Money with a dash of Funny

Thursday, 23 July 2015

Educate your Board

"As is the case with many mid cap listed businesses, there are very few shareholders that Curro will have to talk to. There is a total of 83 shareholders that hold 75.4 percent of the shares, we have identified three shareholders who control 45 percent of the business, together with the founder, just over 50 percent. Remembering that Curro need not get it all, they are offering smaller shareholders cash."

To market to market to buy a fat pig. Wow. I thought that the BHP Billiton production report was decent enough, sadly the commodity rout continued across our market, as a collective the stocks sold off nearly four percent. Perhaps the "all emerging markets with commodities exposure" sell button was hit. And from there we were down, and heavily, the Jozi all share index fell 999 points. That is a loss of 1.75 percent on the day. What to do? Nothing.

Locally there was an inflation read that suggested that perhaps a rate hike today is the wrong thing to do, in particular as food inflation is moderating, what do I know however? I am just a stocks guy, the powers that be must set interest rates and normal people must deal with the repercussions of higher borrowing costs relative to their income. There always will be an obsession with interest rates and that is for both savers and indebted folks at exactly the same time, a move one way or the other. There are relatively few mortgages in South Africa, relative to the population, there is however a lot of short term debt that is being serviced at high interest rates.

On the other side of the world, stocks clawed their way off the worst levels, whilst Apple lagged the market badly (down 4 and one quarter percent by the close), Boeing, which is a big Dow component had a sterling day, up over a percent relative to blue chips down one-third of a percent. We continue to see earnings top expectations, there has been a view that expectations have been set too low. I for one do not think that equity markets are too hot, we could be accused of being too optimistic all of the time. Wall Street and financials services businesses have been shrinking their respective workforces for more than half a decade since the financial crisis and it looks like that is going to continue.

Pick yourself as an analyst/strategist in an environment where your pals are being handed pink slips, the bonus pools are shrinking and regulation is making it harder to get ahead, your reality is different from those people in Silicon Valley who are changing the technological landscape forever with newer inventions, better products, pushing technological boundaries. Someone who tells you that things are terrible may find it very hard to separate their lived reality relative to the rest of the country, or pockets of brilliance and change.

In this regard I am lucky. I have a job that I really like and each and every day is completely different from the one prior and tomorrow will be different from today. I have never seen the market close completely flat, the days differ from one another. It does not however mean that you do not try and do the same things over and over again, and make sure that you have the same high standards for yourself. One of the main reasons that we churn this note out day in and day out is so that we ourselves can stay relevant and up to date. We need to be sure that we act as shock absorbers, making sure that we understand and get across the point that you own companies and not share prices. Yet ironically, share prices need to go up in order for the businesses to attract more capital from their shareholders and have more favourable borrowing costs. There is of course a big correlation between the two. Stay calm, invest in quality and always stay the course.

Company corner

It's getting hot in there, so take off all the prose. In this case it was the other way around, the chaps from Curro stuck out a stinging SENS in response to the Advtech board rejecting their offer. This is unusual that any PSG controlled company goes hostile, it seems now that Curro will speak to the shareholders of the company. After all, they are the owners of the company and had expressed a desire for a deal of some sort to happen, bearing in mind that it is at a significant premium. We had seen earlier in the day a letter to parents of a school that is owned by Advtech, suggesting that any bid would be disruptive for the teachers and pupils. Not a single mention of the shareholders, the people that actually parted with their funds in order to build these institutions.

First things first, who are the shareholders of Advtech? As per their website, under the segment Major shareholders, they are:

Coronation, Kagiso, Old Mutual (who have done deals with Curro before, that is not unusual for Old Mutual though) and BD Buckham. Who is BD Buckham? He used to be a non exec, Brian Buckham, who last transacted in shares in November 2006. He sold a few, correction, he sold nearly 900 thousand shares. He is actually the founder of the business, from way back in 1978. At 76 years old, I wonder if he is up for the fight, or maybe he can cash in at this level. His stake at the closing price is worth 287.7 million Rand. Motty Sacks used to be a non exec there too.

As is the case with many mid cap listed businesses, there are very few shareholders that Curro will have to talk to. There is a total of 83 shareholders that hold 75.4 percent of the shares, we have identified three shareholders who control 45 percent of the business, together with the founder, just over 50 percent. Remembering that Curro need not get it all, they are offering smaller shareholders cash.

Before we move away from shareholders, there is one board member, temporary CEO, Frank Thompson who has much to gain here. I think that is worth noting. As at his retirement date last year, in October, he owned 12.367 million shares. At 12.2 Rand, where the price closed last evening, he is worth 150 million Rand on paper. Not bad for a 30 year plus career in corporate South Africa. He ran Advtech from the beginning of August 2002 to October 24 last year. Leslie Massdorp (who had 2 million options at 8.19 Rand, as per the annual report) came to replace Thompson and left immediately on the 23rd of March. I am guessing that if anyone knows the business well and better than anybody else, it must be Frank. As part of the board and person who owns 2.9 percent of the business, he has said no thanks to Curro. I certainly think that is worth noting.

Yes, so here goes, as per the SENS announcement from Curro, they had written letters of support for a deal price of 13 Rand from "major Advtech shareholders". This was at a 42 percent premium to the 30 day "volume weighted average price of Advtech at 28 April 2015, the date prior to the submission of Curro's initial expression of interest to Advtech."

Curro had made a proposed offer at 13 Rand: "The proposed offer by Curro is based on a share swap with Curro valued at R33.65 per share, resulting in a swap ratio of approximately 2.59 Advtech shares for every 1 Curro share. The proposed offer also includes a 50% cash underpin for Advtech shareholders who do not wish to accept Curro shares (a minority shareholder is likely to be able to receive 100% cash, as many of the major shareholders have indicated preference for Curro shares). The aforesaid offer was only subject to a limited due diligence on specific matters;"

Possibly the best point that Curro made in their SENS announcement is a point that Byron made on PowerFM last evening (what you mean you never heard him?) and it is simple. When Advtech announced that they had bought Maravest, they were happy that issuing shares of their own at 8.02 Rand a share and that was a fair price. The Advtech board believed this to be a fair reflection of the value of the business, and said as much. So why would 13 Rand a share not reflect (it is after all a 63 percent premium to that) a really magnificent price, more than fair? That is why I think Curro are more than peeved, you can't suggest it does not reflect the real value of the business, when you said something much lower was fair. Even if the market might have thought that Advtech overpaid for their recent transactions, perhaps Curro are talking to those shareholders, they would have made some quick bucks out of all of this, not so?

I suspect that this is not over by a long stretch, it is pleasing to see private education making so much headway in South Africa, filling a vital gap in the economy where parents see the benefits of a wonderful education for their children. Far better than they had or their parents could afford, education is something that everyone should be passionate about. It is of course a very emotive issue globally.

Linkfest, lap it up

This puts the global GDP into perspective, I am glad to see that South Africa made it onto the map - This one map explains the entire worldwide economy

The wonders of modern medicine - Attention celiac sufferers! Scientists are working on a pill that will let you eat bread and pasta. Would you take a pill so that you can eat gluten or would you still rather avoid it?

Will a market with lower trading costs and longer trading hours be a good thing or a bad thing? The academic answer would be yes from a practical point of view, probably not - The Cost of Free

Home again, home again, jiggety-jog. There was a Rolling Stones article on the worst first names for good bands, Pearl Jam their first name was the Mookie Blaylock. Huh? Radiohead called themselves "On a Friday" first. That could work. Queen's first name was "Smile". Freddie Mercury and the Smiles? Nah. Def Leppard was Atomic Mass. Maroon 5 was Kara's Flowers. No, no, no, Adam. The Beach Boys were The Pendletons. What is that? Green Day was Sweet Children. They are not that sweet now, are they? Pink Floyd were called Screaming Abdabs. Try and say that quickly. Red Hot Chilli Peppers were, wait for it "Tony Flow and the Miraculously Majestic Masters of Mayhem". They actually shortened their name. What is in a name however? It turns out a lot if you are trying to get a gig I guess.

Stocks have bounced a little here this morning, look out for the interest rate decision later. I think that there is too much focus on that (from an equities view), really. It is what it is, as we mentioned however it does impact on more peoples lives than just the equities market, hence all the air time that it tends to get. A hike? Would it be right or wrong, it is irrelevant what I think, it is one of those many things that are beyond our control.

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

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Wednesday, 22 July 2015

It's raining iPhones

"What is pretty amazing is that revenues increased by 33 percent when compared to the corresponding Q3 from the prior financial year. That is enormous. What is bigger is that earnings were 45 percent more. All from the biggest company in the world, not a start up. This is also the fastest growth reported in three years, that makes this even more astonishing."

To market to market to buy a fat pig. Over the seas and far away it was about earnings, and specifically poor ones from IBM which recorded their 13th successive quarterly revenue decline, across all geographies at that. Seeing as this is a big stock holding of the Sage of Omaha, Warren Buffett, there is a little more attention when the stock price is performing poorly against the backdrop of poor company numbers. IBM is certainly not a dinosaur, there are however concerns that they are missing too many tricks and struggling, like many of their competitors in the internet age.

An ex employee of the company puts it less politely: IBM is so screwed. I think that he may have personal issues, his points are however well made. In the same way that the Dow Jones does not have Google, it has IBM as a constituent, the stock was down nearly 6 percent by the close, dragging the blue chip index down a percent by the close. The nerds of NASDAQ closed one fifth of a percent down, over the last five days tech stocks have trumped blue chips by nearly three percent, all thanks to new tech, Google versus old tech, IBM. Expect that to stay like that even today as Apple is a constituent of both indices.

Anxiety seems to have abated about an almost certain rate hike in September now, you know our views on that, it changes very little for the outlook of stocks. In fact rates going up signals strength in the underlying economy, when we turn our eyes locally here, expectations are for a rate hike tomorrow. And I do not believe that it is warranted. Are we reacting to an inevitable rate hike in the US and worry what it may do to currency markets? Not too sure, with the recent move lower in oil prices and the Rand sort of stabilising, it seems that inflationary pressures have abated. And if all the conversations that I have with people out there about the economy, then it is certainly not demand that is going to drive inflation. It looks fairly quiet out there.

At the end of the session the All Share index (Jozi, Jozi) ended down 0.16 percent, just below 53 thousand points. Financials were the biggest losers, there was a big bounce in gold and platinum shares, still, they need to add fifty odd percent from here just to break even for the year. Sigh. How times have changed. And at the moment, wage negotiations are not going well in the gold mining sector, we are looking at signs of a strike, perhaps even a long and protracted one. Paul mentioned that unfortunately in cycles of business this is hardly favourable for anyone and normally represents how dire things really are when labour is at this point. He is right, gold mining in South Africa is about to get a whole lot harder.

Company Corner

Last week we had the second quarter results from Wells Fargo, who you will probably know as one of Buffett's "Big Four stocks". Berkshire Hathaway owns nearly 10% of the company which currently has a market cap of $299 billion. Here is where it ranked in size at the end of last year:

Here are the numbers that count: EPS up 2% YoY; Revenue is up 1% to $21.3 billion for the quarter; loans up 1% to $870 billion; dividend is up 7% and they repurchased 36.3 million shares. Net interest margin dropped to 2.97% from 3.15% a year earlier. Net Interest margin is the main number to look at when it comes to banks. It is the difference between the interest that they have to pay out to their depositors and the interest that they receive on lending out money. So the bigger the Net Interest margin, the more profitable the company. Given the low interest rate environment, the Net Interest Margin has been pushed lower as their longer term interest received on loans has been substituted by lower interest rates.

What impact does a FED increase of interest rates have on Wells Fargo? My first reaction would be a slightly more negative impact, due to customers having to pay higher interest, they would demand less of the product (loans). It is defiantly a blurry cause and effect in the case of many banks but after doing much reading on the topic I think Wells Fargo will benefit for interest rate hikes. Here's why:

1) Interest rates going up means that the economy is stronger meaning that there are less bad debts but also that corporate America becomes a bigger customer.

2) Currently 26% of deposits with Wells Fargo is non-interest generating, which means that when rates go up they can take those deposits and lend them out at a higher rate and still not have to pay for them. This will have a nice boost on their Net Interest margin.

Banks are considered a good proxy for the economy in general because the better things are going in the economy the more people spend and the more people borrow. This is a company that we would buy given that the long term outlook for the US is bright and that interest rates are going to start rising soon. The added bonus is that the major shareholder is Buffett who likes a more 'boring' approach to banking and an earnings stream. The result is less 'blackbox' earnings and less exposure to fancy, complicated products that can make short term profits but have a tendency for blowing up. They are not going to shoot the lights out but should continue to grow and distribute more profits to shareholders each year.

Mediclinic rights issue

Ok, listen up shareholders, Mediclinic announced their rights issue yesterday. This is of course in relation to their purchase of a 29.9 percent stake in Spire Healthcare from Remgro, who had the immediate resources to do the deal first. Mediclinic are going to be raising 10 billion Rands. Here goes, per 100 shares that you hold, you are going to get 12.80145 rights at 90 Rand a share. Just a reminder, the share price is currently at 106 odd Rand, so it makes sense to follow your rights. So around 11 percent of the value of your shares currently, that is what you have to factor in for the rights. Remgro are underwriting the rights issue.

Here are the dates, it looks a little tight. The stock goes ex rights after the close of business on the 31st of July, which is next week Tuesday. The rights issue closes 21 August, the new shares start trading on that Monday, the 24th of August, in around four and a half weeks time. Like I said, we do not have that much time to work with here. We will be in touch with shareholders, we are recommending that all shareholders follow their rights.

Hey Apple

The biggest company in the world by market capitalisation (and cash position) reported numbers last evening after the market closed. I am talking about Apple Inc. A company that makes fine products, their most well know being the iPhone, in the current cycle the 6 (and 6 plus) has been a real amazing product very well received by customers all over the globe. At first take revenues of 49.6 billion Dollars for the third quarter are a beat (and a record), the company reported profits of 10.7 billion, also a record for the third quarter. Earnings of 1.86 Dollars a share. Gross margins improved to 39.7 percent, also better than the corresponding quarter.

What is pretty amazing is that revenues increased by 33 percent when compared to the corresponding Q3 from the prior financial year. That is enormous. What is bigger is that earnings were 45 percent more. All from the biggest company in the world, not a start up. This is also the fastest growth reported in three years, that makes this even more astonishing. iPhone sales are three times the growth rate of the rest of the smartphone market, growing in all their markets, emerging and advanced. And what is pretty astonishing, in terms of surveys done by a crowd called ChangeWave, 86 percent of iPhone owners plan to get another one. Whilst you may say why isn't it 100 percent, for other smartphones the same survey crowd found other brands have a 50 percent repurchase intent.

China drove smartphone sales, comparable quarterly unit sales up 87 percent on revenue growth of 112 percent, now at 13 billion Dollars it represents 26.2 percent of total sales. Yet other smartphones grew only 5 percent in the same time frame in China. Pretty astonishing and perhaps pent up demand for the product. Mac is also making inroads in a falling PC environment, growth of 9 percent may not sound amazing, against the backdrop of the rest of the market contracting 12 percent it is astonishing. All in all, the company sold 4.8 million Macs. In the services division, the company set another quarterly record, 5 billion Dollars in revenues. So roughly ten percent of revenues come from this division. Inside of services, the App Store had its best quarter ever, revenue growth of 24 percent. App store revenue in China more than doubled. Wow.

Cash has popped above 200 billion Dollars for the first time, with cash and cash equivalents at quarter end 15.319 billion Dollars, short-term marketable securities 19.384 billion Dollars and 168.145 billion Dollars worth of long term marketable securities. Add those up and you get to nearly 203 billion Dollars. Just of cash resources. When measured against their likely opening share price and by extension market capitalisation of 708 billion Dollars, you get around 28.6 percent. Of just cash. 89 percent of all of this is offshore.

The company could buy almost anything they want, yet their largest ever transaction has been to buy Beats by Dre (I have a pair, they are incredible, amazing), 3 billion Dollars in total. That is the biggest deal ever, which is around 0.42 percent of their market cap currently. Of course more back then, you get the point I am trying to make, which is that they rely on internal resources to make desirable products. Talking of cash resources, the 52 cent dividend is payable 13 August, the stock goes ex div on the 10th. That is quick, when you have the resources I guess anything is possible. Apple pays currently around 12 billion Dollars a year of dividends. Wow. That is more than all the market caps of the JSE bar for the top 17 shares.

The Watch? How is that going? Without giving numbers specifically, estimates that I have read suggest that the company sold 1.9 million units. Tim Cook on the conference call chatted about various medical uses already, from chart to dosage use (and reaction of patients) to monitoring of cancer patients receiving care at London King's College Hospital. Cook also spoke of being a good way for doctors to monitor hypertension patients daily, minute by minute. Beyond the obvious medical monitoring comes fitness applications. There is a renew in the coming months for the operating systems, the watch so far has received a 97 percent customer satisfaction rate. The other three percent of people have sausage fingers.

Apple music has been launched in over 100 countries, as a family I have signed us up, it works beautifully I have found. Is it the death of radio as we know it, at least music radio with everyone with an iPhone and an internet connection (the two go hand in hand) able to listen to exactly the same music at the same time. Michael had a friend who was excited about that, I'm getting the same music as they are in New York, London and so on.

Why did the stock take a pounding after hours? One of the reasons is that whilst revenues topped estimates, iPhone sales, their flagship unit, were slightly lighter than anticipated coming in at 47.5 million units. Another reason is that guidance was lighter than the market had anticipated, or had pencilled into their models. Revenue for the fourth quarter is expected to be between 49 to 51 billion Dollars (4th quarter last year was 42.1 billion), gross margins are expected to be 38.5 to 39.5 percent. That does not sound too different to the quarter just past, the growth rate is still tremendous.

So you want more? On the conference call Tim Cook answered a question that I think is relevant here, only 27 percent of people have upgraded from the last cycle, meaning that potentially 73 percent of all iPhone owners own a 5 or lower model. Not everyone gets a new phone, it gets handed down, bought second hand and so own, the renew cycle is nowhere near full. And already people are talking about a new phone. The current iPhone 6 is pretty amazing engineering. They are seeing the largest ever Android switcher rate (read maybe Samsung?), the company still has the highest loyalty rate.

The International Data Corporation (IDC) suggests a smartphone market growing from 1.4 billion units last year to 1.9 billion in 2019, there are still many people out there without the product. In China LTE penetration is only 12 percent. Consumption is happening in China, on the conference call Tim Cook said that McKinsey is projecting that middle class China is going to grow from 14 percent in 2012 to 54 percent in 2022. Plenty of opportunities and room to grow in that part of the world, it will in time be their single biggest territory by quite some margin.

Plus, there are a whole multitude of new products coming, apparently the company is working on a motor vehicle project codenamed Titan. Yes, really. Recently chief of global quality at Fiat, Doug Betts joined Apple in Operations. The Watch I think has just scratched the surface, there are many uses for it. The Mac continues to make slow headway, whilst tablet sales are falling, the company is starting to sell strongly into the corporate market.

The stock is mooted to open at around 122 Dollar, down nearly 8 percent from the open yesterday morning. Not good. Don't stress however, the fundamentals are still really good. They are still set to grow, notwithstanding their big size, at around 13-15 percent in earnings over the next couple of years. Ex cash the stock trades at a discount to the rest of the market, less than 10 times earnings and with a more than two percent yield. Whilst too much of size and scale becomes a problem in time, I think we are nowhere near that yet. We continue to recommend Apple at current levels and see plenty of upside, relative to the rest of the market. Buy.

Linkfest, lap it up

Driverless cars will be part of our future at some point, the question is when and how much automation do the cars have? - Researchers just opened a fake city in Michigan that's the size of 24 football fields to test driverless cars. Testing different scenarios has to be an element to ensure that they are safe and to have the data to show consumers that they are safe.

Given the current theme of commodity prices and gold, here is a piece from one of our favourite bloggers - A History of Gold Returns

Home again, home again, jiggety-jog. Markets have started lower here today, pain across the resources stocks again sadly. BHP Billiton issued a good production report, sadly the selling prices are a whole lot weaker and that is hardly going to change any time soon, I think. Greece votes today again, to rush through everything to get some more money. More earnings today, they are coming thick and fast.

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

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Tuesday, 21 July 2015

Sishen Slippin'

"The biggest news is that they have suspended their interim dividend, which is terrible news for people who owned them for their dividend yield and for Anglo who used Kumba as a cash cow. The group's cash break even has dropped from $63/tonne to $45/tonne, the current iron ore price is around $50/tonne."

To market to market to buy a fat pig. What?!? Surely not, I had a double take at the gold index level after market, down nine and a half percent on the day. Oh dear. It is all happening rather quickly here for the gold price, unravelling in a hurry. What is gold useful for? Since humans first learnt to smelt lead and tin (softer metals) and then later copper (by extension bronze) around 7000 years ago, we have been obsessed with jewellery. It looks great, it shines beautifully and makes people feel special. Of course the uses go far beyond jewellery, for these metals above.

We take it for granted the complicated extraction processes that deals with the gold bearing rocks of the 3200 million year old formations beneath the surface of Jozi. Or let us just say that used to, whilst we are still a pretty sizeable gold producer (South Africa), about the same size as powerhouse Peru, 150 metric tons a year is the current run rate. China produces three times that, and have held the top spot for a stunning 8 years in a row! Australia at 270 metric tons possibly have little chance in the short term of catching the Chinese, one does not necessarily associate China with gold production, right? Russia are in third spot at 245 metric tons, the US with 211 metric tons (according to this article -> 10 Top Gold-producing Countries) are ahead of Canada in fifth place with 160 metric tons.

Below ourselves and Peru is the well known country of Uzbekistan (come on, point it out on an unmarked map of the world!), with a little over 100 metric tons. So it is going to take a serious fall from grace from the local producers to lose the 5/6 spot currently. In 1983 we produced roughly two-thirds of all gold. Now it is around 6 percent. It is twofold, the decline, the emergence of other producers in a huge way, there is still a lot of murky data about Chinese gold mining companies and deposits. Whilst China accounts for around 13.8 million ounces of production globally, the biggest single mine produces less than 600 thousand ounces per annum, the Zijinshan Gold & Copper Mine. 2100 employees mine at relatively shallow depths in this open pit mine. The gold mining industry in China is very fragmented and perhaps this is good for them, I am not too sure. It does probably signal that deposits are not that rich, I have very little knowledge in this regard.

Talking gold holdings, the US have 8133 tonnes of gold reserves. Germany is in second place at 3384 tonnes. South Africa is in 29th place, our reserves are 125.2 tonnes. I am talking about the ability of certain governments to acquire the gold from the producers there, to use as reserves (for historic reasons) and not the gold in the ground. For that measure we come second, to Australia. Noooooo, not again! This graph is from Statista, here is the link: World mine reserves of gold as of 2014, by country (in metric tons).

Interestingly, digging through the sources I came to this page: Global Gold Mine and Deposit Rankings 2013. This page had a US mine, Pebble Deposit, over 300km southwest of the capital of Alaska, Anchorage as the one with the largest reserves, grades are terrible however, the environment is not a fun one to work in. According to that deposit ranking, South Deep, owned by GoldFields is in fourth place, second by production to Grasberg in Indonesia. Grasberg is owned by Freeport-McMoRan and if I am not mistaken is near the end of its life as a mine. With regards to great grades, apparently Tau Tona has the best grades. There is lots of data to suggest to me that I am wrong on the grades, or at least this publication is wrong.

Anyhows, our only interest here at Vestact is not the listed businesses, which we have no investments in, not the gold price, which we have no investments in, rather the country that we reside in, the companies that produce precious (and bulk) commodities. If we continue to see hard falls in commodity prices we will definitely see mine closures, whether or not there is the political will, that is another question entirely. You can have amazing ore bodies, with lower commodity prices and higher costs (moving higher still), they become unprofitable to mine. In the case of the gold miners, being smaller by global standards means inevitably that mines will have to close. That is all part of the cycle, whether or not the powers that be will accept this remains to be seen. We continue to avoid all single commodity stocks. Metal prices seem to have stabilised and as such we should perhaps see some buying here today.

Yet, even with the dire moves in the gold prices, the index yesterday reflected what you know already, South African equity markets are no longer dominated like they were thirty odd years ago by gold miners. The market locally gained half a percent as industrials led the charge. Times have changed, that is good for all of us that there is choice and diversity. This morning there is a yet another reminder of how single commodity stocks can get thrashed, more on Kumba Iron Ore below. No interim dividend, what does this mean for Anglo American, the parent company? We will see today, I cannot imagine good things however, I suspect a little blood letting.

Kumba released their Interim Results For The Six Months Ended 30 June 2015 this morning. It does not make for pretty reading. The biggest news is that they have suspended their interim dividend, which is terrible news for people who owned them for their dividend yield and for Anglo who used Kumba as a cash cow. The group's cash break even has dropped from $63/tonne to $45/tonne, the current iron ore price is around $50/tonne.

Further pain is being felt due to Sishen moving into more unprofitable seams of ore, where their waste to ore ratio is increasing. Waste mined increased by 24% and production decreased by 5%. The share is down 4.5% this morning and I don't see it recovering in the near term due to supply increasing faster than demand - Iron Ore Supply to Overwhelm Weak China Demand, Goldman Says. This stock highlights how quickly things can change and that not all stocks rise all the time.

Over the seas and far away stocks were looking better until half an hour to go in the session, still ending positive on the session, ever so slightly though. The S&P 500 ended up only 0.08 percent, nothing really to write home about. PayPal listed, unbundling from eBay, I can see quite a few people really liking them at the moment. The eBay price adjusted accordingly, down from 66 Dollars to 28.5 currently. PayPal has a market cap of more than Netflix and trades on a price to revenue of 25 times, it trades on a multiple of 46 times. Remember that there was an Elon Musk involvement here from way back, Peter Thiel and the rest of the board ousted Musk whilst he was in the air on the way to the Sydney Olympics. Nice guys, well done. We forget that at the heart of many businesses, mostly new ones, there is an entrepreneurial streak and individuals pulling strings in all directions. If there is a difference of opinion then that can have a negative impact on the outcome. For older and established businesses, it depends on the culture and brand.

Linkfest, lap it up

Have a look at what rent costs in different parts of the world - This Is What $1,500 A Month In Rent Would Get You In Cities All Around The World. I was surprised to see how expensive China was.

The world is quickly moving away from Coal powers stations, given that they are dirty and away from Nuclear given the huge fall out if something goes wrong! - Half the world already gets more power from renewables than from nuclear. South Africa has huge potential on the renewable energy front.

Starbucks is a brand that is associated with giving back and here is another way they are building on that brand - Starbucks to opening stores in Ferguson, low-income neighbourhoods. The stores will need to be profitable but will probably only just be profitable. They are probably playing the long game, where by investing in the community, the community thrives and that results in Starbucks getting bigger profits. For that to happen they will need many other companies to take the same view and be patient.

Home again, home again, jiggety-jog. This is my sideswipe at the team from Durban. They had to go further south and past the wild coast to take on a lone Aussie surfer at Jeffreys Bay. Sharks take on surfer in backyard, still can't score. Stephen Saad is chairman of the Sharks rugby right? It says that he had a stint of professional rugby in Ireland, Saad that is. So it is not like he knows nothing about rugby, unlike all the experts that I met on Sunday, who possibly struggled to hold on to the orange peeler (left back in the change-room?) position in the third team at school. Funny that? Pretty much like throw away comments about the stock market made around the coals, I have heard many.

Stocks are about flat this morning. I am reminded that it is summer in the Northern hemisphere when watching the tour de France, the place looks gorgeous. I suppose that is why people in cold countries "enjoy" summer more than we do, there is less of it.

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

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Follow Sasha, Byron and Michael on Twitter

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Monday, 20 July 2015

Google Doodle should be Dollar Signs

"With Google soaring 16 percent plus on Friday to have a market capitalisation of 459 billion Dollars now, the NASDAQ boat was floated to the tune of 0.91 percent, the broader market S&P 500 was up 0.11 percent whilst the Dow Jones was off nearly one-fifth. It is not often that you see a day like that, when one really big company has such a marked impact. As we had pointed out on Friday however, this was a relief for all the (short) suffering Google shareholders, the stock has still underperformed the index over the last 12 months"

To market to market to buy a fat pig. The securities of Google do not appear in the Dow Jones Industrial Average, a 30 constituent price weighted index that is chosen by employees of McGraw Hill Financial. They decide what the American economy looks like and what the future is likely to look like, choosing the companies accordingly. So there is careful consideration with regards to what represents the American economy in an index of 30 shares. I guess they do a pretty good job, the rest of the market participants in stocks choose companies in the S&P 500, those companies importance and relevance on the index is based on their market capitalisation, i.e. what they are worth. If you want to find out currently which company has the biggest impact on the Dow Jones, then look here -> Sorted by % Weight in the Index. Goldman Sachs' share price is currently very important, as is IBM and 3M on the overall Dow Jones moves.

With Google soaring 16 percent plus on Friday to have a market capitalisation of 459 billion Dollars now, the NASDAQ boat was floated to the tune of 0.91 percent, the broader market S&P 500 was up 0.11 percent whilst the Dow Jones was off nearly one-fifth. It is not often that you see a day like that, when one really big company has such a marked impact. As we had pointed out on Friday however, this was a relief for all the (short) suffering Google shareholders, the stock has still underperformed the index over the last 12 months. True story. Year to date, it is one of the very best performing stocks out of the big caps.

I missed it, darn, the nerds of NASDAQ on Thursday passed their prior intraday high (5132.52 on the 10th of March 2000), settling at the close of 5210 on Friday evening. That took a decade and a half to get to!

2000. That was a while back, early 2000 saw those terrible floods in Mozambique, who will forget the pictures of the woman being airlifted, she gave birth to a child in a tree, I saw reference to the story on the web, who followed up a decade later: Baby born in tree now a 10-year-old girl. I am guessing that when she finishes school there will be more excitement, rightfully so. That just goes to show how long ago that is, if you had religiously continued to buy the NASDAQ index month after month, following the theory of Dollar cost averaging, you would have been able to buy the NASDAQ at 1139 points in October of 2002, over 2800 points in November 2007, back at 1380 points in March of 2009, it has been wild and rough, investing rather than chasing your tail (like a Jack Russell I told a I client this morning), you would have found yourself well rewarded.

Interesting fact about the Google price spike, it was the single biggest move higher in market cap for one company, ever.

For all the issues and problems of Greece and their citizens, their indebted nation and all the problems of Chinese stock investors, I do not know a single person who owns mainland listed Chinese stock, do you? And Greek stocks, do you know a person who owns those? I suspect that all the mainland European people that I know, indirectly they own European debt, Greek debt at that. What each and every Greek person advocating and pushing for debt relief must remember is that assets belong to someone else, that person will have to actually take the loss. Most of the money that Greece owes is to the European Financial Stability Facility (The EFSF), around 131 billion Euros, 53 billion to Eurozone governments, 27 billion to the ECB, with over 20 billion owed to the IMF. Other peoples money, right? And the terms given are pretty good, 2 percent bonds with maturities of as much as 30 to 40 years.

Anyhow, Greek citizens will see the banks open today, they will be able to withdraw the daily amount in one weekly amount, i.e. visit the ATM only once. Let us presume that people withdraw their amount each and every week for the whole year, 420 Euros times 52 weeks equals 21,840 Euros a year. Which at the current exchange rate of 13.46 = 294 thousand Rand. And this would be after you have serviced all of your bills, that monthly amount is 24 and a half thousand Rand. That is a rather big amount, wouldn't you say? How many South Africans would be in a position to stand in front of an ATM with capital controls and withdraw 24 thousand Rand a month? Very few. I think that the Greek government missed the best social experiment in eliminated money forever here, by encouraging everyone to use electronic methods of transferring money, thus creating a receipt on each and every transaction. No more cash, who cares, right? It may be the same pain as trying to eliminate the check in the US however. Too hard for ordinary people to wrap their heads around. M-Pesa is a necessity to those in rural East Africa who have no access to ATMs and they seem to thrive just fine, no queues for ATMs, as there are none.

Locally the market closed down one quarter of a percent, the resource stocks dragging the rest lower. Anglo American is now in the listed environment in Johannesburg worth less than Standard Bank and Sasol. Steinhoff and FirstRand are bigger. True story, the market cap of Anglo American is now 236 billion Rand, whilst seemingly the asset management community here seem to think that this is still the go-to investment. No sir. Old Mutual and Vodacom are breathing down the neck of Anglo American and if ever you needed a reminder of how the South African business landscape has changed, this was a city built on the gold mining industry, the first gold miner appears at 48th place on the market cap ranking tables. AngloGold Ashanti is roughly the same size as Truworths, smaller than Life Healthcare. And it is not just the gold companies, Amplats is now the same size as Brait, who would have thought?

The platinum price is below 1000 Dollars an ounce. 970 Dollars an ounce currently. Wow, that is completely awful. And what is more astonishing is that this is against the backdrop of European motor vehicle sales being at a five and a half year high. The gold price, all metal prices have been beaten up. The upshot of it all is that in the top 100 companies listed on the local exchange, there are 6 precious metal businesses. That is all. These are the pure gold and platinum companies, 6 apiece. I read the Harmony annual report last week after reading the news that Graham Briggs had resigned, skimmed it is a better word, that business sadly has a market cap of 6 billion Rand. The share price in New York, the ADR as quoted on Google finance goes back to October 1996, nearly 19 years worth of data shows that the stock in Dollar terms is down 86 percent since then. Simply astounding.

As per the Harmony annual report of 2014, 40 percent of costs are salaries and wages, and only 2 percent taxes and royalties. 12 percent is spent on electricity. Think about that for a second, nearly 55 percent of your costs before you have even budgeted for mine maintenance, exploration or paying a single supplier. It is more than that, I found this little pie chart on page 49 of the annual report from last year:

And to think that with the current round of wage negotiations a way away from being completed, it seems like the most costly item, labour, could increase substantially. And the current mining environment, with the much lower gold prices (at a five year low) is hardly great for the company. And their 34 thousand employees and contractors. One third of Harmony shareholders are US based, (as at June last year), 13 percent the UK and 42 percent here. As at the end of June 2014, African Rainbow Minerals owned 14.62 percent, the PIC 6.75 percent and Allan Gray 11.11 percent. Big and respected names in there. As per the Harmony annual report, another image, the all in costs from last year are as follows:

The current Gold, Rand per kg is 444,195 thousand Rand. So that yellow line is basically unchanged, if labour costs (the biggest) increase, that has a market impact here. There is a reason why we do not own these companies, I wish them all the best, it is hard at these current prices to not see something crack, and in a bad way currently. Mine shaft closures and job losses are inevitable, if the hard decisions are not taken now then it is a possibility that all "stakeholders" could end up losing here. Sigh.

Linkfest, lap it up

Where do you fit on the global income spectrum? This interesting piece will tell you and put things into perspective - Are you in the global middle class? Find out with our income calculator

The title of this article will already get people's emotions going. Either you think CEO's are paid what they deserve or you think CEO's get paid too much because of their ability to get tonnes of share options - Is a CEO really worth R28 million per year?. I think that the market is the most efficient way of allocating resources, so if demand and supply have determined the salary of a CEO, who am I to say the market has got it wrong? Rather the market allocating resources as opposed to government policies. I also think that investors need to pay closer attention to the remuneration policies of top management.

This trend seems set to continue, which will create opportunities in the advertising arena - Mid-year report: The newspaper industry's billion dollar challenge

Home again, home again, jiggety-jog. Oh no, the single commodity stocks, specifically the gold and platinum (precious metals stocks) are taking an absolute whipping. Platinum stocks down 4.5 percent and as a collective at the get go (the index) is at its lowest levels in over a decade. Better off than the gold stocks as a collective, in Rand terms down 45 percent over the last decade. The outlook is clouded, avoid. The rest of the market is OK, stocks as a collective up one third of a percent.

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Friday, 17 July 2015

Google Rising

"In ordinary trade, i.e. in the spot market that is open from 08:30 to 16:00 in New York, the Google stock price (ticker GOOGL) rose three percent to crest 600. After hours the market saw something they liked a lot, I suppose we could call it the Ruth Porat effect. The stock is up 12 percent plus post the market, 675 Dollars. That means, should these gains hold, Google would have finally performed inline with the rest of the NASDAQ and finally we can say that the company (and the stock) is 'doing well'."

To market to market to buy a fat pig. The Greece afterglow, the Janet Yellen I am going slowly, in a year and a half time we will have something new to talk about. Mind you, from what I have read, market participants are always anxious about where the Fed are going next. To be clear, that falls in the category of things that we have absolutely no control over and as such should spend more time obsessing over company earnings and company potential. And reading annual reports. Rather than obsessions over stuff you have no control over. Try to see current trends and predict where consumers are going to spend, where companies are likely to develop life changing technologies and services that will be readily adopted.

Rather than worrying what it is that Janet Yellen and the Federal Open Market Committee (The FOMC meet and discuss interest rates) are thinking and interpreting which word belongs where in a committee statement. Spend less time caring about what other people care about interest rates. That should be your investing mantra. If you were worried about something currently making headlines that could scupper market rallies, you would never part with a cent, thus confining yourself to a lifetime of average returns. And cash returns after tax are lower than inflation. I am not suggesting throw caution to the wind, I am advocating buying (and by definition owning) quality companies. That matters.

After all was said and done and interpreted in a second day of testimony on the hill by Janet Yellen. Low level questions that could be easily answered if the person asking the question did not have a political agenda. And surely they could email her the questions, she could answer them long before a deadline. I am of the opinion that her time is better spent elsewhere and not answering to self important people looking to score political points. By the end of the session stocks were up, the S&P 500 now only 10 points (one good day) away from the all time highs. So much for all those worries a few weeks back.

Company corner

Google has been a serious laggard, in terms of their price performance relative to the market. As I speak to many people about companies it is human nature for us to look at share price performance and translate that to internal company dynamics and quite quickly come to the conclusion that Google "is not doing that well", we are ALL guilty of that. Don't beat yourself up, we all do it. Revenue growth of 11 percent year over year (when measured against Q2 last year), serious currency headwinds in there, constant currency revenue growth was 18 percent. 17.7 billion Dollars in revenues for the quarter is pretty impressive, currency impact was a whopping 1.6 billion Dollars, with the benefit of modest hedging that was reduced to 1.1 billion Dollars. GAAP diluted EPS clocked 4.88 on GAAP net income of 3.351 billion Dollars. 9 out of every 10 Dollars are still from advertising, check out the revenue breakdown:

What the market liked the most however about these results were cost controls. In March this year we wrote about Google's new CFO, who was heading back to her San Francisco roots after an extended Wall Street stint (quarter of a century plus) at Morgan Stanley. She has immediately been credited with this success, Wall Street's estimate concerns on costs getting a little hot have been addressed.

Not that it is the job for Ruth Porat (Google CFO) to pander to the earnings needs of Wall Street analysts, rather her job is to keep spending at the correct levels. Again this represents a certain maturity of Google, whilst there is still a company encouragement of free thinking to maintain the entrepreneurial spirit, it become harder when you reach the size of 70 billion Dollars of annual revenues, with your 57,100 employees at quarter end. Notwithstanding the large workforce, Google still ranks as the best place to work in the USA, Canada and Japan, courtesy of the publication Fortune. And they continue to hire, the number of Googlers increased by 18 percent over the last year.

The company continues to "win" in mobile and in particular with YouTube. The purchase of the video website an age ago is just starting to take off, according to Porat on the conference call: "Growth in watch time on YouTube has accelerated and is now up over 60% year-over-year, the fastest growth rate we've seen in two years. Mobile watch time has more than doubled from a year ago." Who would have thought that people like to watch moving pictures on their smartphones?

As with many technology companies, there is possibly too much cash on hand, 70 billion cash and cash equivalents (58 percent outside of the USA), this amount is approximately 19 percent of the closing market capitalisation. This will be deployed properly to sustain their core search business (they spent 2.5 billion Dollars in the quarter, mostly on data centre construction and for production equipment), as well as their newer and possibly bigger revenue generators of the future, Nest, Fiber and Google Life Sciences.

Nest is a set of smart home products, thermostats, smoke and carbon monoxide alarms, as well as camera monitoring. Hardware. Google Fiber, I want it, 1000 Mbps, Google TV and all that, hardware again. Google Life Sciences, that is a little more secretive. Competing with big pharma, using technology, there are many competing firms in this space. The reason why we own Google is that they are one of the very few companies that are constantly trying to find extra businesses that will benefit humankind, you have to admire that.

In ordinary trade, i.e. in the spot market that is open from 08:30 to 16:00 in New York, the Google stock price (ticker GOOGL) rose three percent to crest 600. After hours the market saw something they liked a lot, I suppose we could call it the Ruth Porat effect. The stock is up 12 percent plus post the market, 675 Dollars. That means, should these gains hold, Google would have finally performed inline with the rest of the NASDAQ and finally we can say that the company (and the stock) is "doing well". Patience and owning great companies, with rosy futures, are rewarded in time. Should the stock open around these levels, it will be a comfortable all time high. More significantly, Google has been a ten bagger since listing. We continue to hold and buy this transformative company.

Thanks for your input, we always appreciate it. I stand to be corrected, all the way from the second largest country on the planet, Canada (you knew that, yet you are still surprised) comes our old friend who tells me that I have it wrong on Carl Icahn. I said that Icahn was nuts yesterday. Perhaps I meant to say his manner comes across as nuts as he is one of those rare people who speak their mind, no matter what the situation. Most people are uncomfortable with that abrasive style, perhaps I am one of those. Seeing as Larry Fink was sitting right next to him whilst he was articulating that he thought they would hit a "black rock" after falling off a cliff (Fink runs investment firm Blackrock), I can't see anyone else able to do the same. Perhaps with age and experience comes two things, one, the ability to not care what others think what you say and two, to actually have the confidence to say it.

Herewith our good friend from Canada telling me Icahn is a top chap:

"if I may disagree, I think Carl Icahn is anything but nuts. And he reportedly has accumulated a net worth of $25bn through Stock market activities only. His point to Larry Fink about the potential illiquidity of the high yield bond market when everybody wants to exit at the same time is very valid. Exactly what happened in 2008. When everybody wants to sell his bond ETF (or any ETF) at the same time and ishares cannot sell the underlying instruments, what then? Will the Fed buy up those unwanted bonds. Probably not. Result - turmoil as in 2008. Carl Icahn is actually in my opinion a deep thinker and very astute and observant."

As this is an opinion piece, I encourage everyone to disagree with me if they think I am wrong, collective thinking makes us all the wiser. Valid observations, perhaps as I said earlier, Icahn is abrasive, I should not have used the word nuts. Sorry. In my box on this score. BTW I have read the Icahn autobiography an age ago, his street fighter approach may be a long way away from the finesse of fellow activist Bill Ackman, their end goals are the same, to make money for their investors. And themselves.

Linkfest, lap it up

Looking forward to heightened conversation with members of your family or friends? Sorry. According to a Bank of America we are using our phones more and more. In short, we are addicted to our smartphones says this report: Trends in Consumer Mobility. This image made me LOL. Not really out loud, in my head, that is the way we LOL. Get, it, that is the way we roll? Nope? Take the next two days off then.

Moore's law basically says that computing power will double every 2 years. When you think about how powerful that compound growth is, it blows my mind! Imagine if stock prices doubled every second year, going back to the 1960s - Moore's Law stutters as Intel's tick-tock skips a beatThe link also has a video of Mr Moore himself talking about how he didn't think his observation would become a 'law' and how he didn't imagine it would still be relevant today.

What does technology mean for jobs, education and society in general? This short paper from The Hamilton Project has a look at what they think the future will hold - The Future of Work in the Age of the Machine - A Hamilton Project Framing Paper.

One fear that many people have is that technology lessons the number of people needed in certain industries, which will then lead to rising unemployment. History has shown that, that has not been the case as technology has been introduced. "For example, between 1900 and 2000, the proportion of the U.S. workforce in agriculture fell from 41 percent to 2 percent, yet agricultural output rose dramatically and there was no long-term increase in the unemployment rate, even as a greater proportion of the population participated in the labor force".

Another example used is that of Henry Ford's production line. It lowered the number of workers needed to produce a car but it made cars cheaper, so more people could afford cars, more cars meant that there was a demand for car service centres, creating jobs. It also meant that more people could travel longer distances at cheaper rates, creating a boost for tourism. Also cheaper transport means that people then have more money in their budget to spend on other things, creating more jobs in retail.

Going forward computers will continue to replace more routine and non-intuitive jobs. High skilled workers and those who are creating new things or ideas will receive high wages. The story for unskilled people is bleak though, as more technology is introduced more unskilled people will be displaced resulting in the value of unskilled labour to drop. The point that is made in the article is that the education system has not kept pace with the skills needed in the working world, which is part of the reason for growing inequality in society. Spending 12 years in school is already a large opportunity cost and for poorer families the cost of further studies is then very high. So 12 years of schooling to get skills that are not relevant to the working world, means that only those who can study further (pay the opportunity cost and the fees) get to the skilled level where they can get the high paying jobs.

Home again, home again, jiggety-jog. Stocks are up marginally. News on the wires is that the German Finance minister, Wolfgang Schauble wanted Greece out of the Euro area. He was that tired of it all, suggesting that an exit from the region would allow debt forgiveness, which at the moment is not possible under the Euro rules. i.e. One country borrowing form their brothers and sisters inside of the currency union cannot get debt relief. From the IMF and others, that is possible, which is why the private bondholders took deep haircuts last time around. The rules say not from others, that leads to deeper distrust, right?

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Thursday, 16 July 2015

Go Private, save the state

"It seems like there is a whole lot more room to grow. I for one would much prefer it if the government outsourced all schooling to private entities, which set themselves really high standards. As Curro points out (just after this table in their 2014 Annual Report), them building schools saves the state 70-120 million Rand initially and then 50 million Rand a month. People pay for private education after they have paid their taxes."

To market to market to buy a fat pig. Agreekment done. At the "money moment", the Greek parliamentarians, for all their noise voted for the money. In fairness however to Syriza, the governing party, much of the members voting against the package were part of the ruling party. Were or are, it is difficult to say. Whilst there were heated debates inside the Greek parliament, there were the 'no to austerity' protestors throwing molotov cocktails at police. Question, if there were to be a cut in Greece's debt that is owed to the Troika, who would ultimately be hurt as their asset is written down? Is it the pensioner of France, Italy and Germany, Spain, Portugal and the Netherlands? Debt to one is an asset to another.

The bigger picture is that the IMF are right, even if there were incredible terms imposed on Greece and they were told that there was a 30 year interest holiday, they were told that there was more debt reduction, it needs to happen sooner rather than later. Investors of Europe need to know. Even if this is not exactly a deal breaker for opening a business elsewhere in the common currency area, it has captured the imagination of the networks for the better part of five years. Greece needs to grow their economy, that is the only way that tax receipts will rise and that the government will easily be able to service the debt more aggressively.

There needs to be political will power and I am afraid as long as there are far left wingers feeling that the only way to do things is more government intervention, and less private sector, I do not see that happening soon. The Golden Dawn (one of their members tore up the agreement in parliament yesterday) are borderline cases to be institutionalised. No, that is rude, as I said to my eldest last night, people get what they vote for. And do not ever question why someone voted X or Y, that is immediately suggesting that their political views are inferior to yours. That is exactly why each and every person has a single vote, it may not be perfect, it is however better than having no choices.

So that is done and dusted, expectations are for a fall out of sorts in the ruling party. Resignations, perhaps even new elections. If Tsipras comes through this wiser and better as a leader then thumbs up to his leadership skills, well done to him. If he firmly believes that what he is doing is the best interest of Greece long term and not scoring political points (even though he suggested that there was a knife held to his throat), then I admire that. It shows some maturity that was possibly lacking beforehand. Read the NYT piece: Greece, Its Back to the Wall, Adopts Austerity Steps.

The other "thing" capturing markets yesterday was Fed chair Janet Yellen delivering testimony in front of the House Financial Service Committee, see the NYT story: Janet Yellen Warns Congress Against Adding to Fed's Oversight. What I find really funny about the story, and perhaps it deserves a copy paste is the following paragraph in that story: "Ms. Yellen provided few new indications about the Fed's plans for the next few months, and she was not pressed on the issue. Lawmakers in Congress evidently do not share Wall Street's obsessive interest in the exact timing of interest rate increases." Ha-ha! A Wall Street obsession is definitely not a worry of the person on the street.

I expect that we will see rate rises different to those in the past, the trajectory will be slow to begin with, I reckon a range adjusting in smaller increments that the street is used to, like 10-15 basis points at a time. i.e. Moving the band slowly higher until you can hike by 25 basis points, why not, the way down was unconventional, why should the way up be anything ordinary? And expect the high end of the next interest rate cycle to be lower, i.e. not 6.5 percent, rather somewhere between 3.5 and 4, that is my best guess. Markets on Wall Street? Not too much action if you look at the scoreboard, the Dow and broader market S&P 500 were a whisker lower. Earnings, those continue to filter in and through, Bank of America was the standout, the stock was up 3.3 percent. It is still down 61 percent over ten years however, the "great recession" saw to that.

In the local market, Jozi, Jozi, stocks rallied across the board, obviously there strong Chinese GDP number buoyed commodity stocks. Both Anglo and BHP have recorded big write downs in the last two days, the Anglo production report from this morning does not look encouraging. Lower prices, lower demand is not a perfect cocktail for shareholder returns.

Less commodity exposure, I still am struck by that comment I read earlier this year that said an investment in commodities was a bet against humanity, I think that it was our old pal Cullen Roche who said it. I think what he is trying to say is that humanity keeps doing more with less of the same resource. That is not too dissimilar to that graph from yesterdays piece with more than double the number of people on earth eating food that is roughly the same price, farming technology has improved significantly over fifty year, without ordinary people noticing. When something changes slowly and constantly, it is called a Mesofact says our old pal Samuel Arbesman. Of course none of these people are really our pals, as a result of the awesomeness of Twitter, we fell we actually know these people. Including folks like Novak Djokovic and Serena Williams who we can (and do) follow on platforms like Instagram.

After all was said and done, the local market closed at 52 and a half thousand points. That looks like the best level in around one month to me. However it has been a tough old year, stocks have not really moved, the JSE all share index is up an uninspiring 5.55 percent. Although, that is around what inflation is, and on an annualised basis you would be double that. That is a decent enough long term return, remembering the rule of 70. i.e. how long does it take to double your asset base. Is it 70, or 72 or 69.3? Read Wiki: Rule of 72. Divide the annualised returns by 70, that is your number. Working the other way around, what return would you have to get in order to double your money in 5 years. Divide 70 by 5, you get to 14 percent. 6 years, that number falls to 11.66 percent, per annum. In other words, the consistent return matters. As Warren Buffett says however, he would rather have "lumpy" (read outsized) returns than solid and consistent ones.

Company corner

Curro and AdvTech confirmed yesterday that they are in talks. Obviously it was Curro who initiated the talks, they want to buy AdvTech. It makes sense that as the bigger competitor by market cap that they use the momentum and big shareholder to buy another business that the market has not taken so kindly too. As Michael pointed out yesterday however, and lean in a little closer to your screen here, Curro has a market cap of 12.1 billion Rand, turnover of just on one billion Rand for the financial year to end February. AdvTech has a market cap of 5.2 billion Rand, turnover of 1.93 billion Rand. Curro's turnover grew at 51 percent last year, AdvTech at less than ten percent.

Even at elevated share price levels, AdvTech trades on a 27 multiple, Curro has recently started making a profit, it trades on a multiple of nearly 200 times. Is the market bonkers? Perhaps not. There may be expectations from the market that the PSG magic could work again here, as it did for Capitec, PSG own 57 percent of the shares. And of course PSG have underwritten all the rights issues along the way, Curro has grown exceptionally fast. I doubt that there will be a massive PE unwind for Curro in a hurry, the goal is to continue to roll out as many affordable private institutions as possible. Where the perception is that paying for education means that the quality offered against the alternative (the government) equals a better outcome for the child, that is all that parents worry about. Curro have recently been in the news for all the wrong reasons, I truly hope that (for the sake of our nation) that this is dealt with swiftly. Racism is narrow minded and plain dumb, we should be all turned inside out, we would all look the same. Not very good "same" though, I love diversity and different.

Not too dissimilar to many success stories, and often what the ordinary person on the street misses, Curro started with a small school, all of 28 pupils in 1998. They started this year with 42 schools and 36 thousand scholars, learners, pupils, whatever you want to call them. So are they going to triple the number of scholars (or are they customers?) in the next three years?

It seems like there is a whole lot more room to grow. I for one would much prefer it if the government outsourced all schooling to private entities, which set themselves really high standards. As Curro points out (just after this table in their 2014 Annual Report), them building schools saves the state 70-120 million Rand initially and then 50 million Rand a month. People pay for private education after they have paid their taxes. I still like to think that the modern schooling system needs a serious shakeup, more responsibility needs to be given to the child. To get real life readiness, you have to be responsible for your actions. Elon Musk is right to start his own school, that is however for super rich kids. Sadly here in South Africa there are limited resources.

Whether or not a formal offer is made, or a merged entity appears at the other end when these talks between the two private education providers appears on the other side (or even if the competitions authority allows it), progress is being made shaping the minds of the youth. And that is something to celebrate, after all, the founder of the nation, Nelson Mandela was quoted as saying: "Education is the most powerful weapon which you can use to change the world." That will always be right, the only problem with that is that the more you know, the more you realise there is to know.

Linkfest, lap it up

I enjoy peanut butter, I buy the sugar and salt free one from Woolies. Not everybody can eat nuts, 1.4 percent of kids have a nut allergy in the US and this is rising. There is always capital looking to solve this problem, Mr. Picketty should take note that it is a French firm raising money in the US to solve the problem of nut allergies: Progress in peanut allergy trials raises hopes. Darn one percenters looking to solve problems of ordinary people.

Yesterday Amazon turned 20 many people didn't think it would get past its first birthday, it has survived start up phase, the dot come bubble and a host of new competitors - At 20, Amazon Continues to Defy Predictions.

Where there is a will there is a way! Many young people that I speak to are struggling to get jobs in the industries that they hope to have long careers in. This CV highlights the possibilities that are out there if you are willing to do what it takes, very inspiring! - Hey, I'm Nina!

Higher cash levels with asset managers may point to people preparing for an interest rate hike? Where funds want to own a couple more bonds but can only purchase them after the rate hike - Fund Managers Holding Highest Cash Percentage Since Lehman. This isn't pointing to a bear market because cash is also flowing into financial stocks which can be seen as a proxy for the economy and one of the sectors that do a bit better with higher interest rates.

Home again, home again, jiggety-jog. Mixed Asian markets this morning, I saw an interesting comment from Blackrock's Larry Fink that suggested that the reason why Chinese markets are so volatile is that capital markets are immature. There was an awesome interaction between Carl Icahn (who is nuts) and Larry Fink, you might see footage during the day. Back to the real grind of earnings today. Google, Ebay, Goldman Sachs, Mattel, Philip Morris, UnitedHealth and of course an interesting one Schlumberger. That is why we invest in markets, for companies, not for Jannet Yellen comments or Greek debt issues.

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

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