China, extraordinary savers

"The Chinese savings rate, 51 percent of GDP. And then I explained that the capital markets are relatively new, and the social security net is fragile at best. So if you are not saving like crazy, then you are likely to spend your retirement not having the means to find your way through. Your golden years are more likely to be dusty. And if you are a set of Grandparents in China and living in the rural areas then you are more than likely to have only one grandchild. One child, one grandchild. So do not expect those folks below you to look after you, it is not going to happen. That is one of the reasons for the savings rate being so incredibly high."

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To market, to market to buy a fat pig. We basically ended the day where we started, flat. OK, up a few points. The fixed income markets in the US were closed yesterday as a result of Veterans Day, or Armistice Day in Europe. The day that the first World War ended, the war that was supposed to end all the wars. Fat chance. Supposedly the peace treaty was signed at 11, but that is not right, I learnt yesterday that it was signed at around 5 in the morning. Always learn something new, otherwise what is the point, right!!! But today, if you date your calendar like the Americans it is 11.12.13. The 12th day of the 11th month of 2013. For ourselves down here you will have to wait four weeks to reach 11th of December of 2013. 11/12/13. Lovely! Across the seas in the US markets traded sideways for much of the session, the Dow Jones closing 21 points higher (0.14 percent nowadays!), whilst the S&P 500, the broader market measure added half of that, from a percentage gain point of view. Tech stocks were about flat!

That storm in the Philippines and the aftermath with the associated visuals breaks your heart, the human toll not known yet, the damage estimated to be 14 billion Dollars (around 3 percent of GDP) with only 2 billion Dollars of that insured. It is normally poor folks that are uninsured, because of course insurance takes a back seat when it comes matters of the stomach and day to day living. If you struggle to make ends meet, you are almost always uninsured.

Talking of such matters of making ends meet, Michael came across a figure that baffled him initially, the Chinese savings rate, 51 percent of GDP. And then I explained that the capital markets are relatively new, and the social security net is fragile at best. So if you are not saving like crazy, then you are likely to spend your retirement not having the means to find your way through. Your golden years are more likely to be dusty. And if you are a set of Grandparents in China and living in the rural areas then you are more than likely to have only one grandchild. One child, one grandchild. So do not expect those folks below you to look after you, it is not going to happen. That is one of the reasons for the savings rate being so incredibly high. And the results of the third plenum of the 18th Central Committee? I think more private sector reforms and the migrant worker (Hukou privileges) issues must and will be addressed. We wait, these meetings take place behind closed doors, no media, no commentary during the event.

China watching and interpretation, that has always been incredibly hard. Read up today about the marriage and dating circles in the big cities, how the men outnumber the woman and as such men with higher savings are more stable. In fact yesterday in China, the 11th of the 11th month is singles day, the anti Valentines Day if you will. Not only is it filled with lonely hearts, BUT it is the single biggest online shopping day. Check out the Bloomberg story: Alibaba Breaks Sales Record Amid China Singles-Day Discounts. There are many, many things that we will not understand about each other, but the internet is slowly demystifying our secrets and quirks.

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As promised, we head towards the Richemont six month numbers that were released on Friday. The company is the owner of 18 brands, some of them associated with Uber luxury, some a little more affordable, but all quality. You cannot lie to your core clientele with luxury, if it is not the very finest piece then your clients can tell the difference. After all clients who shop at luxury stores might have the money for these purchases, but these are big ticket items and as such more time and care will be taken before a purchase. This is natural.

The brands include Cartier, Van Cleef and Arpels, Piaget, Alfred Dunhill, Panerai, Baume & Mercier, Montblanc, Vacheron Constantin, Shanghai Tang and Roger Dubuis. All well known iconic watch, jewellery and pen manufacturers, more recently Richemont has bought Net-a-porter and clothing brand Peter Millar in the US. Quality is paramount to their existence as a business, we said that already. Recently there have been murmurs of the company selling off some brands, but they dispelled that thought process. Nothing is for sale, no brands will be spun off. Personally I would not mind seeing the shotguns (Purdey), luggage (Lancel) and the pens part (Montblanc) being sold, perhaps the online portal too, slimming it down. But on Net-a-porter you can get basically anything that you want, anything that deals with luxury. Your one stop shop. Design gowns, clothing, accessories, shoes, beauty products and, and, and... the list goes on. Perhaps it fits better. In fact the company made an announcement back in October the 10th - Net-A-Porter group not for sale. Three whole sentences squashed pages of speculation and hours of talk.

Here are the unaudited consolidated results for the six month period ended 30 September 2013. Sales (5.324 billion Euros) grew by 4 percent in Euros, 9 percent in constant currencies, operating profits were impacted by the same currency headwinds, down 1 percent to 1.370 billion Euros. Operating margins were 130 basis points lower to 25.7 percent, but notwithstanding that, absolutely fabulous margins. At the end of the period, Richemont have a net cash position of 3.855 billion Euros, an increase over the year of 810 million Euros. The company has a market cap of 51.33 billion Swiss Francs, which translates to 41.63 billion Euros. 9.2 percent of the market cap is cash!

Don't stress too much about the currency moving all over the show, the company engages in currency hedging (it must be hard work!), I have taken a screen grab from the release, I was struggling to do a copy and paste:

Wow. See that? I am not too sure what to make of the hedging strategy, but in a world where the currency fluctuations have been more severe than at any other time in recent history, I guess if you think back to George Soros as the man who broke the bank of England, perhaps that was much worse. Soros made one billion Pounds on Black Wednesday back in 1992, September 16th.

EPS increased 9 percent to 2.118 Euros, divide by ten for the GDR's (the local listed stock is one tenth of the Swiss listed entity) to get to 0.2118 Euro cents, convert to ZAR and you are at 2.93 ZAR for the half year.

The dividend is a major irritation. No, let me rephrase that, the Swiss government has a withholding tax of 35 percent, locally that amount is 15 percent, local shareholders can apply for a refund of the difference. I am not too sure why you should tax a dividend, it has been taxed already, but of course it is meant to close the gap between the corporate tax rate and the individual tax rates. In Switzerland however, taxes make up 29.3 percent of GDP, which is slightly more than here, at 26.9 percent. Switzerland however have a corporate tax rate of 18.01 percent, South Africa has a corporate tax rate of 28 percent.

The income tax rate in Switzerland is low, but there are lots of people, so they collect a lot. 13.2 percent at a Federal rate, whereas in South Africa it is 40 percent at the top end. The Swiss authorities have to close the gap somewhere, so their dividend tax is much higher than many other places. But as a GDR (Global depositary receipt) holder, you have to claim that money back. And that means going down to you local SARS office, filling in a form and waiting for the refund less the processing cost. In effect, it is twenty percent of the dividend of 10 Swiss Franc cents (conversion done for the GDR's to 1.13 ZAR), about 22,6 ZA cents on the last dividend that was paid on the 27th of September. Not the best yield, and then the Swiss government go and smash it further. As a shareholder no doubt you have seen the message in the post.

So what now for the business? In Zurich the stock is up nearly 29 percent year to date. But we live sleep and eat in a Rand environment, the stock is up a whopping 48 percent locally. The weakening Rand has certainly protected you a lot! The next question is, do you sell, or just stay put after such a fabulous run? At 20 times earnings is it wildly expensive? No. The growth rates will pick up. There are many more consumers of their products than at any other time in history. And they are getting richer. Provided the quality of the brands remains, people will pay up. We continue to add to new portfolios.

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Home again, home again, jiggety-jog. What a terrible one liner here yesterday. It is an action packed week on the economic front, and earnings continue to rush at us. We need time to check out those and we will take time, unfortunately to cram everything in makes for heavy reading. So tomorrow we can get to Vodacom and ABIL, explaining the rights issue again, the N shares are trading. We will advise. European inflation numbers across the board look low, lower than anticipated. British CPI was also lower than anticipated. Markets are lower here to start with, slow leaks from the Chinese wrap ups is starting to hit the wires.

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Sasha Naryshkine and Michael Treherne

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120 times is cheap!

"I managed to dredge some stuff up about why an analyst justified Cisco at 120 times earnings. Here it is: Firm's market cap climbing to $1 trillion. One of the analysts quoted in the article (George Kelly from Morgan Stanley Dean Witter) has some amazing justification of why Cisco at 120 times earnings is trading there, and why Intel (at 42 times earnings) and Microsoft (at 55 times earnings) are cheaper. Firstly: "A low P/E usually signals investors are uncomfortable"."

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To market, to market to buy a fat pig. Another day another record. Phew, that is getting a little monotonous, but I bet it sounds better than will Greece fall out of the Eurozone. Or, will the US default. Or, some other such disaster, double dipping, austerity and the list goes on and on and on. In the absence of the news of scrambling politicians, central banks and puzzled analysts/professionals all at the same time. Right now the debate around the affordable healthcare act rages on in the US, even the creators of SpongeBob have weighed in, Mr Krabs in an upcoming episode fires the Yellow square panted fellow to save a nickel because the economy is that bad.

SpongeBob says something along the lines that he won't live off the government and sets out to find a job. So this has sparked a debate. Wow. About social welfare and the workplace, because the lazy co-worker, Squidward gets to keep his job because he was there longer. The square panted fellow offers to work for free, he loves flipping crabby patties, but Mr. Krabs says no, that is against labour legislation. A sponge that is alive, that works (or used to) as a short order cook is now more than just for kids, or couch potatoes, setting off a debate about labour laws and welfare? Yip. That is happening right now. I wonder how my favourite character in that show, Patrick Star (a pink starfish), the square panted fellows best mate. Hey, I have children, of course I watch these dumb shows. This much anticipated episode airs on the 11th of November, I am quite keen to see the reaction if there is any.

Meanwhile the Dow Jones Industrial clocked a new record, closing at 15746 points. The broader market S&P 500 edged closer to the all time high, close but not back. The nerds of NASDAQ are exactly nowhere near their all time high. 10 March 2000, 5048 points, the intraday peak is even further away 5408.6 points. So another 1000 points and then some more and we should be there, back at highs last seen when Palm Pilots were cool. Predictive text was pretty cool too (forget colour screens) and Netscape was the alternative browser that had crowded the others out.

Google was small, Facebook was nowhere, the Zuck was still at school no doubt in 2000. Ditto Twitter. Twitter was not at school, but rather not yet in existence. Apple was tottering. Microsoft is down 20 percent from that time. Yes, down, because the market hysteria and lack of thinking afforded technology companies crazy valuations. Cisco is down a whopping 66 percent from that March 2000 high when it was the worlds most valuable company at 557 billion Dollars. Lack of solid thinking, stocks were just going to the moon. Or so people thought at the time. Pets.com and the list goes on of internet businesses, Wikipedia have some splendid entries and some examples.

CyberRebate: Promised customers a 100% rebate after purchasing products priced at nearly ten times the retail cost. Went bankrupt in 2002, leaving thousands of customers holding the bag. The bankruptcy was settled in 2005 and customers received about eight cents on the dollar from their original rebates.

GeoCities – Purchased by Yahoo! for $3.57 billion in January 1999. Yahoo! closed GeoCities on October 26, 2009

The Learning Company, bought by Mattel in 1999 for $3.5 billion, sold for $27.3 million in 2000

Lycos – Purchased by Spanish telecommunications provider Telefónica for $12.5 billion in 2000 to expand its Terra Networks online platform. It was sold in 2004 to Seoul, South Korea-based Daum Communications Corporation for $95.4 million in cash, less than 2% of Terra's initial multi-billion dollar investment.

inktomi – Valuation of $25 billion in March 2000

OK, so those are just a few examples, there are many, many more. In the great ramp up of the internet becoming more important in peoples lives, we all got ahead of ourselves. And normal valuation metrics were tossed out the window, Buffett was even ridiculed because he was missing out, having not bought any internet companies. Well, at least the Oracle of Omaha had the last laugh, even if he did not reveal it publicly.

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I managed to dredge some stuff up about why an analyst justified Cisco at 120 times earnings. Here it is: Firm's market cap climbing to $1 trillion. One of the analysts quoted in the article (George Kelly from Morgan Stanley Dean Witter) has some amazing justification of why Cisco at 120 times earnings is trading there, and why Intel (at 42 times earnings) and Microsoft (at 55 times earnings) are cheaper. Firstly: "A low P/E usually signals investors are uncomfortable". Before you say, what did Kelly know, you must remember that he was at the firm when they took Cisco public. He knew the company better than most, no slouch in the industry and not a fly by nighter.

Kelly also goes on to say, again justifying the high multiple: "One of the reasons investors value Cisco so highly right now is that, unlike Microsoft, Cisco doesn't have the uncertainty of a Justice Department settlement—it's a much cleaner situation. Second, Cisco has had a tremendous track record of continuous upside surprises. And Cisco is viewed as opening several new markets, the biggest of which is optical, which is expected to be an explosive market." I don't recall the specific settlements.

Another analyst, Paul Weinstein, from Credit Suisse believed that Cisco would get to 1 trillion Dollars before any other company, he is quoted in the above article as saying: "We humbly submit that over the next two to three years, Cisco could be the first trillion dollar market cap company" Again, Weinstein (from his bio here -> Paul Weinstein, General Partner) is and was no mug at the time, he was saying this stuff against the backdrop of strong earnings momentum.

You all know what happened after that. The story suggests that caution should have been the watchword, the market cap of Cisco was three times the annual revenue of the state of California. Just let that sink in for a bit. Where am I going with all of this? Well..... many are suggesting that we are in bubble territory with a small subset of stocks, in particular the social media stocks. Facebook for instance has a sales to market cap ratio of 24 times. Facebook trades on a forward multiple of 55 times, with expectations that the company will make less than a Dollar of earnings. At least they have earnings, right? And sales? Sales expectations for Facebook next year are for just over 11 billion Dollars. That is substantial. In 2015 sales are expected to grow by 50 percent, ditto earnings, but that would STILL mean that Facebook was trading at 35 times earnings.

Cisco saw sales climb from 8.4 billion in 1998, to 12.1 billion in 1999 and 18.9 billion Dollars by the middle of 2000, their year end. Last year revenue was 48.6 billion Dollars. The company's stock currently trades on a dividend yield of 2.9 percent and an earnings multiple of 12.5. At 2.6 times sales. And nobody views it as an opportunity of a lifetime now, but it was back then.

I am struggling with a conclusion here. All I know is that no two times in history are the same, I firmly believe that. Back then (1999/2000) the internet was going to change the world significantly and it did, we know that today. It was just not as quick as people anticipated, the change was slower, more modest. But we live in a world that is a LOT more advanced than 2000. Smartphones, tablets, the cloud, faster mobile and fixed line speeds. There are more people who could have access to the internet as a result of better and improving infrastructure.

In the year 2000 only 6 odd percent of folks globally had access to the inter webs (300 million people), according to Internet World Stats, by March of this year the number was 38.8 percent or 2.749 billion people. That is according to the ITU. Many more people could be poised to get internet access over the next decade, that would be critical for internet based (and by extension social media) businesses. So in terms of absolute customers, Intel, Cisco and Microsoft have many more now than in 2000. Major web browsers are only 20 years old. We are now in the app revolution. Cisco put out a document in May last year, which is really worth reading: Cisco's VNI Forecast Projects the Internet Will Be Four Times as Large in Four Years. I suspect the key parts in this document are the conclusion that I struggled with.

An increasing number of devices: The proliferation of tablets, mobile phones, and other smart devices as well as machine-to-machine (M2M) connections are driving up the demand for connectivity. By 2016, the forecast projects there will be nearly 18.9 billion network connections-almost 2.5 connections for each person on earth, - compared with 10.3 billion in 2011

More Internet users: By 2016, there are expected to be 3.4 billion Internet users ― about 45 percent of the world's projected population

Faster broadband speeds: The average fixed broadband speed is expected to increase nearly fourfold, from 9 megabits per second (Mbps) in 2011 to 34 Mbps in 2016.

More video: By 2016, 1.2 million video minutes―the equivalent of 833 days (or over two years) -would travel the Internet every second.

I guess those numbers speak for themselves and do certainly set ones mind at rest about the newer internet businesses. And that leads beautifully into the topic that will dominate today, which Michael covers.

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Michael's musings. Tweet, tweet, Twitter time. And the 7 most important letters.

Twitter has announced that they are going to sell 70 million shares today at $26 a share, making it the second biggest Internet IPO, only behind Facebook. Today's IPO will raise $2.1 billion and will give it a market cap of $14.4 billion (which I expect will be much higher by the end of the day), not bad for a company that still makes a loss. The original price offering range was $17-$20, which then grew to $23-$25 range, and due to the offering being greatly oversubscribed the investment bankers underwriting the IPO have decided that a price of $26 is the best price. The higher the listing price, the more money that Twitter will make, which is better for the company, so a higher price is a good thing. Twitter say that they are going to use most of the cash from the IPO to increase advertising and to grow their brand, which I think will be money well spent.

Twitter made a loss of $64.6 million in the last quarter ending in September, but having said that Twitter expects to grow their gross margins to 70% (compared to Facebook's 40%) in years to come, which should comfortable put them in profit territory. So why would you buy Twitter? It comes down to where to you think the world is moving? Twitters key to success is that 75% of their users are mobile and 70% of their revenue comes from mobile. Mobile is where the world is moving. The next place where I see value in the future is in data or more accurately, very large volumes of precise consumer information.

Twitter can provide that information through what people are tweeting and clicking on, 33% of people tweet while watching TV, providing valuable real time information to TV stations about who is watching and what they think about the show. Twitter also gets revenue from the ads that are placed in your Twitter feed, meaning that the more people who actively use Twitter the more money they should make. There are currently 232 million active users and that figure is currently growing at 6-7% a quarter (the number will get a nice boost from the IPO hype), which if maintained will double every 2.5 years. With there being over 7 billion people on the planet, they should comfortable be able to reach the 1 billion mark. Twitter is going to be one of the nails in printed media's coffin, because why would you want to get day old news, when you can get it as it happens from people who were there?

Moving onto the share price, and if you should put money into the stock. My personal opinion is that the share price will be higher at the close today as opposed to Facebook's last year. The first reason is that most of the shares being issued are new shares and not insiders trying to sell, which should lead to there be more people wanting to buy than sell. The next reason is that 75% of the shares in the IPO have gone to 30 investors, which we are lead to believe are 'long term' holders, but for me personally (I consider myself a long term investor), if the stock popped by 20-30% today, I would probably sell my stake and book it as some of the easiest gains I have made. If you have the stomach for a very bumpy ride, then Twitter is an option, they are a high growth, high margin, futuristic company who have yet to make a profit.

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Home again, home again, jiggety-jog. Markets are really, really mixed here in Jozi, we have the retail stocks that are down 3.3 percent whilst the gold stocks are up nearly one and a half percent. A tale of two different sectors, for the year however the retailers are off just less than 10 percent whilst the gold shares are down more than 40 percent. But the reason that the retailers are stinking up the joint is a very, very average Truworths trading update.

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Sasha Naryshkine and Michael Treherne

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Nestle's L'Oreal stake really worth it!

"Nestle got their stake in L'Oreal when Bettencourt was worried that the socialist French government would nationalise her business and as such swapped half of the families fortune for a Nestle stake. Wow. so there is the history of THAT. And why this is important to minority shareholders is that there is a big event coming next year, in order for the company to buy the Nestle stake, at last evenings price they would have to pay at least 22.26 billion Euros. A lot of money. So stay tuned for this very important event."

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To market, to market to buy a fat pig. Markets on Wall Street climbed off the worst of the day and managed to finish marginally higher. Locally the weakening Rand has been a bit of a problem for the inflationary outlook. So whilst the oil price has been trending lower and the petrol price locally is set to fall by 28 cents midnight tomorrow I think, the weaker currency means that perhaps this is short lived. Frack baby frack to paraphrase Sarah Palin. Palin could have been a single heartbeat away from the presidency. That could have happened. But I guess Bushisms and Palinisms went hand in hand, it could have been more of the same. Back to local, where we managed to add around one quarter of a percent on the local markets, a closing high for the year.

In Rand terms, the currency which we spend and invest each and every day, the market is up 21 and one quarter of a percent over the last 12 months. The Rand has weakened by nearly 14 percent to the USD over the last year, so in greenbacks we are not as rich as we could be. And let us face it, when there is Kleptocracy, the funds are squirrelled away in Dollars/Euros/Swiss Francs and not Indonesian Rupiah's, Philippine Pesos or Congolese Francs. Suharto, Marcos and Sese Seko are used as examples here. I wonder where all those stolen public funds are? Paul told me when I asked that the Libyans are desperately trying to get the money back that Gaddafi stole. That is another piece entirely, and the only upside to corruption locally is that it is all spent within the borders of South Africa, not externalised into a foreign national bank account. I think it is sickening to spend money that belongs to the people on unnecessary luxuries, but again, that is another argument for another day, stay clear of politics young man!!

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L'Oreal released their results last week. Interesting business, essentially in the control of the daughter of the founder, and because we live much longer nowadays than before, she basically was there with her dad at the beginning. Liliane Bettencourt, the only child of the founder of L'Oreal, Eugene Schueller, has just celebrated her 91st birthday. According to her Wikipedia entry she started working for her dad when she was 15. The business only went public in 1963 after her father had died (1957) and had passed on the family fortune. So how long did she work for? Well, effectively until the day before Valentines day last year, that is when she officially resigned as a director of the business. 74 years long at the business founded as Aureale (a hair dye product) and then in 1919 he (Eugene Schueller) registered Société Française de Teintures Inoffensives pour Cheveux (Safe Hair Dye Company of France). Phew, L'Oreal does roll off the tongue a little easier than that longer name.

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Like most companies, there is a fair amount of controversy surrounding the founder, Eugene Schueller. He provided funding for a fascist French movement that then collaborated with the Nazis during World War Two in Vichy France. Anti communist he was too, that sounds more like an entrepreneur. Ironically Schueller's granddaughter (Bettencourt's only daughter, Françoise Bettencourt Meyers) married Jean-Pierre Meyers, who's grandfather, a rabbi by the name of Robert Meyers was murdered at Auschwitz by the Nazis. Astonishing history.

Now if you think the family you live in is pulling in different directions, the granddaughter, Françoise has sued François-Marie Banier in 2008 (whilst her mom was still a board member) for taking money from here mum and wanted to declare her mum mentally unstable. Wow. She is currently under the care of her family. The son in law, Jean-Pierre Meyers is the vice chairman and if you wondered who was next in line (and naturally from the family's point of view the best person for the job), the founders great grandson, Jean-Victor Meyers is also on the board!!! But, fear not, they are not operational, rather non executive members of the board to keep an eye on the family wealth. Three of them? Well, yes. Nestle have the same number of board members, more on that in a second.

Why does the family matter at all? Because Liliane Bettencourt (the family) are the major shareholder here, as per this graphic from their annual report last year.

And Nestle? Well, for now the agreement between the two exists whereby they vote and agree together. And as such control the company. So how did Nestle get that big stake? And how did L'Oreal get a 9 odd percent stake in Sanofi-Aventis? A very valuable stake at that, around 9 billion Euros, around 12 and a half billion Dollars. Nestle and Bettencourt signed an agreement nearly 40 years ago in which they gave each other the option to buy their respective stakes as at a date, and that date is 29 April 2014. Nestle cannot increase their stake in L'Oreal for six months after Bettencourt dies, I am guessing that when the document was signed all those years ago that everyone thought they would not be around to see this. But from 29 April 2014, Nestle is able to sell this stake to whomever they want.

And if the signals from Nestle are anything to go by, they are sellers of their stake and not buyers of the Bettencourt stake. And L'Oreal the company have signalled that they would use internal reserves to buy this back, including the Sanofi-Aventis sale. The Sanofi stake according to the CEO, Jean-Paul Agon is "financial" and not strategic. So therefore it is for sale. Plus the company has around 1.6 billion Euros of cash. But they would definitely have to borrow a whole lot in order to do this. Perhaps Nestle could unbundle the stake to their shareholders? Likely? No, they would prefer to use the funds I am guessing for other projects.

Nestle got their stake in L'Oreal when Bettencourt was worried that the socialist French government would nationalise her business and as such swapped half of the families fortune for a Nestle stake. Wow. so there is the history of THAT. And why this is important to minority shareholders is that there is a big event coming next year, in order for the company to buy the Nestle stake, at last evenings price they would have to pay at least 22.26 billion Euros. A lot of money. So stay tuned for this very important event.

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What the company has on their side are some powerful brands, Lancôme, Vichy, Garnier and The Body Shop augment their L'Oreal brand beautifully. I just had to throw that part in. The CEO reckons that they could double their potential customer base in the next half a decade. Cosmetics are soft luxuries, not as expensive as jewellery but just as necessary for emerging middle income people to announce that they have arrived. The cosmetics business is a very fast growing in emerging markets, and according to this paper, GLOBAL BEAUTY INDUSTRY TRENDS IN THE 21st CENTURY: In 2011 all those countries generated 81% of the global cosmetics sales growth, according to Euromonitor International's data, more than half of which (54%) was attributed to BRIC. Further emerging markets, among others Mexico, Argentina, Indonesia, Thailand and Turkey, have shown incremental growth of about 8 billion dollars

Inside of the beauty products global sales have grown strongly in the skincare category. A little table snapshot from the same paper shows you how the trends have changed pretty quickly over the last 15 years:

It makes sense that rapid industrialisation leads to wealthier middle income families that have disposable income in order to fund their lifestyle choices, beauty products included. Skincare will continue to grow faster than the other segments, meshing together science and smart marketing. In China for instance, according to research paper above: it is believed that a pale and youthful-looking skin determines the social and economic position of a person. Richer people look younger because they spend more time out of the sun, and less time doing physical labour!!!

Results, well they were a little disappointing, well at least the market was disappointed. The US specifically from a sales point of view fell short of expectations, inventories were wound down by some of their distributors as well as a slowdown in the market. Japan was strong, South Korea was NOT, China, India and South East Asia continued to make major progress, the area as a whole posted an 8 percent increase in like-for-like sales. Latin America, Eastern Europe and Africa/Middle East all grew at stronger rates than that. Western Europe, which is still their core market, 5.68 billion Euros of the 16.099 billion Euros in cosmetics sales (for the 9 months to end September), grew at an encouraging 2 percent for the year. Not great, but still going forward. We continue to accumulate what is a fast growing segment of the consumer market in developing markets, and continues to be a robust and fairly recession proof business in what are recovering developed markets. Buy.

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The Steven Cohen (SAC Capital Advisors) settlement with the SEC leaves a bad taste in my mouth, many s's there! I could not care a hoot if the guy was brilliant at what he did, nor if he is worth 9 billion Dollars (7.2 after the settlement) and now this is a massive blow for his reputation. He likes winning, we all do, even Charlie Sheen when he is full of Tiger blood. SAC, the firm which Steven Cohen has presided over for twenty years, has pleaded guilty to securities fraud and will pay a whopping 1.8 billion Dollar fine. But they will stop managing money. So Steven Cohen has effectively ended his career here, that is what I think, he can still trade as himself I think. Confidential information was obtained by employees of SAC in order to trade profitably for the firm, enriching themselves and Cohen along the way. History (for now) will show that Cohen's outlandish returns (after some outlandish fees - 3 percent of assets and as much as 50 percent of the upside) were tainted with insider trades and knowledge that the market did not have.

According to a Bloomberg article (Cohen's Dream of Soros Status Dies as SAC Pleads Guilty), 87 people have been charged in the network and 75 convicted. But not Cohen. It feels weird, the guy has little or no ego to speak of, but he wanted to crush everyone. He does not wear the fancies and keeps to himself. So it is about winning, you just need to be inside of the borders of the rules.

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Home again, home again, jiggety-jog. Markets are bring driven here locally by a strong PMI number out of China, following some decent ones from Europe yesterday. Blackberry is semi kaput, but you knew that already, i think.

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Sasha Naryshkine

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Turns out Facebook and mobile are a like

"Q3 revenue when measured against the corresponding quarter last year increased 60 percent to 2.02 billion Dollars, topping that number for the very first time. Monthly active users registered 1.19 billion. Roughly 56.6 US cents per user per month. That sounds like next to nothing, if you think about it, the company generates not even 1 Dollar per user per month. OK, firstly, who are these users?"

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To market, to market to buy a fat pig. Markets in New York slid from the record open, and oh yes, there was the FOMC announcement. Which I guess was a non event in some regards, doing the same. So Ben Bernanke will retire in a few months time as the chair of the Fed (if all things go according to plan) and then Janet Yellen will proceed as before. Easy. A non event as Professor Eugene Fama suggested, thinking that the impact of QE has been completely overstated. And even going so far to suggest that it has not had the desired impact.

The interaction that we pointed out yesterday when Eugene Fama basically took Rick Santelli apart does two things. Firstly, Fama is currently the recipient of the Nobel economics prize. So the assumption is that he must know what is going on, right? And by him telling Rick in no uncertain terms that QE has little impact. And so everyone droning on and on and on and on about easy money and liquidity sloshing around and so on, what will happen when folks realise that the recovery has been less induced by (by completely supported of course) the Federal Reserve, and more by companies having done better. When the Fed is finished their tapering of their bond buying program in two years or so from now, what will then happen? I can assure you that your guess is better than mine. Too much emphasis is placed on what the Fed is going to do and where interest rates are going to be in a couple of years, when energy should be focused on what businesses are creating new services and products that investors can get a piece of right now.

I read a book titled "It Was a Very Good Year: Extraordinary Moments in Stock Market History". In one of the years profiled by the author, I cannot remember the exact year but it was sometime around the late 1950's, the market participants were so anxious about what William McChesney Martin and the Fed were going to do next. Martin of course coined the phrase remove the punchbowl. If you are going to time your investments (which should be retirement in nature) around what the Fed are or are not going to do, then you are barking up the wrong lamppost. I mean tree. What are the Fed going to say or do in 45 days time? Who knows, who cares! Do you remember what Alan Greenspan said in 1995 and what the market did from there for those three months after? Probably not.

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Facebook reported numbers last evening. 49 percent of revenue came from mobile, let us call it half. And I remember when everyone would get completely anxious that yes, Facebook would struggle to monetise mobile. Here is a headline from Fortune's website from July last year, which is hardly a long time ago:

Now having seen these results and with the benefit of hindsight, Facebook knew more than Fortune. In four quarters their number of daily mobile users have gone from 329 to 507 million users, I admit that I am one of those. But back to mobile. That is why there is Zuck and that is why there is Fortune magazine, with all due respect. I am not suggesting that an enduring brand, the publication first hit the news stands in 1930. So this is over 80 years old, whilst Facebook is zoning in on their first decade, having started in a dorm room. The parent company for Fortune is Time Warner inc., which has a market capitalisation of 63 billion Dollars. Facebook? 119 billion Dollars, nearly double.

Headlines I expect to see on Facebook, Fortune struggles to monetise their online offering. This is a case of new versus old, newer media forms where anyone can be an author with an ill informed dangerous opinions versus someone who has had their story overseen by an editor. That aside, and it is dangerous of course to believe everything that you read whether edited or not, you know the point I am trying to make. New media enables anyone to put their opinion across in a less formalised manner, sometimes with dire consequences, you know the old think before you speak.

OK, but to the results specifically. Here they are, you are able to peruse them, thanks to the wonder of the internet: Third Quarter 2013 Results. Q3 revenue when measured against the corresponding quarter last year increased 60 percent to 2.02 billion Dollars, topping that number for the very first time. Monthly active users registered 1.19 billion. Roughly 56.6 US cents per user per month. That sounds like next to nothing, if you think about it, the company generates not even 1 Dollar per user per month. OK, firstly, who are these users? Check, from the presentation (Quarterly Earnings Slides) that came with the results:

The growth in their numbers outside of the US and Europe has been pretty astonishing. In 24 months, the rest of the world Facebook users have doubled and some more. I am guessing that is people like ourselves. The number of Asian users has also nearly doubled in 24 months. These are daily active users of course, more interesting than the folks who are browsing by monthly, having a check. But what remains very important to me, anyhow, is that those users have not yet been monetised as aggressively as the one in the US. Check out this slide:

Revenue growth in the US has been huge, but their base was so much higher. I think that is what I am trying to get across. Think about Facebook from an advertisers point of view. I am not the best active user, but the company has a very good idea of who's posts I like. But some of my friends (yes, I have some) have long lists of their movie likes, their book likes, their TV series likes, their music likes, the businesses that they like and the list goes on. Facebook knows more about your activities than almost all other advertisers globally. If you change your status to engaged from in a relationship, that triggers a response for wedding photographers to advertise, you become a different audience.

What amazes me is that the Zuck thinks (at 29 years old) that his work is a long, long way away from being done, and that is reflected in the release: "(W)e're prepared for the next phase of our company, as we work to bring the next five billion people online and into the knowledge economy." Be clear here, there is NO Facebook in North Korea.

After hours the price was wild, really wild, up a lot, and then off a lot from being up a lot. To basically around 2 percent up as we speak. Why? Because on the conference call the CFO said that teens were not that active users anymore, younger teens at that. Wow. Personally, the way I see it, the folks paying the bills and holding the credit cards are not the young teens. And more users globally will continue to adopt and advertise through these channels. I have not met a single person who has advertised on Facebook yet. Paul has however and he said the experience (for that specific corporation) was absolutely fabulous. Real time money exchange and real time money out with an amazing backend. So there you have it then. The platform is young. The users are still not that sophisticated. But the advertisers are adopting at a rapid rate. This is not for the faint hearted, trades on a crazy multiple and no doubt will take time to make serious money. It will.

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Starbucks released their finest brew in results ever last evening, post the market. This is the 42nd year of operation, the business was founded in 1971. The very first store opened in a spot in the Pike Place Market in the city of Seattle. I suppose that is a place that you desperately need coffee, or so you would think. In reality the city receives less rainfall than New York, or Boston or Washington DC. Fact. BUT, 150 days of the year the city gets some form of precipitation. Seattle is cloudy for 201 days a year, partly cloudy for 93 days a year. 70 sunny days a year. So now you know how the idea of Starbucks came about, a wonderful warm environment in which to drink your favourite brew and escape the cool weather outside. We will explore these results tomorrow when we have more time, like a good cup of coffee with friends, you do not want to rush anything!

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Home again, home again, jiggety-jog. This is an ancient quote from Lao Tzu, who lived thousands of years ago. Yes, around 6 centuries BC. "Those who have knowledge, don't predict. Those who predict, don't have knowledge." Now I don't really do quotes, because I believe individuals must get their own preppy pieces together and live by those principles. Michael, who sits over the desk from me, is always pulling his hair out (he is still young and has lots of it) as he just can't get how and why ordinary folks cannot separate the core philosophy of trading and investing. They are not the same thing. When you understand that simple concept, you will find your inner investing Zen!! For now, just stay the course with the quality, do not overthink movements in share prices, worry more about what the companies do. Oh yes, and it is Halloween. Which is the day before All Saints Day, tomorrow. Hallowmas

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Sasha Naryshkine and Michael Treherne

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Apple seeds growth

"The worrywarts will point out the obvious, even though there have been growth in iPhone sales, the other products have been slipping, or in the case of the iPods, not even worth mentioning! But also, the fact that the average selling price of the iPhone fell 6.6 percent must be worrying at some level. This current quarter hardly caught any of the sales of the newer products, only ten days of sales of the iPhone 5C and 5S. And in the current quarter that we are in, the first quarter of their 2014 financial year, the company anticipates that they will generate revenue of between 55 and 58 billion Dollars. To put that into perspective, the quarter past, the one that we are talking about now, saw sales of 37.5 billion Dollars. The expectations are for a whopping 20 billion more in festive season sales! Wow."

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To market, to market to buy a fat pig. I have been away for a few days, on the South Coast, with the kids on half term. Apologies for the down time, we will make it up to you as best as we can. Often the time away from the screens (you always have your emails nowadays) is a time for reflection. And I am pretty sure that if I asked you on the 1st of January if you would take an average year (15 percent for the market is average), I suspect that we would have taken it with both hands. This year has not been without its dramas, the most recent being the US government shutdown and the debt ceiling debate. We came into the year with the automatic cuts, those automatic cuts became reality, as the US budget attempts to slash 1.1 trillion Dollars in spend all the way through to 2021. And all the while the Tea Party types have demanded more and more. Discretionary spend as a percentage of US GDP is set to fall to 5.5 percent (of a projected much larger GDP) by 2023, from as much as 8.3 percent last year. So with all these concessions, in a sense, you would think that the relationships between left and right of centre would be a little more amicable.

What history has taught us however is that the masses become uneasy when there is an economic downturn, looking for someone to blame, and turning to people who seemingly have radical answers to their economic dilemmas. Look at the Golden Dawn in Greece (they have just had their funding pulled) who increased their number of votes from 4500 to 440,000 in 16 years, from 1996 to 2012, most of that recently. It is far easier to blame immigrants than the system, right? It is far easier to blame foreign workers than take a little time for self reflection, right? If there was more to do, i.e. more work to go around, there would be more economic prosperity and less time to think about who is to blame.

As decent a year as we have had over year, the Americans have had an exceptional one, valuations at the beginning of the year were way too cheap, stock prices have seen multiple expansion. The same, or modestly better earnings but investors willing to pay higher multiples on the basis that the worst of the storms have passed. The S&P 500 is up 23 and a half percent year to date. The NASDAQ is up a whopping 30 and a half percent year to date, but it has definitely not been a tide that has raised all of the tech boats. The Apple share price has hardly budged this year, but yet it makes up the largest part of the tech sector. Google and Amazon have rallied (both around 43 percent year to date), Microsoft and Intel have had really good years in the face of lower PC sales. Surprising, but true.

Facebook (at a little over one and one third of a percent of the NASDAQ) is up 88 percent year to date. And reports numbers post the bell tomorrow. Not bad for a company that a year ago had "investors" worried that they could not monetise mobile. Pfff... investors my foot. The entire issued share capital of Facebook turns over every 290 trading days, and that would include the shareholders who do nothing. Zuck owns 426 million Facebook shares, with an option to acquire another 60 million shares. The way that I read the annual report, those are exercisable at 6 cents. Yes, 6 cents. Let us just say that it would be dumb for the Zuck not to. Not great for other shareholders, but good for him, through the A and B shares arrangement Zuckerberg maintains voting control. More on this company in a couple of days time when their results are released. It will be interesting to see their monthly active users trends.

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Hey Apple. Remember the annoying orange? The little animated fruit that laughed at the demise of the other fruit around it? This is not it. This is a write-up on the fourth quarter of the Apple results, which were released after the closing bell last evening. Here goes, you can read along as we try and explain: iPhone Sales Grow 26% to Establish New September Quarter Record, with the key product sales numbers being as per the release:

The Company sold 33.8 million iPhones, a record for the September quarter, compared to 26.9 million in the year-ago quarter. Apple also sold 14.1 million iPads during the quarter, compared to 14 million in the year-ago quarter. The Company sold 4.6 million Macs, compared to 4.9 million in the year-ago quarter.

And since then, Apple announced that they would return cash to shareholders, an astonishing 36 billion Dollars. An amount that is larger than the market capitalisation of Anglo American. Or even Sasol. Marginally less than the whole of MTN. The original announcement of what the company would do with their cash pile came in March (the 19th, that is my birthday, diarise please) of last year, 2012. So it has been a little over a year and a half since the grand announcement.

If the buyback program were completed today, as far as I read, that would retire roughly 8 percent of the shares in issue at the current share price. And to think that if you add the cash and cash equivalents, short term marketable securities and long term marketable securities, you get to a number of nearly 147 billion US dollars. After that 36 billion buyback and reintroduction of the dividend. Remembering that the dividend is currently 3.05 US dollars per quarter, the current yield being 2.3 percent per annum, at the closing price last evening. Tim Cook suggested that the current program would be revisited during the first quarter of next year. Which if you needed reminding, today is the 303rd day of the calendar year. There are only 63 days remaining inside of this calendar year!!! Today is also exactly a year on from the landing of Hurricane Sandy on the East Coast of the US, which caused 70 billion Dollars worth of damage, and the loss of 286 lives.

The worrywarts will point out the obvious, even though there have been growth in iPhone sales, the other products have been slipping, or in the case of the iPods, not even worth mentioning! But also, the fact that the average selling price of the iPhone fell 6.6 percent must be worrying at some level. This current quarter hardly caught any of the sales of the newer products, only ten days of sales of the iPhone 5C and 5S. And in the current quarter that we are in, the first quarter of their 2014 financial year, the company anticipates that they will generate revenue of between 55 and 58 billion Dollars. To put that into perspective, the quarter past, the one that we are talking about now, saw sales of 37.5 billion Dollars. The expectations are for a whopping 20 billion more in festive season sales! Wow.

Sales of iPhones only? Well, not entirely, this is what Tim Cook, the CEO anticipates: We're excited to go into the holidays with our new iPhone 5c and iPhone 5s, iOS 7, the new iPad mini with Retina Display and the incredibly thin and light iPad Air, new MacBook Pros, the radical new Mac Pro, OS X Mavericks and the next generation iWork and iLife apps for OS X and iOS. iPad sales have been flat, and the newer fresher models could possibly wow folks to upgrade at Christmas time.

Margins have levelled out at 37 percent, but are comfortably off the highs. Again, the worrywarts will point out that Apple will continue to have to discount their phones, or search for more revenue by selling a cheaper phone, obviously something much cheaper than currently. But that is not going to be the plan I suspect. Apple are in the business of selling products that people really want. Well crafted and at the top end of the range. I am pretty sure that BMW and Daimler battle with this too. Ironically Apple generates more in annual sales than Daimler. Most of the companies globally that are ahead of Apple on the annual revenue list are the oil and gas businesses as well as utilities, energy is still the most important business by global sales!

Where to next though for Apple? I suspect that the company will continue to be hugely profitable, generating huge excesses of cash that will continue to be returned to shareholders either through share buybacks and increasing dividend payments. The company continues to invest nearly 1 billion Dollars a quarter in research and development, looking for better ways to maximise their current product offering and future product offering. Earnings for the full year ahead are expected to register a high teens growth, 18-19 percent. Expect EPS around 48 Dollars a share. We continue to accumulate the stock, but are always mindful that the next disruptive consumer device is just around the corner!

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Michael's musings. When is it too expensive? (Part 1)

With markets locally and over the ocean reaching record highs, doomsday sayers are getting a larger audience from people who are anxious. At what point do you as investor start to say, the market is too high and it is a bubble that is just waiting to pop?

What is the reason for a high P/E ratio? There are a number of reasons, the first is due to stable earnings and dividend payments from a company. If a company is a big player in a stable sector that is expected to continue to be viable for the foreseeable future, investors are willing to pay more for that companies earnings because the earnings are 'certain'.

The next reason for a high P/E ratio is due to high growth being expected in the earnings. Using my Google example from my piece a couple of weeks ago; Google shortly after listing in 2004 had a P/E of 93, since then up until the end of 2012, their earnings have grown by 1468% and the share price has grown by 245% (based on current prices the share price is up 420%).

Taking Netflix as an example, Goldman Sachs has forecast their revenue to rise by 50% from the end of 2012 to the end of 2014, and forecast earnings to go from 0.2 to 5.41 over the same period (very impressive earnings growth!). Given those assumptions, Goldman Sachs is willing to pay $360 for the stock, but as results come in they are either going to be higher or lower than their forecast resulting in a marked change in the value of the share.

In this case, the share price will change for two reasons, the first is an earnings rerating (change in P/E ratio) and the second is due to that multiple being applied to a different earnings figure. If we assume that earnings grew faster than expected, the share price will increase because investors will give the share a higher P/E ratio and then because the earnings base is higher; the share gets a double bump up.

Given the mix of certainty and expected growth, certain sectors in the market go thought cycles of favour and disfavour. As a sector comes into favour its mix of certainty and growth has improved, resulting in an earnings rerating, so investors are willing to pay a higher earnings multiple for a stock. Large returns are normally made over a short period of time when a stock get an earnings rerating.

Part 2 will cover how P/E ratios relate to the broader market, and if we think that things are getting "over heated"

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Home again, home again, jiggety-jog. Markets are flat. There is terrible news. The Europeans have clicked over to daylight savings, which means we get an hour less trade in the morning. And an hour less in the afternoon when the US change over to their daylight savings program. This is worse than contemplating what it is that you must wear for Halloween. Sigh, why do we involve ourselves in a tradition that is spreading globally. The US National Retail Federation suggest that Halloween spending by US consumers is expected to be 6.9 billion Dollars this year, costumes (including for furry friends) is expected to be 2.6 billion on its own. Oh, how much is 6.9 billion Dollars? The combined economic output of both Malawi and Somalia. more or less. Don't beat up on Malawi.

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Sasha Naryshkine and Michael Treherne

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Apple speed, light weight

"The new iPad Air is going to weigh one pound, which is 453 grams to you and I, be 20 percent thinner than the iPad 2 and it has the same chip as the recently launched iPhone 5S. Faster, lighter, better battery time. And have a ten inch screen, that is 25.4 centimetres to you and I! And much, much better graphics than ever before. What is also interesting to note, by Apple's calculations, is that the iPad is used 4 times more than any other tablet."

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To market, to market to buy a fat pig. OK, the very late and delayed jobs report was a bit of a downer. The headline number, the number of jobs created for the month of September was 148 thousand, the unemployment rate was lower at 7.2 percent. The participation rate was flat, possibly indicating that it had bottomed out. And perhaps the anxiety around the baby boomers coming out of the workforce. Over one-third of those unemployed have been so for more than half a year. If you read these numbers here in South Africa you would be forgiven for having a warm glow come over you, but in America they demand more. And expect more. So that is why when the government healthcare portal doesn't work, they hake a song and a dance and a noise about it. If you demand excellence, strangely you end up with that. If you accept mediocrity, you get worse than that, really. At the end of the day it is about accountability.

The theory was that a worse jobs number would continue to delay the end of the Fed's taper, which I guess is good news for stocks in the very short term. I am not too sure why it is helpful, but I guess that an easy monetary bias will be maintained. More of the same with Janet Yellen, she is certainly very short, but I am sure packs the greatest of economic punches. I think that she will surprise everyone, positively of course. After all was said and done, the S&P 500 closed at another record high. Always be asking, is it expensive?

Many people warn of the lost quarter of a century from 1929 to 1954 as the time it took for the Dow Jones to reach the same level prior to the most famous stock market wipeout of October 1929 and the subsequent resulting great depression as a great example of what can happen. True, it can. Back in 1929 some financial institutions were trading at more than 4 times book. Valuations were crazy, there was mega leverage and the SEC did not even exist yet. The Fed had few powers and were new. 10 thousand banks failed during that time and deposits were wiped out, as much as 140 billion Dollars. That is equal to 1,854 trillion Dollars in todays money. Ask yourself, how was there not civil unrest of epic proportions? There were of course, and many a shanty town and uprising were quashed by police, but having presented that number, you would have thought it would have been more. Hence, Bernanke the student of the era was not prepared to have a repeat. So, the lesser of the two evils has been government intervention and broad based central bank stimulus.

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It is a company that serves 69 million customers daily in over 34 thousand restaurants in 118 countries (obviously around the world). The company provides jobs for 1.8 million people globally, third only in a commercial sense to WalMart and China Railway Engineering corp. The Chinese Army and the US Defense dept employ more people than those commercial ventures. It is a company that opens 28 new restaurants a week around the world. You guessed it, McDonald's, who reported numbers on Monday that I guess failed to impress Mr. Market. Year to date sales are only two percent higher, net income is up 3 percent, whilst EPS is up 5 percent. Earnings per share for the quarter were 6 percent better (7 excluding the currency translation) at 1.52 Dollars. One cent negative currency translation for the quarter, three cents so far this year!

Europe and America were OK, from a sales perspective, if not at all inspiring, with the major disappointment being China, Japan and Australia. Why? Well, the release suggests an ongoing challenging environment. The only main new menu innovation was the mighty wings launch in Atlanta, you guessed it, chicken wings! The lack of acceleration in sales has promoted a few broker price target downgrades, and all around negative sentiment.

A little history and background to cheer you up a little. Everyone knows who Ray Kroc was, but perhaps Fred Turner, or plain old "Fred" who died at the beginning of the year, is considered by many internally as the person who set the standards for quality. Fred was a stickler for size and quantities and many of the systems he put in place (the 30 something employee at McDonald's) around sizes and consistency still remain today. Ray Kroc's wife (Joan, 26 years his junior), when she died in 2003 left 1.6 billion Dollars to the Salvation Army. Wow.

I found something amazing. Number of shares in issue in 1996 or McDonalds was 1,389 million. Ten years later it was 1,204 million (as per the 2006 annual report, page 20). In that time, earnings per share increased from 1.08 Dollars to 2.30, whilst the dividend rose a whopping 85 cents a year, to 1 buck from 15 cents in 1996. Systemwide stores grew from below 21 thousand in 1996 to 31.6 thousand in 2006. Fast forward to the 2012 annual report, page 9 (things were super sized back then) and the number of shares in issue is just a whicker over a billion, 1,003 million in issue.

In 16 years, the number of shares in issue have been reduced by a whopping 386 million. Earnings per share last year clocked 5.36 Dollars and the dividend rose to 2.87 Dollars. Over the last three years however, 107.8 million shares, roughly 36 million a year. There are now under 1 billion shares in issue. At this rate in a few (that is three) years time the number of shares in issue over a two decade period would have reduced by nearly one third. That is amazing, truly amazing. Another amazing fact about McDonald's is that the dividend has risen each and every year since they starting paying one back in 1976. The current quarterly payout is 81 cents (raised 5 percent in September) to bring the annual payout to 3.24 percent. At the current share price (95.28) that is a yield of 3.4 percent on the button. With a rough 5 percent increase in earnings, McDonald's is hardly cheap at 16.9 times forward, especially if they are only growing earnings at single digits.

I feel inclined suggest that one leaves the investment alone, there is a fabulous yield underpin and the brand is amazing. The store presence is still growing at an astonishing rate, 1 store rolled out roughly every six hours, somewhere around the world. The plan is to be in each and every neighbourhood. For the time being the sales momentum seems more like soggy fries than the delicious (must eat hot) fries that they normally sell. There is no way that this company is transformative in any way whatsoever, you could argue that the menu changes slowly to adapt to the ever aware society, in terms of health priorities. They are doing that, offering apples instead of fries with their happy meals, watch this short Bloomberg video: McTaco? McOmelette? Meet McDonald's Top Chef Dan Coudreaut. Interesting, isn't it?

Accumulate on weakness, that is the perfect time to be adding to a solid company, when most people are not really paying that much attention, and have lost the faith.

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Another company with a fabulous last decade, a spotty prior decade, but the original maker of the home computer, . The new iPad Air is going to weigh one pound, which is 453 grams to you and I, be 20 percent thinner than the iPad 2 and it has the same chip as the recently launched iPhone 5S. Faster, lighter, better battery time. And have a ten inch screen, that is 25.4 centimetres to you and I! And much, much better graphics than ever before. What is also interesting to note, by Apple's calculations, is that the iPad is used 4 times more than any other tablet. Tim Cook in the presentation last evening our time (which I "watched" here -> Apple's Fall Product Event) said that the market was skeptical that the iPad could compete against the netbook (remember the small laptops), what has subsequently happened is that they, Apple, have sold 170 million iPads. Let the consumer decide, right?

A new iPad mini was announced too, a better processor, better graphics and of course a better battery life. To be brutally honest, I think that for most home users an iPad is all they need, mail, the internet and apps for doing different and out there things of their particular interest. I have seen with my own eyes people make the shift seamlessly and enjoy the product experience a whole lot more. I know that the product is a beautiful one, people who have them tell others how wonderful it it, to the point where it becomes a little nauseating, hence the term Apple fanboy. Fangirl sounds a little derogatory, or not? These beautiful products are available in major territories (where rich people live and the demand is high) in early to mid November. Here, I guess hopefully by Christmas.

At the beginning of the product launch event, and the company has a tendency to do this, they unveiled the newer Mac's. The kind that is allergic to cheese and pickles. Rather the seemingly overpriced laptops. But I will let you in on a secret, they are probably worth every single cent. The updates are few and far between, the move is easier than you think, but more importantly the performance (better) is absolutely astonishing. I am amazed by the quality each and every day of my Mac. It is truly a beautiful machine that deserves more airtime and the users prior were all right. The first few weeks are hard, you make mistakes, but I tell you, it is worth it. So on that note, I cannot wait for the new operating system, OS X Mavericks is what it is called. I will let you know how it goes!

The stock price? Tell me that you cared more about the product release than the share price and I might have to look at you funny. Well, Apple closed (including the after hours move) around flat. I guess that the market got it right then, moving north in recent days ahead of the product launch, expect another one in around two months time.

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Sharing is caring. Here it is, there are around two weeks left for public comments around shale gas legislation in this country, here is a great article about it from the US: The shale-gas boom won't do much for climate change. But it will make us richer. Good. And create jobs. Much needed jobs.

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Home again, home again, jiggety-jog. Stocks are lower here! We ran out of time to cover the superb production numbers from BHP Billiton yesterday, we will do that tomorrow. The stock is zoning in on their all time high, somewhere around 323 ZAR if memory serves me correct.

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Sasha Naryshkine

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Taxing issues

"There are 13.7 million registered tax payers, of those 5.8 million are liable to submit a tax return and of those 5.8 million only 5.1 million submitted a tax return. SARS doesn't say what happened to the 700 000 people who didn't submit."

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To market, to market to buy a fat pig. That is eight days in a row for the JSE to have been higher. Wow. Thanks mostly to US markets, which saw the S&P 500 register the most modest of gains last evening (does 0.16 points count?). But I guess that means that is another closing high. Should we be very concerned about the new highs? High after high, it sounds like a dangerous Quentin Tarantino masterpiece. The truth is that the underlying index constituents, the companies themselves, ultimately set the levels of quoted levels. Telling someone x or y index is at a specific level is as useful as telling people the gold spot price on the radio. How are those things useful for ordinary people?

But, if you tell someone that a specific company launched product x or y, well, now you have their attention. And what that is going to do to sales and profits, now you are talking. Identifying businesses that are going to change the way we do simple things and staying the course is of course more important than identifying the companies that can't evolve because their product is becoming less attractive, but it is critical to note that all these businesses make up the index. Always be thinking!

OK, so what has really changed other than the market mood? Are earnings set to race ahead? Sort of, but those predictions can always dashed, if we run into some headwinds from here all the way through to next year. So whilst we can be confident that there is less likely a scenario of the Eurozone splitting up, a marginal periphery country (like Greece) leaving, a hard landing in China or runaway inflation as a result of central bank stimulus, those scenarios have not yet reach the apocalyptic proportions we were led to believe by the finger waggers (krokodils?). In truth nothing has been done on Capitol Hill, other than delaying matters again, but the one thing that you can be sure of is that politicians are less likely to bumble and fumble this time, it is an election year next year.

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General Electric reported their third quarter earnings on Friday, which was in market terms so long ago that people have forgotten already. Well, not really, but you get where I am going. This is possibly one of the most recognisable companies globally that is not an out and out consumer stock, and is associated with Thomas Edison and his inventions. It is indeed a company that traces its roots back to the US industrial revolution, post the civil war there of course, where many corporations had to catch up to their European counterparts, for obvious reasons. There were of course three extra founders, Charles Coffin, Elihu Thomson and Edwin Houston. I had also never heard that name, Elihu. It is a biblical name apparently, I was not paying enough attention in RE classes at school, apologies Reverend de Gruchy. What a nice guy he is! Three of them were engineers and inventors, the other, Coffin was a shoe salesman and businessman. Hey, the intellectuals need the business types to make sure that they run on an even keel.

A quick run through the numbers here, for the quarter for GE. Revenues of 35.7 billion Dollars. Oh, why do all of that when you can give a graphical breakdown of the divisions! Their revenues and profits, so that you can see which ones are more important than the others.

GE Capital as you can see is an enormously profitable business. The parent company, as per the earnings call transcript, in which CEO Jeff Immelt had his prepared comment will receive around 6.5 billion Dollars in dividends from GE Capital. Wow. But this business is not exactly (at least the retail end of the market) what GE envisaged, I remember CEO Jeff Immelt commenting that they wanted the business to be only around a 30 percent contributor, they were not quite sure that the financial crisis was going to be the reason that GE Capital was going to shrink. Of course he meant that tongue in cheek.

Earnings, on a per share basis clocked 36 cents, a penny ahead of estimates. GE continues to pay 19 cents a quarter in dividends, less than 10 years ago, when it was 20 cents a quarter, peaking in 2008 at 31 cents a share, per quarter. That subsequently plunged to 10 cents a quarter during the dark days of late 2008 and early 2009, but as you can see, it has been ticking back up slowly but surely. During the course of this financial year, 18 billion Dollars will be returned to client through buybacks and dividend payments (around 2 billion a quarter). So the metrics currently are that GE trades on a 18 and a half multiple with a 2.9 percent dividend yield. Still cheaper than some of their global peers, United Technology is the obvious comparison, Philips and Toshiba perhaps less so.

Why own GE? Just because they are a diversified and are an enduring and hardy business, the longest surviving Dow Jones Industrial constituent, that should tell you everything you need to know, right? Perhaps a value unlock of the retail portion of their GE Money business, that would give the share price a lift. But perhaps more importantly, the quality of the operating divisions, that is why you want to own GE. General Electric has some high quality service businesses operating in the sweet spot of healthcare, aviation (more about selling the equipment to the marginal businesses that operate airlines), transportation (locomotives), energy management (smart platforms), appliances and of course GE Capital. GE Capital has the leasing and lending business to commercial clients, the consumer segment (136 billion Dollars worth of assets) and the real estate business. There are quality businesses operating in the power and energy generation space, healthcare, transportation, these are all growing areas of the developed and developing world economies.

GE Capital, expect some big announcements there, on the conference call, Jeff Immelt had this to say with regards to a question prompted by Scott Davis, a Barclays Capital analyst, referencing a WSJ article about GE spinning off their credit card business: You know, Scott, these things always take a little bit of time, but we are still planning staged exits of the value-maximizing platforms of GE Capital. We have got a big meeting set November 15 with Keith and Jeff; I think there will be more clarity at that time on the Capital side. And we continue -- and the rest of the Company continue to look at ways to make the Company more streamlined and more effective. But you are going to see those in good time. I think we just want to be thorough in our planning, and you will get a lot more details soon. So stand by for announcements in the coming weeks!

We continue to accumulate the stock at current levels.

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I am a subscriber to many aggregators of web content, there are several that I find very interesting. I think that the likes of Josh Brown, Joe Weisenthal at the BusinessInsider, heck, even Time business does a great job. All of these people present their own ideas and thoughts, as well as adding various stories seen all over the inter-webs. The inter-webs is a big and intimidating place. We used to have a section called shorts, more specifically Bart's shorts and digest this. But that was too cryptic, you remember that Bart Simpson used to say, eat my shorts? That is where it came from. An interesting factoid, you remember the nutty professor from Back to the Future movies, "Doc"? Well, the character, played by Christopher Lloyd was voiced by Dan Castellaneta, the voice of Homer Simpson. One a clever eccentric scientist and the other a simpleton nuclear power plant safety inspector from Springfield. Where is this bit going? I would like to share some interesting bits (no more than five) of what I read that I had to share. That is where we are going. So, here goes, to paraphrase a big friendly purple dinosaur Sharing is caring.

Apple is set to unveil new iPads today, according to familiar people, I mean people familiar with the company, or something like that: Apple to Refresh IPads Amid Challenges for Tablet Share. And believe it or not, the Microsoft Surface 2 goes on sale today. And Nokia unveiled a tablet. Guess which one is capturing the headlines.......

This is always worth a rehash in light of dumb comments that I hear day in and day out from some folks, who should know better. Central bank stimulus being referred to as free or easy money. What? I asked Michael if he had seen any of this free stuff, and he said no. Me neither I said. So once again, a rehash: Where Does "Cash" Come From?

Michael sent me this simple piece, saying that Starbucks is still a buy on this basis: 11 Reasons Why You Should Drink Coffee Every Day. I am still mindful that coffee is a drug, the only (currently) daytime drug that people do not frown upon. Smoke outside. Drink a glass of wine at lunchtime? Phew, that is stretching it a little far, this is not (southern) Europe. But coffee, that is still OK. For now.

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Michael's musings! Paying our dues

SARS has released the stats for the tax year ending Feb 2012. It can be found here http://www.sars.gov.za/AllDocs/Documents/Tax%20Stats/TStats%202013%20Highlights%20WEB.pdf

There are 13.7 million registered tax payers, of those 5.8 million are liable to submit a tax return and of those 5.8 million only 5.1 million submitted a tax return. SARS doesn't say what happened to the 700 000 people who didn't submit.

The income categories for the 5.1 million are; 0 - 60 000 (620 000); 60 001 – 120 000 (1.1 million); 120 001 – 500 000 (2.8 million); 500 001+ (427 000). Of these assessed tax payers they had a total income of R1 trillion and a tax liability of R206 billion, meaning that the average taxpaying South African pays 20% of their income to the taxman. According to Stats SA there are 13.6 million employed people in the economy, which translates to; of the employed population only 33% of people make enough to pay tax, or the inverse 67% of employed people earn less than R 60 000 a year.

When it comes to companies' income tax, there are 266 companies with a taxable income more than R200 million, put into percentage terms, 0.2% of companies' with a positive taxable income, contribute 58.2% of the tax collected. I was a bit shocked at this figure, but after thinking about it, the figure makes sense, I just don't like it. In order to have a stronger middle class and less unemployed people, there has to be a greater contribution from smaller companies'. A positive though in the companies' numbers was that about 100 000 of the 600 000 companies that were assessed, were Small Business Corporations, so hopefully those 15% grow and graduate to being normal tax payers.

From these stats it is clear that South Africa is a society of two worlds. If you are a skilled worker, it means that you are earning better than around 70% of the labour force, and if you are unskilled you are earning very little. Sasha and I were having a discussion yesterday about how do you get out of the low income earning category if all your income goes to transport and food, and we couldn't come up with a solution. If you are in the middle class, you have the opportunity to invest your money in order to increase your net wealth (it just takes discipline), but many South African are not able to do that.

On a brighter note, 70% of assessed people got a refund, so hopefully that was you.

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Home again, home again, jiggety-jog. It is the 22nd of October today. Which means that it is non farm payrolls day, right? Well, that second part (and first part once off) is all true. The September non farm payrolls number will be released today, very late, but you know why, this was as a result of the government shutdown. Which is now over. That undoubtably will be the main event of the day.

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Sasha Naryshkine and Michael Treherne

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