google must be miffed with), the panoramic photos were quite cool (you need the landscape to match) and the facetime application that will be possible through the faster networks. The screen and definition is going to probably also blow users away. Siri is a whole lot more useful, integrating better with the applications. Facebook is built in, don't take that part too lightly. I can assure you that not everyone is as excited as some of the blogs that I read. Some folks still love keyboards. So are saying, nothing different, innovation is going to be slower, the other phone releases are comparable in features. Competition. Maybe Apple are not as far ahead of the pack as before, but let multiple users, well, use it!

So when is it coming? Very, very soon. If you are in one of nine lucky territories, then you can pre-order that phone tomorrow. The phone will ship a week later, next Thursday. Yes. And then it will probably be available in late October or early November here. Wow. That is cool. Those who follow these things very closely are expecting around 50 million phones to be shipped in the coming two quarters, anything less than that would apparently be a disappointment. The margins on the iPhones are key for the Apple business, as long as people are still willing to pay what look like outlandish prices for a handset that is in many ways part of your life, then Apple will continue to be more and more profitable. As the phone was released and my Bloomberg app told me, it is happening, I told my eldest daughter, Apple has a new iPhone. She immediately piped up, very excited, I want one! And I can tell you, this is a little person who has just used the products before and thinks that they are awesome. As long as the user experience remains, the customers will be there. Communication is hard coded.

Currencies and commodities corner. Dr. Copper is last at 366 US cent per pound, the platinum price is higher at 1650 Dollars per fine ounce. The gold price is slightly higher at 1731 Dollars per fine ounce. The oil price is last at 97.14 Dollars per barrel. The Rand is weaker, banks in particular are getting trounced. The market is marginally higher, but not really going anywhere. FOMC, that is what it is all about.

Sasha Naryshkine and Byron Lotter

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Wednesday, 12 September 2012

Lonmin losing

"The Lonmin saga is an emotionally charged issue with many passionate opinions from all social, cultural and income groups. In fact most of the commentary I have seen from a social context has been in favour of the miners. And this is from people who are privileged and understand the laws of economics."

Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E. We reached the worst point at midday, resources were getting a thrashing, in particular the precious metal producers. The platinum stocks sank nearly 2.7 percent. Lonmin talks have stalled and failed. The company has lost, by my back of the envelope calculations, a whopping 750 odd million Rands in production. Average platinum price over the last 30 days is 1525 dollars per ounce, the company has been losing roughly 2000 ounces of platinum production per day. Both the gold and platinum miners are facing labour unrest, collectively the stocks are down 18 percent plus this year, both sectors. Compare that to the top 40, which is up over ten percent and you can definitely see that "investors" have been voting with their feet. The all share index is up just over 11 percent this year, retailers are up 25 percent collectively and industrials are up a 23 percent year to date. Misery or cheer, depending on where you have been investing your money.

Wow. Again! EOH results hit the screens this morning. Revenue grew 50 percent to 3.643 billion ZAR, profits before tax rose 45 percent to 341 million Rands, profits after tax grew 50 percent to 223 million Rand. Earnings per share grew by nearly 30 percent to 254.9 cents, with the dividend increased by nearly one third to 70 cents. Cash on hand swelled by 130 million Rand to 452 million Rand, which is roughly 12 percent of the market cap. This translates to 4.54 ZAR per share, for a company that trades at 36 ZAR a share, last trade that I saw when writing this piece, of course. So roughly, the market affords the company a 14.1 times earnings multiple and a 1.9 percent dividend yield. Not cheap, not expensive, perhaps just right for a growth stock of this nature. Margins are not great, but I guess 6.2 percent for a business such as this is acceptable.

As per their presentation, which you can download, Reviewed Condensed Consolidated Results "EOH is a leader in technology and business services, the largest implementer of business applications and a provider of end-to-end solutions." Which is a pretty broad explanation of the business, but they basically provide any type of technology solution that you might want. Their customers are a broad bunch too, mining, healthcare, the state and financial services included. So it is fair to say that the company are not reliant on one specific industry to make headway. Services however form the largest revenue segment, and represents 64 percent of group sales. Software accounts for nearly 17 percent of sales, whilst infrastructure, which has the worst margins of the three accounts for nearly 19 percent of group sales.

Growth plans include leveraging off government spend, which is currently one quarter of their revenue. The rest of our continent is seen as another growth area for the group.

I quite like the company, they have certainly absolutely crushed most of their peer groups. Much of the growth has been acquisitive growth. But make no mistake, to bed down these transactions and even improve on the businesses bought, we all know that sometimes comes with enormous challenges. They clearly have the knack for spotting the competition that is worth buying, and executing on that. I am not too excited about the company looking for more government spend, and more government business, but I welcome the efficiencies that it no doubt will bring to the recipients. I am not too sure that the stock is still a screaming buy, and perhaps one should be a little more cautious than in the past. However, having said that, I suspect that their business will continue to thrive, but perhaps not show the same growth rates as in the past. However, most people have been saying that for years. And have been wrong.

Bart Simpson's shorts, digest this.

Need a new job? Mervyn King, oops sorry, Sir Mervyn is retiring as the Governor of the Bank of England. Still a way out, in June next year but the search is on for someone with "intelligence, independence and integrity". Well, good luck. My best pick is a name that has been thrown around, Jim O'Neill. But I suspect that perhaps the appointment might be under our noses, Paul Tucker. Check it out, courtesy of the WSJ: Britain Places Want Ad for New Bank of England Governor. I like that opening line: "Help wanted: Powerful central banker. Good pay, long hours, ornate office. Might get a knighthood."

Strasbourg, you know where that is right? The capital city of the Alsace region. If you know your World War One history, you will know that the city and region "went" to France. But there is peace now, lots of peace. Today however Strasbourg, as the capital of the European Parliament, sees European Commission President Jose Manuel Barroso deliver his state of the union. Here is some insight: Europe to outline banking union to tackle crisis. Right now, as I type this, Barroso is outlining the European Union as he sees it. He is calling for a federation, which will require a new treaty. He is calling for a banking union. Looks all good at face value, we will have comments tomorrow.

Lehman Brothers was a victim (and one of the culprits) of the financial crisis right? I guess so, the finger is often pointed at Lehman. So I guess you will be surprised to read that Lehman is alive and kicking, in a very different format, this New York Times article is fun to read: Lehman Brothers, We Heard You Were Dead. Lehman should be officially wound down in 2017, nine years after they declared bankruptcy. Tricky business, but I am guessing for the folks unpicking it, "nice" easy work.

The Zuck gave an interview yesterday. His first since the stock listed, you can catch it all here, from Techcrunch: Zuckerberg Talk Drove Facebook Stock Up 4.6% In After-Hours Trading. There is an associated video that I am trying to watch, it is rather long though. Still, I will try get to it! Clearly Mr. Market liked it!

Apple will supposedly unveil the newest iPhone today. Not quite the iPhone 4, because the 4S came after 4. There was of course no iPhone 2, we went straight to 3. For 3G, I think, the 3GS was a better version. Cnet are following it if you want to feel it and be a part of it: Apple's iPhone event: Join us Wednesday (live blog). And then the link to the live blog: CNET's Apple event live blog (Wednesday, September 12). Because each release comes with more anticipation than the last, the stock could have quite easily set us up for something big, another huge leg up, and equally another fall. One way or another, this is a huge event!

The German court rules on the ESM emergency "challenges". Paul told me that the verdict is 85 pages long and that it will take 90 minutes to read. The gowns worn by the judges have a certain sheen to it, red. Not so stylish. And their hats, well, I cannot say that I am a fan of those either. The actual finding was to allow ratification of the ESM pact, BUT there were certain conditions imposed. Which included a cap of 190 billion Euros, without the lower house approving it. Which sounds to me like the lower house could approve something bigger, if they wanted. Ah well, let this wash around for a while. Equity markets are making headway shortly after this ruling. Yields are falling on the peripheral debt. Sounds like good news to me. The Euro is much firmer, heading for 1.30 US Dollars per Euro. Improving outlook.

Want to make 104 million US Dollars? There is a catch though. You would have had to spend 31 months in jail. This actually happened, the IRS in the US awarded a whistle blower that sum of money for lifting the lid on dodgy rich Americans looking to skirt tax rules. Check out the story via Bloomberg: UBS Whistle-Blower Secures $104 Million Award From IRS. Two things here, banks will be more careful with their business and perhaps take less risks leading to lower profitability (but you knew that already) and secondly, compliance will be much higher at banking institutions. Leading to dare I say it, less revenue generating staffers. Which also leads to lower profitability. This is however good news.

Alongside the Apple event today, the most exciting event this week will be the FOMC announcement tomorrow. Citi reckon, which I gathered through this piece, Bernanke likely to announce QE3: Citi, the Fed is going to target Mortgage Backed Securities. And perhaps even announce that rates will stay lower for longer than initially anticipated, perhaps all the way through to the end of 2015. Whoa! But let us not detract from the Apple fanboys and girls, today is about them!

Byron's beats

The Lonmin saga is an emotionally charged issue with many passionate opinions from all social, cultural and income groups. In fact most of the commentary I have seen from a social context has been in favour of the miners. And this is from people who are privileged and understand the laws of economics. Here at Vestact we have covered it in a subdued manner, steering away from any emotionally charged debate because we mainly focus on the financial facts. Because this is an opinion piece I am going to give my honest opinion based on emotion, financial reasoning and conscience.

Firstly let's look at Lonmins numbers (I am getting these from a combination of financial reports, annual reports and media articles so please correct me if I am wrong). For the 6 months leading up to March this year the company lost $18 million. This was due to cost pressures from electricity tariffs, above inflation wage increases a low platinum price and capital expenditure to increase and improve mine shafts. Most of which are out of Lonmin's control. This was on the back of $1568/oz average platinum price achieved. The price as we speak is at $1629/oz but the average achieved in Lonmin's second half will be comfortably below $1500/oz because the price has only rocketed in the last few weeks because of these exact production concerns.

Now let's look at wages starting with management. Sasha wrote this the other day after looking at their 2011 annual report. "Non execs are paid handsomely, the total for the 2011 financial year was 861 thousand pounds. The three executive board members, Ian Farmer, the CEO, Alan Ferguson, the former CFO and Simon Scott, the current CFO collectively pocketed 3.416 million pounds, including 640 thousand pounds in annual bonuses. These are all clear as daylight in the annual report. That amounts to roughly 44.6 million Rands all in (including salary and benefits), and can actually be directly attributed to two persons. Two."

The 28000 workers are demanding to clear R12500 a month. According to Lonmim they pay the miners more than the R4500 they are claiming when you include bonuses, housing allowances etc. The real number is more like R9300. R12500 is 25% more than what Lonmin already pay their workers which should cost the company an extra R90 mil a year.

Now that we know the finances let's look at the options. If the execs took a pay cut, which I 100% agree they should, it will make a difference but only a small one. We also have to realise that the execs are highly skilled people with many options. If they are not paid enough they will move somewhere else and the company will lose the skills it needs to operate. A balance needs to be found. Management needs to take some of the blame for neglecting the conditions of the workers and believe me, many who own shares have paid the price. The stock is down 40% since April.

The miners cannot expect a 25% wage increase. I understand conditions are tough but the money is just not there. The company will have to shut down the mine which means 28000 people will be out of work. That is the hard truth. I understand that it is easy to sit in my comfy office and say this, but we are not a communist state. That system has proven time and time again that is does not work. These are unskilled labourers whose productivity has in fact decreased in the last year while wages have increased. This is unsustainable in the competitive world we live in. I say this again, the world is competitive so either compete or go it on your own. Just ask the people of Venezuela how that is going for them, nationalisation.

I also fully blame government for letting unions get to where they are. They have been allowed to mobilise workers as they please and to completely ignore previously signed agreements deeming them unreliable. Get the unions in check, labour laws are too rigorous in this country and it will bring us to our knees. For the 3rd time we need to compete with the rest of the world or go it alone. The former is by far the better option.

My solution for Lonmin. Install an incentive based remuneration system based on hours worked and productivity. That way, miners are paid in relation to how much they bring to the company. I am not sure however whether our labour laws will be flexible enough to implement this system. I'd expect unions will be also be opposed to it to. They should also pay more attention to working conditions. It erupted at Lonmin specifically for a reason, they have been slack with this. It is in their (Lonmin) best economic interests to keep workers happy. Lastly management must take a cut. The company is losing money, they do not deserve huge bonuses. The remuneration however must be high enough to keep the skills there.

My solution for government. Amend labour laws and get our unions in check. It's harsh, capitalist in nature but I honestly see no other way. (I understand that votes of the masses need to be considered, that is why this debate is so difficult. It needs to be done subtly.) This mindset of illegal strikes with an absolute all or nothing approach is spreading like wild fire and government need to intervene now. Starting with Julius Malema. He is causing havoc. Like skilled labour, foreign investment also has choices and right now everyone is losing faith in our once loved mining sector. That right there, is affecting all of us.

Currencies and commodities corner. Dr. Copper is last at 367 US cents per pound. The gold price is starting to head higher, last at 1742 Dollars per fine ounce. The platinum price, with all the above problems for the producers is higher at 1633 Dollars per fine ounce. The oil price is also higher, last at 97.93 Dollars per barrel, the highest level since May. The Rand is weaker, 8.20 to the US Dollar.

Partly cloudy with a chance of something. Hooray for the German chief justice! A fellow by the name of Andreas Voßkuhle, who is rather young, appointed two years ago when he was 46. But today will be about the Apple iPhone, until then we are much higher.

Sasha Naryshkine and Byron Lotter

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Tuesday, 11 September 2012

Fantastic FirstRand

"Steve has managed to convince many clients to move to FNB backed by what seems to be a better service from my own experience and word of mouth. Diluted normalised earnings grew by 26% to R12.73bn which equated to 225c per share. The dividend also grew by 26% to 102c per share while normalised return on equity grew to 20.7% from 18.7%."

Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E. It was a strange old day for equity markets here in Joburg. After the markets had closed the scoreboard showed why. Retailers were thrashed, there were a number of broker downgrades and some high fliers were dumped, most unceremoniously. Mr. Price sank over seven percent. Woolies, careful here, they were ex-div too (123 cents), but the stock sank by more than double that, down four and a half percent. Standard Bank led the banks lower, down five and a quarter of a percent, the stock was also ex-div, but were also hit with a broker downgrade. The retail stocks ended the session down 3.72 percent, ouch, the banks as a collective closed down 2.71 percent. At the other end of the spectrum another announcement from the Chinese regarding their infrastructure spend sent commodity prices higher, the resource stocks rallied three quarters of a percent. Sasol's superb results saw the stock touch its highest levels since March this year. SA inc. taking a bashing, resources getting a leg up here.

Bart's shorts.

Glencore decided officially to up their offer to the Xstrata shareholders, well, the balance of them anyhow, the other 66 percent of Xstrata shareholders. Remember that they, Glencore, own 34 percent. Under the new revised offer, the ratio was bumped up to 3.05 from 2.8, but you knew that already. Mick Davis will be offered a six month interim CEO role, after which Ivan Glasenberg will assume the role. The WSJ reports that Xstrata was feeling rather cold to the new offer, let alone the old offer. Glencore now have to wait until the 24 of September, two Mondays time when Xstrata will recommend the deal to their shareholders. If they say no, some expect Glencore to go hostile and look for that 16 percent needed to control the business. What is of most interest to me is that if Xstrata shareholders are firstly recommended the deal, and then they say yes, what then of a renewed launch of having a go at Anglo American. Perhaps. The last four or so trading sessions have seen nearly a ten percent gain for Anglo. Speculation. I would first like to know that Glencore has sealed the deal. Today Anglo is taking some tap, as the recent concerns around mining in South Africa and labour unrest sends shareholders scurrying.

They said that they would never make money from bailing out the banks, it was like pouring money down a hole. We would be far worse off now if the US government had not acted swiftly back then. Far worse. Over the weekend, in case you missed it, the US government said that it would be selling more AIG shares. But the US government are still in waist deep, with this New York Times article, Big Step in Selling A.I.G. Stake, but Other Bailouts Remain, saying that 343 institutions are still part of the TARP program, but are working their way out slowly. It worked. It might have cost a lot, but it worked. And the US Treasury did not lose all the money, in some cases it made money.

We often say around here, don't worry too much about what non-Europeans say about the Euro zone, because the implications and subsequent decisions do not really impact on them. So when I read in Der Spiegel Why Merkel Wants To Keep Greece in Euro Zone, I am not surprised. Europe has been working on the Euro project since the Second World War so that there would not be another war. Free trade and all that. Movement up and down. Perhaps the idea is starting to sink into everyones head that it is better to be inside of the inner circle than to be out.

Oh dear. The Japanese Minister of Financial Services allegedly hung himself at his own home. This ministry is similar to the FSA or the SEC, or locally the FSB, but with more powers. Amazingly Japan has a very high suicide rate, 30,000 per year, and this keeps pace with an ever decreasing population. The pressures of the job were just too much, I imagine this must be the case. In many cultures the act of suicide is not seen in the same way as it is in Japan. Phew, I guess culturally we will always struggle to understand.

Richemont are getting a punch in the guts this morning, Nomura have downgraded Burberry, but it comes after the luxury goods maker suggested that full year profits would be at the bottom of the expected range. Check out the Burberry First Quarter Trading Update and Interim Management Statement. So you read that right? Seems ok. But the stock got drilled, down over 18 percent. It is not even the most expensive of its peer group. Trench coats. Turns out people prefer watches. Although I can see myself in this one: VELVET COLLAR CHESTERFIELD COAT. For the five days or so that I might need it in winter down here, I am going to pass. Cheapskate. My point however is simple, trench coats are not watches and jewellery.

Byron's beats

This morning we had full year results from First Rand. There are lots of moving parts here so let's take a look at the structure of the business to get a better understanding. This image hacked from the results presentation pretty much sums it up.

The Numbers. They looked good, Steve has managed to convince many clients to move to FNB backed by what seems to be a better service from my own experience and word of mouth. Diluted normalised earnings grew by 26% to R12.73bn which equated to 225c per share. The dividend also grew by 26% to 102c per share while normalised return on equity grew to 20.7% from 18.7%.

Let's look at the earnings mix. FNB is still the big earnings driver contributing R6.6bn (53%) after growing 25% for the year. RMB and GTS (Global Transactional Services) contributed R3.6bn (29%) after contracting 5% while WesBank contributed R2.6bn (20%) after growing a whopping 40%.

FNB. The bank has been at the forefront of innovation and has really improved its services with the likes of eBucks, fuel rewards, the FNB app and offering iPads and other gadgets through current accounts. This has resulted in 1.3 million new accounts in the year. If FNB was separately listed I would certainly buy the stock for its innovativeness and originality, much like Discovery. ROE grew to 35% whilst margin growth grew thanks to an increase in unsecured lending. That book is now worth R11.4bn, about a fifth of African Bank.

RMB. This is the investment banking division which interestingly announced the termination of outright propriety trading activities due to regulatory changes and the expected macro environment. This is the division we are not the biggest fans of but due to such regulatory constraints it does become less risky. It will however be a lot less profitable than the ''good old days'' before the financial crisis. Earnings depleted from what is described as a high base last year because of muted M&A activity and a tough environment. We still see investment banks as risky remuneration vehicles that benefit employees more than shareholders.

Wesbank. This has grown fantastically and we can see why when we look at vehicle sales figures. Motor finance was up 20% while interestingly unsecured lending played an important role growing 17% to a book now worth R4.3bn. Operating costs were kept down to 3% while corporate new business grew by 15% to R11.8bn.

In the commentary I was interested to see the following statement which I think proves my point that retailers who grow sales north of 15% but say conditions are so horrendous are talking absolute rubbish.

"Consumer demand remained quite resilient throughout the financial year with household spending on durable goods particularly strong. This demand was underpinned by growth in real disposable income and a gradual increase in the uptake of credit by households, particularly unsecured credit. Continued low interest rates provided further support."

I do like the company for its innovation and position to grasp the under banked African consumer. However we prefer African Bank who focus all their activities on unsecured lending, an area where FirstRand are experiencing a big chunk of its growth now and going forward. FirstRand trade on a historic PE of 12.1 compared to African Bank's PE of 10.

New York, New York. 40^o 43' 0" N, 74^o 0' 0" W. Chips. Not the kind that you eat, but rather in South Africanisms, when you say, watch out. Well, in this case chips is relevant to both Intel and watching out, their share price sank 3.84 percent as the chip maker said that they expect to wind in their revenue projections for the current quarter by as much as one billion Dollars. Why? Because PC sales are slowing. So I guess we knew that already. And I guess we knew this already too: Apple's iPad overtaking PC sales in schools.

So tablets are crushing the personal computer. And of course nowadays everyone wants a laptop, they are more powerful than they once were. It is all about the speed. I last used a desktop about four years ago. And I guess perhaps never again. Although naturally the processor in my laptop is an Intel chip. Perhaps the PC revolution will catch up again, once tablet sales become a defined part of total hardware sales. Or perhaps the semi conductors deserve their lower ratings and are more utility like in nature. Time will tell, but we prefer for the moment to be long Apple, Google and Amazon, as well as Cisco in a slightly different space.

Along with the poor news from Intel, tech stocks registered a one percent fall, the broader market S&P 500 dropped just short of two thirds of a percent, whilst the Dow Jones had a modest sell off. Of course this week there is the FOMC and the anticipation of QE3 is heightening. The FOMC statement is due on Thursday. I don't have to tell you that this is the most anticipated FOMC statement, well, since they last released a statement! Hah-hah. No, really, Mr. Market is keen as beans to interpret the Fedspeak and what they will be up to. The politicians no doubt are also hanging around waiting for this one.

I quite liked this Barry Ritholtz article that slightly messed with the Barons idea that the housing bottom had arrived. In part Ritzholtz discredits the publication because they have done it more than once, calling the bottom. Read the article: Barron's Cover Calls Housing Bottom (Yet Again). Ritholtz makes some good points, if you scroll down lower you will see the part about foreclosures, the Fed targeting zero on interest rates and the last one, about home builders stock prices and home prices. The last one I am not so concerned about, that takes care of itself.

But surely foreclosures slowing puts a stop to fire sales and means that the mean price should start to trend higher? But as Ritholtz points out that distressed sales have slowed. I am going to side with Buffett, who said that single homes were the best investment around, that was back in February. He said that if he could, he would buy a couple of hundred thousand collectively. For the record Buffett bought his five bedroomed house in 1957 and still lives there. If not a bottom, then we are as close as we are going to get.

Currencies and commodities corner. Dr. Copper is last at 362 US cents per pound. The gold price is higher at 1731 Dollars per fine ounce, the platinum price is also better at 1595 Dollars per fine ounce. The oil price is also higher at 96.60 Dollars per barrel. The Rand is steady to slightly weaker. We have started lower here, some stocks getting trashed, almost the opposite of yesterday. Mining stocks, South African ones, are getting thrashed as a certain fallen political hero agitates a little.

Partly cloudy with a chance of something. The next three days are thought to be key. Key to looking ahead to the next calendar event. Tomorrow there is the German court ruling, Thursday as we said is the FOMC statement. Today however is one of those anniversaries where you would have remembered where you were. The 9/11 attacks will be commemorated, but lower key than the ten year anniversary which was last year. I remember exactly where I was. We were all watching the old giant tube TV in a dealing room, I was standing next to an old timer, an incredibly likeable chap. I turned to him and asked, what does this mean? And he said something along these lines, "very, very, very, very bad". And he was right. This is not an event that covers humankind in glory and the subsequent associated and ongoing wars are nothing to be proud of. And still we search for answers, why?

Sasha Naryshkine and Byron Lotter

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Monday, 10 September 2012

Sasol sizzles at synfuels

"OK, so is the share price expensive? It is clear that we like the company as an investment theme, they are a mix between an energy and chemicals company, as well as being a technology company. Technology in the sense that they are able to posses these extraordinary skills at that sort of scale, which makes the company sort of unique globally. On that basis I often think that one should expect to pay a premium."

Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E. We finished marginally higher on the day, we initially traded lower after the most anticipated number of the month from market nerds and junkies alike failed to impress. More on that a lot later. The Jozi all share closed off trade at 35744, up nearly one fifth of a percent. Banks sank 0.85 percent, I did see a sell recommendation on some of the majors in a general note about South African banks. Resource stocks absolutely rocked, the general retailers sank 2.36 percent. I am starting to wonder if the folks that priced in another rate cut here locally might have actually been disappointed with the Draghi commitment to "saving the Euro". And as such, a rate cut becomes less likely? I am not too sure, all I know is that the MPC meet later this month. The currency strengthened markedly too, that has a positive impact for the inflationary outlook. It will be what it is.

Sasol have released their full year numbers for their financial year to end June 2012 this morning. At face value they certainly look good. Turnover increased sharply to 169.4 billion Rands, costs rose, but the group seems comfortable with that, they say in-line with inflation, 8.6 percent. Production was much better in the second half, full year production was basically the same as last year. Operating profit increased 23 percent to 36.8 billion Rands, the average crude oil prices received increased 17 percent and the exchange rate weakened by 11 percent inside of the financial year. Headline earnings increased by a little more than that to 42.28 Rands per share, the dividend, and this is a big surprise, increased by 35 percent to 17.5 Rands for the full year. Dividend cover has been lowered (that is good) to 2.3 times. The final dividend has clocked 11.80 ZAR, expect just over 10 ZAR after dividends withholding tax. Listen to this, in direct and indirect taxes, Sasol paid 28.2 billion ZAR to the South African government. Anyone who calls for the nationalisation of the business (in my view for what it is worth) should be gagged immediately.

The best performing segment, as per usual is the Synfuels business which is obscenely profitable. On turnover of 48.791 billion ZAR the division manages an operating profit of 22.095 billion ZAR. Astonishing. See what the group operating profit is above (36.8 billion ZAR), and you can quite quickly see that Sasol Synfuels is 60 percent of the overall group profitability. And therefore, by far and away the most important division. To put it into perspective, inside of the chemicals cluster, the Olefins & Surfactants segment is the second most profitable unit for the group, clocking 3.193 billion in operating profits, nearly one billion Rands less than this time last year. Here is a screen grab from their Sasol audited financial results presentation, page 2:

There were some well telegraphed once off charges, which totalled 2.121 billion Rands. The largest of these were the partial impairments of their Canadian shale gas assets, an amount of 964 million Rands. Byron wrote about this when Sasol released a trading update last month, in a piece titled Sasol take a write down on their gas business. Whilst this is disappointing, the timing of these purchases, we certainly think that this is the future of the business. We will deal with this in a tick.

OK, so is the share price expensive? It is clear that we like the company as an investment theme, they are a mix between an energy and chemicals company, as well as being a technology company. Technology in the sense that they are able to posses these extraordinary skills at that sort of scale, which makes the company sort of unique globally. On that basis I often think that one should expect to pay a premium. But this is not the case, the stock trades on less than 10 times historical earnings, but this is not out of line with the broader oil and gas sector globally. The dividend yield (after tax) is around four percent as at the close of business Friday. That sounds appealing to me.

One of the reason why the market is reluctant to afford the broader sector a higher valuation is simple, at least in my mind, the oil price is volatile. From their release: "For forecasting purposes, a US$1/barrel increase in the average annual crude oil price results in an increase of approximately R580 million (US$72 million) in operating profit with a similar negative consequence if the average annual crude oil price decreases by US$1/barrel (This is based on assuming an average rand/US dollar exchange rate of R8,01)." If the average price per barrel remains at these elevated levels and the Rand remains weak, then the expectation would be for the company to be much more profitable than last year. In fact the last two months have already been good for the company.

The outlook column is as you would expect, I think, cautious, you can read it on page 8 of the analyst booklet, Profit Outlook* - strong management focus in challenging environment. There are uncertainties of course, but production at Synfuels should improve. Oryx is going to be just fine, the Canadian shale gas production should grow, after initially disappointing. Their very important and not talked about enough chemicals division should continue to perform steadily.

The company is shifting gears. And whilst they have been criticized for looking a little slow in making decisions, this has not been the case recently. There are three sizeable gas-to-liquids projects and exploration on the go right now, the one with perhaps the quickest conclusion is the Uzbekistan Gas-to-Liquids plant. The government in that region themselves have started developing the surrounding infrastructure where the proposed plant is expected to be built. The two other major gas-to-liquids projects are in Louisiana and Western Canada, but they are further away than the Uzbek one. These plants, should they go ahead, will be the future. The dirty coal to liquids past is being shifted. And therein lies both many risks and rewards. We continue to buy the company, they look cheap at these levels, even though the stock has had a good run recently. Over the last five and a half years, the stock price reached 515 Rands, but then plummeted to 212 Rands, currently at 380 odd ZAR. Buy.

Bart's shorts.

This is the least exciting market rally for much of my industry, I think that a lot has to do with the fact that it was not supposed to happen this way. At least that is what the majority of Wall Street "thinks" and I can hear that view echoed by all the anchors on my favourite business TV stations. Our own view in-house has been to remain long. Many people are miffed at policy response. I am guessing that they worried about the debt ceiling, the Euro crumbling, Grexit, the fiscal cliff, presidential elections in the US and France, and the list goes on. But when I see this, I had to fall on the ground laughing: Sell Side Indicator. More bearish than ever. And notice friends, that just before the Tech bubble exploded, analysts were even more positive than ever before. The reverse is true now. The only next question to ask then, is when will they (the sell side) crack? Or am I living in cloud cuckoo land?

Byron's beats

On Friday we had an announcement from BHP Billiton which described the completion of the sale of its 37% non-operating interest in Richards Bay minerals to Rio Tinto for $1.9bn. From a South African perspective that is a sizeable deal but for a company of BHP's size it barely reached the headlines.

What I found important to note was this constant trend of the biggest miner in the world divesting from South Africa. I understand that where there is a seller there is a buyer and where BHP want to get out, Rio see an opportunity. But this is not the point. The point is that BHP are only interested in low risk tier one assets and South Africa does not seem to fit this bill as a mining destination.

I don't blame BHP Billiton. Look at what has happened at Lonmin. And it looks like this mindset is spreading which is very dangerous. It is now reported that Implats employees are demanding a further wage increase following an agreement only 4 months ago in April. This is very bad news as NUM loses control of their members at more and more and mines. It also completely undermines the previous conditions set during negotiations in April. What is the point of even discussing a contract if the conditions are so easily broken?

The Marikana incident received so much airtime and flared many polarized emotions already. This mindset could spread like wild fire as workers who are angry and desperate look for any alternative to current conditions. What they don't understand is that the companies in question cannot afford these wages. If Lonmin do not reach an agreement soon and by soon I mean in the next few days, they will have to start shutting down shafts. Then there will be no jobs available and everyone, including all South African citizens will lose out.

Sasha has mentioned this before but I will repeat it for emphasis. The ANC have said that the Marikana incident has not affected foreign direct investment. This BHP Billiton sale is a first class example of a company divesting even though negotiations were probably underway before the incident actually happened. It is the conditions in general which allow for such incidences to occur which will ward off many potential investors. This situation needs to be fixed and fixed fast before it gets out of hand.

Washington. DC. 38^o 53' 42.4" N, 77^o 02' 12.0" W The jobs release from The Labor Department was a big disappointment for Mr. Market. 96 thousand jobs added for the month of August missed the expectations of somewhere closer to 125 thousand. BUT, the ADP report the day before had teed the market up to expect a whole lot more. I suppose the only (at face value) positive was the unemployment rate falling to 8.1 percent, but when you scratch a little harder, this is not the best news, here is a NYTimes piece: Why Did the Unemployment Rate Drop? My point about these numbers having an overinflated importance must be getting you bored on the subject. But it is an overtrumped number. The miss was 30 thousand jobs. That is all. Out of a workforce of 154 million, what is 30 thousand. That is 0.02 percent.

As Paul asked, how many jobs reports before the elections? The conspiracy theory is that the unemployment rate would fall below 8 percent by the next elections, somehow manipulated. But, Diane Swonk one of the regular guests for the jobs number, she told Jo to get rid of that theory. If you want a blow by blow account, check it out: NFP August CNBC Video. Too much emphasis on one number. Mr. Market is all primed for QE3 now.

Currencies and commodities corner. Dr. Copper is starting to get all hot again, 363 US cents per pound. Remember that Friday the Chinese announced a big 60 project infrastructure plan. The gold price is off the best levels, last at 1733 Dollars per fine ounce. Spot platinum is last at 1595 Dollars per fine ounce. Crude oil is last at 96.40 Dollars per barrel. The Rand is firmer, 8.14 to the US Dollar, 13.07 to the Pound Sterling and 10.45 to the Euro. A very mixed start here today, SA inc. getting thrashed. Sasol is roaring ahead, and the rest of the commodities complex is also catching a bid. But overall, the market is lower.

Sasha Naryshkine and Byron Lotter

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Friday, 7 September 2012

Draghi. Suave. Funny. Clever. Italian of course.

"To lower the costs to those two giants, Spain and Italy, so the pressure valve is relieved somewhat, and any of the new issuances will be welcomed by investors at the lower yields. For me the participation is important, but more important is the return of confidence."

Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E. Yesterday was mostly about one man and monetary policy, and the direction of the European Union in the short run. Remember six weeks ago Mario Draghi, the ECB president said that he would do everything in his power to "save the Euro". I still don't know what that means, saving the Euro. Saving from what? The bond vigilantes? From a break up? The last poll that I saw suggested that the Greeks wanted to stay inside of the Euro zone, but the Germans did not want them there. And equally, the Greeks did not want too much austerity. Exactly. We all want more, but you have to work for it.

We will talk about what it is that the ECB will do later, the reaction from markets was huge. Enormous. Resources absolutely rocked, up nearly three and a quarter of a percent, sending the all share index up 1.8 percent. Phew. It has been a tough 10 days for the bulls after the incredible run since the lows in late May, but there was some respite yesterday. Another one percent move forward from here would be enough to take us close to the all time highs. Stocks surged globally, the Stoxx Euro 600 added 2.3 percent. Those are the top 600 European stocks. Big place you see! Did you see that article that suggested that the Australia financial systems market capitalisation is bigger than that of the whole of Europe? Check out this WSJ blog: Australian Banks Are Larger Than Euro-Zone Banks: BofA. I still can't get my head around that.

Ye olde worlde. Mario Draghi saved the day. This was something a whole lot more concrete than the promises that he would save the Euro. And do everything in his power. This new program, called the "outright monetary transaction" or OMT, will buy bonds with maturities of between only 1 to 3 years left. But more importantly, with the words unlimited in front of it. So, they (the ECB) could buy a ten year Spain issuance with three years maturity left in the secondary market, as well as a short term Italian debt issuance, 2 years or so. What Mario Draghi said was that they would effectively remove "tail risk in the Euro zone". Phew. Now to understand tail risk, see this simple (????) definition from Investopedia, Definition of 'Tail Risk': "A form of portfolio risk that arises when the possibility that an investment will move more than three standard deviations from the mean is greater than what is shown by a normal distribution."

So, if you remove the risks, you are more likely to get the middle road outcome, lowering rates in the peripherals and naturally rates would rise in the core, Germany and France. I can understand how this is not great for Germany, and I can see why they were dissenting. Because as someone said about the acronym, OMT, it translates to "on my tab". I could try and do my best to describe the nitty-gritty, but there is still a lack of what the conditions are, for the countries to participate in the OMT. As someone else said, smells like a bailout in a different form, because it involves money and conditions.

The confidence that this is returning to the markets, in fact ever since the actual announcement around six weeks ago, is visible this morning. Spanish ten year yields this morning are comfortably below 6 percent. Italian yields are about to print something with a four in front of it, currently 5.11 percent. This is the idea you see. To lower the costs to those two giants, Spain and Italy, so the pressure valve is relieved somewhat, and any of the new issuances will be welcomed by investors at the lower yields. For me the participation is important, but more important is the return of confidence. Back when people were loose and fast with capital markets, and in particular fixed income, the spreads between the core and the periphery was next to nothing. But this graph from Scotty Barber is key for me: Euro Zone GDP since 2007. Germany are fine. Everyone else is not.

Lastly, if you feel you need more details, I liked this Counterparties analysis by Ben Walsh, Felix Salmon's co writer: Counterparties: Draghi makes his move. Nice. It would be astonishing if the mere presence of the European Central Bank ready to act would be able to chase the yields down to a more "acceptable" level for Spain and Italy, without actually ever implementing the program. But that would be a Utopian view, I suspect that the debt market knows the problems in Spain and Italy are great. And the conditional line that comes with the program might even mean labour reforms, social benefits might be eroded, and that is a pretty poor showing for any politician concerned.

After this press conference, later in the day, Mario Draghi travelled from Frankfurt to Potsdam (both in Germany) where he was accepting a prize. Yes, a prize. Via the M100 website: "The M100 Advisory Board is awarding Draghi in recognition of his commitment to stabilize the Euro and stabilize the European house by all means." Germans giving Draghi the thumbs up! Surprised? Not me. The speech that Mario Draghi then delivered was published on the ECB's website, and it was most useful: For a European Public Space. There are some choice words in there for the Euro detractors:

"The global crisis has revealed the vulnerabilities in this arrangement. Loose coordination of policies neither ensures stability nor does it facilitate effective crisis management. The institutional design of the euro area therefore has to be reviewed to put our economic and monetary union (EMU) on a more secure footing. But how should this be done? There are two possible paths. The first is to go "back to the past", to make the original design work better. The second is to develop a new architecture that properly reflects lessons of the crisis. In my view, the first path is not viable. We have seen that the euro area is too interconnected for economic and financial policies to be a purely national responsibility."

In other words, we are not going to turn around. Turning back is not going to happen. For the Euro detractors I suspect that this is as important to read than for anyone else. He then continues and reminds us of what we already know, how important the common currency is:

"The euro is the world's second most important currency. It makes up 25% of the world's foreign exchange reserves. 1.5 trillion euros are traded daily on the world's foreign exchange markets. And it is used daily by the 330 million citizens of the euro area. A currency that plays a central role in the lives of so many people has to be managed with effective decision-making."

Perhaps that part is more important. Don't come here with your break up this or the other. More citizens use Euros than Dollars. Of course Dollars are interchangeable almost anywhere in the world. The Euro could see their day in the sun at some stage. Again I salute the ECB. They will continue to thumb their noses at the naysayers. And get the job done. The stakes are just too high.

Bart's shorts.

Ha-ha. I confused someone with Bart's shorts, that was not the intention. Bart is for Bart Simpson, and his shorts are for his eating exclusively. So we are digesting short pieces of information here in Bart's shorts. Got it? Good, first things first:

Maybe it is just me who thinks the South African governments line that the events at Marikana are not deterring investors is somewhat clouded in politics speak. Err... perhaps Minister Rob Davies does not read the same things that I do, even in the local press. The Economist has a circulation of 1.5 million. And the magazine, as per the Wiki entry "targets highly educated readers and claims an audience containing many influential executives and policy-makers." I see, so people reading this very exclusive magazine are both policy-makers and execs who make business decisions for their shareholders. That is a fair assumption, not so?

So when I read South Africa - It's not just the mines - The rainbow nation and its ruling party are failing to live up to their ideals, from the print edition, how does this make me feel about my country? And more importantly, how do I feel about my country being displayed to the world like this. Don't patronise us politicians, no matter which way you look at this, it is negative. If Minister Rob Davies really wanted to sort this out, instead of rushing off to London, stay here. Assure business here. Because, if the conditions for business are great here, that will attract the flows from the outside and from local investors too. You know the old adage, build them the field and they will come. Please do not let this short piece detract from the social issues associated with the miners, their living conditions and the whole debate around what is a fair wage, but rather what investors think. That was the idea. And investors vote first and ask the questions much later. In the short term, as Benjamin Graham said, the market is a voting machine. In the long term, it is a weighing machine. You might get no votes if something thinks there is no substance. Just saying.

Staying on matters of shareholder issues, developing this morning is that the whole Glencore and Xstrata deal is going to happen. There has been some tough work going on in the back rooms. The ratio has increased in favour of the Xstrata shareholders, 3.05 Glencore shares per Xstrata shares is the new proposed offer, up from the 2.8 offered earlier. This is supposedly saved the day. The Qatar Holdings shareholder has been holding out for more, and have been very vocal about the deal. But it seems that they will be swayed here. And the new proposal suggests that Ivan Glasenberg and not Mick Davis will be the joint CEO. Ah well. The Xstrata board still have to approve this. The shareholders do too. But this looks promising for Glencore shareholders. And good news for M&A too.

Byron's beats

Yesterday we had results from a company we all know very well. Spur reported some strong numbers again reiterating the strength of our growing consumer. Revenues increased by 24.8% to R503 million thanks to successful promotional strategies, card memberships, 12 new Spurs, 3 Panarotti's, 1 John Dory's and the inclusion of 74 DoRego's outlets which the company recently acquired.

Spur is still by far the biggest money spinner. In the South African division, of the R217 million in franchise revenue, Spur is responsible for R155 million of that. The other divisions include manufacturing and distribution which contributed R142 million and the international business which contributed R144 million. In terms of profits as you can imagine the franchise division has much higher margins than manufacture. Of the R175 million in profits Spur contributed R136 million, Panarotti's R7.8, John Dory's R5.8 million DoRego's 0.928 million (4 months), manufacture R55 mil and international R3.4 million. Wow international has been tough. The UK has not been a success but growth into Africa has potential. There was a R36 million loss related to certain legal issues and purchases which brings the overall profit number into balance.

Headline earnings per share came in at 128c which was up 31.3% from last year and a full year dividend of 47c was announced. At 1980 the stock trades on a dividend yield of 2% and a historic PE of 15.5. This compared to Famous Brands who trade on 25.9 last year's earnings looks cheap. Granted when FBR earnings come out next month this historic number will come down as earnings increase.

Arguments for Spur. I like the franchise business model especially in the fast food/restaurant sector. In South Africa we have a growing middle class and I think we underestimate how pleasant a small luxury like eating out can be for someone who is new to financial liberalisation. The Spur brand is great with good food at affordable prices and the company will certainly grow with this brand which can also be a success north of our borders. The company is certainly the cheapest entry into this market compared to Famous Brands and Taste. They are sitting on R90 million in cash which gives them potential for further acquisitions.

Arguments against Spur. The success of a company like this is very dependent on the brands themselves. I am still not sold on Spurs sub brands in what is an extremely competitive market. Not only do we have the local guys but we also have the big international players like McDonalds and Yum! Brands who are targeting Africa for future growth. Spur needs to grow their brand base which will be expensive because they will have to pay up for already established names. That is why we prefer Famous Brands. They have the buying power and the track record for picking the right names. It is also important to successfully manage the previous management which Spur have had issues with.

Conclusion. Good company, good sector, but better options available.

New York, New York. 40^o 43' 0" N, 74^o 0' 0" W. Whoa, stand back from the screens. We had a good chuckle in the office here when someone on the talking screens suggested that perhaps the bears were throwing in the towels. Surely that is not the case. Just like the bulls, a top for the bears is seen as the absolute worst it can get, not so? So the bears should in that case have more conviction than they would have had before. The nerds of NASDAQ was last at these levels a whole 12 years ago. Yes. The last time the NASDAQ was at this level George Bush was campaigning against Al Gore for the presidency of the United States of America. The end of that story was more than a very inconvenient truth for Al Gore. Well, at least Al Gore was deputy president for 8 years in the Clinton era!

The level was also the best level for the Dow Jones Industrials since December 2007. In part it was a much better read on the ADP data too, that clocked 201 thousand leading people to believe that the most important event of the day, non-farm payrolls would be better than anticipated. That is going to be the main event of the day. Forget the Draghi excitement, if this is huge, it will be another major market move higher.

Currencies and commodities corner. Dr. Copper is on a tear as the Chinese have announced early messages about some more infrastructural development. The WSJ, subscription only sorry, has this piece: China to Spend $156 Billion on Infrastructure Dr. Copper is last at 354 US cents per pound. The oil price is last at 95.76 Dollars per barrel. The gold price is slightly lower at 1694 Dollars per fine ounce, the platinum price is also a fraction lower at 1576 Dollars per fine ounce. The Rand is stronger, risk on in a big way. 8.21 to the US Dollar. In a way, this is dragging on the markets a little, the firmer currency. It is all about the non-farm payrolls number today. No doubt about that. Watch on your favourite business television station later, at two thirty pm. Nice.

Sasha Naryshkine and Byron Lotter

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