Money with a dash of Funny

Monday, 21 August 2017

The Clouds in China

To market to market to buy a fat pig. Markets were mixed on Friday, with both our local market and the US markets sitting in positive territory at some point in the trading day. Come closing time/beer o'clock (I think in Jozi on a Friday the beers start much earlier in the day) our market was down 0.2%, with the gold miners being the only major green spot, up 3.9% for the day.

US markets started the day in the red, then moved positive with more staff changes in the White House (Stocks see brief bump after Bannon ouster) but then closed with the Dow down 0.35%, the S&P 500 down 0.18% and the Nasdaq down 0.09%. Steve Bannon was Trump's chief strategist and a big proponent of the current anti-free trade agenda. Restricting free-trade would be a bad outcome for most of the companies listed in the US, who already have significant customers and operations outside of the US.

Then on Friday after the market closed, Bidvest announced that the Joffe chapter in their history has come to an end. Brain Joffe resigning as a non-executive director with effect from last Friday. Since the Bidcorp unbundling last year, Joffe has not had an executive role at the company and has been regularly selling his shares. Currently, the combined market caps of Bidcorp and Bidvest is around R160 billion, incredible value considering that he founded the group in 1988. As South African's we need to celebrate entrepreneurs who create jobs and economic growth through their ideas and vision. Here is a great interview with Joffe, The Bidvest story with Brian Joffe, in the interview he talks about his mindset going into the new South Africa. The end of his Bidvest chapter and just the start of his Long4Life chapter.

Company corner

Michael's Musings

On Thursday we had another expectation smashing, set of numbers from a Chinese internet company, this time it was from Alibaba. They had revenues of RMB 50.1 billion ($7.4 billion) for the first quarter, an increase of 56%. Analysts had estimated it to come in at RMB 47.7 billion. Earnings per share were up even more, growing by 62%, showing that even with their monster top line growth they are not sacrificing margins. Here is a look at how the different divisions stack up.

As you can see, the bulk of the business is Chinese retail, which is not a bad thing considering how fast their middle class is growing. Even though the country's growth is slowing to 6.9%, retail growth is still above 10%. Based on the following graphic, the Chinese consumer still has plenty in their 'consumption tank'.

The first thing that stood out to me though was how many opportunities there are for their international division. Currently, if you are a business and want to buy a container of anything from China, you would strike up a relationship with an agent in China who will source the product for you. The agent will pick the factory who can produce what you want, in the correct time frame and at the correct quality. The agent then charges you for their services but as a business, it is worth it because you know that what you ordered will arrive. Imagine if you can now use Alibaba to find what you are looking for and Alibaba will guarantee quality and delivery time? Given the size of the company, they would have no problem refunding you if your order goes wrong. I think that there is huge potential for the 3% 'International Wholesale' figure to become more significant.

On the 'International Retail' front, there has been a strong push into South-East Asia. Part of the push includes free shipping on selected items in Singapore. Added to that Alibaba have also teamed up with Netflix and Uber. Cross-marketing where ordering something from Alibaba gives you free services from Netflix and Uber. Their approach seems to be working shown by the 136% growth for 'International Retail'. How long until they are in South Africa in a big way and we have access to their HUGE singles day (11/11) promotions?

Much has been made of their cloud division in the media since their results came out and you can see why. Revenues were up 96% and the number of customers increased from 577 000 to just over 1 million. One of their significant customers is Air-Asia, having a well know brand run their systems and app through the Alibaba Cloud infrastructure is a vote of confidence that I am sure the sales team is using to lure other customers. The division is still loss-making though which is not a concern for now, as long as they keep growing at this rapid pace. The beauty of the cloud business is that once a company chooses to run their IT systems on a particular cloud infrastructure it is very difficult to move to a competing cloud company.

In this space, our preferred company is Amazon due to their primary market being the US and having a much larger cloud division. That seems to be the market consensus at the moment because, at current valuation metrics, Alibaba is cheaper than Amazon.

Linkfest, lap it up

One thing, from Paul

This week on Blunders: CEO of the Year (allows girlfriend to expense $5.8m on his company credit card), chili pepper eating contest in Hunan, long company names banned by Beijing, and a sad story from Venezuela - Blunders - Episode 69

Byron's Beats

I am currently reading the book about Jeff Bezos called The Everything Store. Although it was published in 2013 and much has happened since then, it is still a fascinating read about an incredible man. This article from Quartz titled What is Amazon, really? goes through each of Amazon's divisions and gives a nice description of the current business models.

Michael's Musings

I had to read the headline twice but after thinking about it, why not include esport in the olympics? - Esports in consideration for 2024 Olympics. If it does go through, it would be a big win for the likes of Tencent and Naspers.

Even though most of these inventions were very impractical at the time of their inventing, they show the pioneering human spirit - 13 things that were invented much earlier than you probably thought. My favourite is probably the first attempt at a car radio, where they were driving around with what looked like the washing line from your back yard.

The guys at visual capitalist have come up with a nice infographic showing how Tesla compares to other car makers globally and in the US - The World's Largest Automakers, By Market Value. It is worth remembering though that Tesla is much more than just a car maker.

Home again, home again, jiggety-jog. Asian markets are mixed this morning and the All Share is higher 0.4%. AdvTech released their half-year numbers this morning that looked positive, resulting in the stock up around 2%. We will have a full breakdown of the numbers for you tomorrow. More important this week will be full-year numbers from Woolworths on Thursday.

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Friday, 18 August 2017

It's Not What You Buy, It's What You Pay

To market to market to buy a fat pig. Yesterday was a bad day for markets due to a combination of White House political rumblings and the horrible terrorist attacks in Spain. The Dow dropped 1.24%, the S&P 500 dropped 1.54% and the Nasdaq was down the most, 1.94%. The All Share flipped between green and red all day, until the US markets opened, keeping us firmly in the red. The All Share finished down 0.21%, the only significant sector showing a dark shade of green were the gold miners, who finished up 2%.

As CEOs have been quitting Trump's committees due to the poor handling of the hate fuelled protested last weekend in the US, Wall Street is worried that some of his top advisors will also quit. There was a false rumour that his top economic advisor, Gary Cohn had quit. Wall Street considers Cohn a voice of reason in team Trump and someone instrumental in getting pro-business legislation through congress (False rumours that Gary Cohn is leaving the White House just spooked Wall Street - for good reason). If CEOs have quit, I'm sure that the thought of quitting has at least crossed the minds of team Trump members. Meaning that the next controversial thing Trump does could result in more people quitting.

Company corner

Bright's Banter

We love the education sector here at Vestact and here's why. The South African Private School sector is a very fragmented market with only three prominent companies operating in the sector namely: AdvTech, Curro, and Reddam.

There are roughly 26 000 schools in Mzansi with just under 13 000 000 learners of which around 600 000 go to private schools. This equates to 4.5% of the entire school market, a small piece of the pie. Contrast that to developed markets where private schools make up 20%-30% of the total number of schools.

What these private school operators do is take the burden of having to provide good quality education (which is in very high demand) from the government by investing aggressively in the curriculum and infrastructure. With only 4.5% of the schooling marking, the likes of Curro and AdvTech are barely scratching the surface considering the current demand from parents and global trends in private schooling. I think with more schools being built across the country we should see that 4.5% number slowly creep up to global norms. This is a growing tide no doubt!

Curro has had an interesting journey as they started out with 2 059 learners in the year 2009 when PSG bought 50% of Dr. Chris van der Merwe's business. Fast forward eight years, they now have 54 campuses, 127 schools, 47 002 learners and 2 844 teachers.

Curro's growth has been paramount in the past few years and this half-year was no different with revenue growth of 24% to R1.08 billion and earnings growth of 36% to R110m. The question you might be asking yourself is why did the shares of Curro close 5% down on the day? Well, the devil is in the detail.

The company trades at a price to earnings ratio of 99 meaning the market has set very high expectations for the company. The Meridian brand (their cheaper offering) came under pressure especially in mining dependent provinces like the North West and Limpopo. This resulted in the number of learners decreasing by 6% for the brand. With a high PE comes high expectations and with high expectations, comes high responsibility.

The other issue was Stadio, their answer to AdvTech's tertiary offering. Stadio was a drag on earnings, maybe a bit more than expected because of the high set up and license costs. The good news here is that Stadio will be spun out of the business in September 2017.

The other issue is that Curro has only one brand i.e. "Curro". If anything negatively affects the brand such as notorious learners in one school or a derogatory educator in another school, this damages the whole Curro brand. Country wide brand damage was seen due to the racial incident at Curro Roodepoort for example. This contrasted with AdvTech who operates over multiple brands, the damage is then limited to those few schools that operate under that particular banner.

Finally, Curro is highly exposed to the middle class and the earnings potential of the middle class tends to be highly correlated to the economy. When the economy is doing well, parents will be able to pay for the school fees with ease but when it doesn't, the company will find it hard to pass on increases without driving the parent out of the gate to go find a cheaper alternative. As we have seen at Meridian.

In the words of the legendary Howard Marks (Investor). There is no such thing as a good idea or a bad idea in the investment world without reference to price. It's not what you buy, it's what you pay. Finally, investing is not a matter of buying good things, it's a matter of buying things well and people who do not know the difference shouldn't be in the business.

Here at Vestact, we prefer AdvTech which trades at a historic PE of 24 with growth expectations of high single digit to double digits for the next couple of years. It is more exposed to people who are in LSM 6 and above (not that sensitive to price) and recently the price of the shares started to look very attractive on different logical valuations.

Linkfest, lap it up

One thing, from Paul

I got into a discussion yesterday with our partner in New York, Ted Weisberg of Seaport Securities. He emailed me to commiserate about the market slump on Thursday evening on Wall Street.

His opening comment: "Weakness across the board. Market internals have been deteriorating for weeks. Not sure what the "spark" was for today. Perhaps Spain. Perhaps dysfunction in the White House. Perhaps just a market that is overbought. Whatever the reason it was an ugly day and I suspect more to come."

My response: "Lets see what happens. As you know, we keep a steady hand on the wheel. No change to portfolios, that is the default."

Ted: "Understand. But we both know that trees simply do not grow to the sky."

Paul: "You are right, even great companies don't last for ever, as a look back at the constituents of the Dow in history will show. However, great multi-generational family equity portfolios do grow to the sky? Our job is to try to position those portfolios to be invested in the best stocks in any given era. Clearly the term "best" is subjective, and there will be some failures. Some turnover in portfolios is obviously appropriate, but it seems to me that less activity is better than too much activity, as a rule."

Byron's Beats

As you know, healthcare is a core investment theme here at Vestact. But healthcare can be a broad term and the companies tapping the market can come from all sorts of sectors. For example Apple have pipeline products that can read your blood sugar via the Apple Watch. This article from Moneyweb suggests that Google is the most important healthcare company in the world. The most important healthcare company on the planet. I tend to agree, you have to be cautious on what info you accept from the internet though. By having patients more informed on what could be wrong with them, collaborating with doctors will be a lot more efficient.

Michael's Musings

If you have $20 million burning a hole in your pocket here are some beauties that you could buy - The 10 Most Expensive Cars at the Pebble Beach Auctions.

Walmart reported their 2Q numbers yesterday, I am amazed by the absolute size of the company. They had revenues just for the second quarter of $123 billion! Their most recent FY numbers had revenues posted at $485 billion. What do you think South Africa's GDP is? All the cars in that traffic jam this morning, all the people in the shopping malls this weekend, all the cocktails bought at the Saxonwold shebeen and any other economic activity taking place within our boarders over a 12 month period comes to around $300 billion. Basically Walmart is 61% bigger than South Africa - Walmart beats on earnings as online sales surge.

The market is telling you that it thinks Amazon is less likely to default on its debt than China - Amazon can borrow money more cheaply than Russia, Mexico and China. How can that be true?

Home again, home again, jiggety-jog. The economic news flow today doesn't have any significant market moving numbers in it. Next week the South African earnings season kicks into high gear, Woolworths will be of particular interest to us.

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Thursday, 17 August 2017

It is all Fun and Games

To market to market to buy a fat pig. There was green on our screens again yesterday, with all three major US indexes up around 0.1%. The main flavour for the day was the Fed minutes with a bit of Trump spice to round things off. The Fed minutes indicated that they would unwind their $4.5 trillion balance sheet incrementally, with more definitive plans coming out of their September meeting. There is the concern though that US inflation is not picking up and that interest rate hikes will hamper things further. The result is that interest rate hikes might be slower than the market is expecting which meant Dollar weakness.

Locally the All Share was up a nice round 1%, to 55 535 points. A positive 3% move from Naspers, thanks to strong Tencent numbers and 12-month highs for Discovery and Firstrand kept the market ticking. Unfortunately, Famous Brands finished down 8% after a weak trading statement, more on them a bit later.

After reading about the amount of time that the average person spends on social media and watching TV, I have been thinking about how that is possible. My conclusion is that it comes down to global wealth creation and technological advances resulting in people needing to work less. Rewind 100 years, around half of the global population were employed in agriculture as a full-time job. You would be working the land when the sun came up until it went down, seven days a week. Unless you were 'noble' or part of the global elite. Even if you weren't on a farm, your job kept you busy six and a half days a week. The half day off was so that you could go to church.

Today, the average person works 35 hours a week, leaving many hours free to consume social media and entertainment content. Coupled with that, more people globally now live in cities than those who live in rural areas. City living normally comes with fewer square meters to live in. Imagine coming home from work to a 25 square meter apartment. Going out all the time is expensive, Netflix at $10 a month is a great cost effective way to take up your time. Social media is free and a night of gaming is cheaper than a round of beers. As the hours of leisure time increase, entertainment creators and providers will become more valuable.

Company corner

Michael's Musings

The Tencent 2Q numbers didn't disappoint when they were released after market close in Hong Kong yesterday. This was in the middle of our trading day, the Naspers share price immediately shot 4% higher. Tencent is up 3.5% today. The numbers beat on top and bottom line, with revenues up 59% YoY and EPS up 44% YoY. What is amazing is the QoQ growth, where revenue is 14% higher than 3 months ago and profits are 17% higher. Most companies would be happy with that level of growth over twelve months instead of just three.

The biggest chunk of the business is still gaming, where revenues increase 39% YoY, taking the division's contribution to group revenues from 72% to 65%. From a diversification point of view, having their other divisions play a more significant role in the company is a good thing. Gaming is addictive but barriers to entry are rather low.

Their other two divisions are online advertising which saw revenues up 55%, accounting for 18% of group revenues and then their 'Other' division saw revenues up 177% to account for 17% of group revenues. Their other division includes some exciting projects, namely digital payments, cloud computing and then Artificial Intelligence (AI). Remember under the payments segment, WeChat and Starbucks China have teamed up to allow people to pay for their coffee using the app

WeChat is the platform that ties all their divisions together because when people are on the app, Tencent is able to direct the users to other services in the group. The number of Monthly Active Users (MAU) is up 19.5% YoY to 963 million. Joining the 1 billion club is just around the corner now.

Having a look at the above metrics you can see why Naspers's purchase of Tencent was the deal of the century. Unlike Amazon which has razor thin margins, Tencent has operating margins above 30%. Coupled with revenue growth in the region of 40% to 50%, the amount of fresh cash that they produce each quarter is a huge advantage. They can afford to take punts in next generation businesses, where many will fail but the few that survive will be major players in a Chinese economy growing at 6% off an already massive base. Buy Naspers, buy Tencent.

Byron's Beats

Yesterday we received a performance update from Famous Brands which certainly disappointed the market. The share closed down 7.9%. System wide sales grew 7% in South Africa for the six month period. If you exclude new stores, sales only increased 1.8%. 52 restaurants were opened in South Africa for the period.

GBK, the recently acquired UK based burger joint had sales increase by 12.1%. If you strip out the 6 new stores they have opened, like for like sales actually declined 2.6%.

You can see why the market is concerned. The company suspend their dividend to make the big GBK purchase. Post Brexit, the UK economy has been stagnant. Locally, we are also under pressure. Famous Brands have been very resilient in a tough economy but are now seeing the pressures reflecting in the numbers. The share price was expecting more, hence the rerating.

When you buy into a consumer facing company like this, you need to realise there will be good and bad cycles. The company is extremely well managed in a sector that will grow throughout the cycles over the coming decades. They should come out of this stronger and more efficient. We continue to hold the stock and ride the wave. Expect more details when the results come out.

Linkfest, lap it up

One thing, from Paul

This was my best read on the web yesterday. Financial Times US Bureau Chief Sam Fleming has a deep chat over lunch with Federal Reserve Deputy Chair Stanley Fischer. Fischer basically invented the idea that monetary authorities like the Fed can intervene heavily to counteract the effects of an economic crisis (like the one that we saw in 2008-09). Before becoming a central banker in Israel and the USA he was an academic. He supervised Ben Bernanke's thesis. Also interesting, he grew up in Zambia - Stanley Fischer, Fed vice-chair, on the risky business of bank reform

Michael's Musings

Nokia are back with the launch of a new smart phone, this is on the back of the release of an updated Nokia 3310 around 6-months ago - Nokia 8 hopes to beat Apple and Samsung with 'bothie', a new version of the selfie.

Who knew that we have been getting the Star Wars line, "Luke, I'm your father" wrong for all this time - 18 famous movie quotes everyone gets wrong. Some fun for a Thursday.

I can't imagine myself paying an entrance fee to go for a coffee. The argument though is that you are paying for the experience and access to common space, where you get to meet new people or sit in a comfortable environment finishing off your latest read - Grocery stores and coffee shops are starting to charge admission - and it could become more common.

Home again, home again, jiggety-jog. There are UK retail sales figures out later today, which is significant for the likes of Steinhoff and Brait. Then later today there are CPI numbers out of the EU and initial unemployment numbers out of the US. Alibaba and Walmart are reporting later, so we will get a good idea of how the global consumer is doing.

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Wednesday, 16 August 2017

It Only Takes One Click

To market to market to buy a fat pig. The US market was up down yesterday, the Dow was up 0.02% but the Nasdaq and S&P 500 were both slightly down, 0.11% and 0.05% respectively. I would say such small moves can be classified as a flat market? Amazon has claimed another scalp, Dicks Sporting Goods was down 23% yesterday after reporting lower than expected second quarter numbers due to customers shifting more and more to online shopping. As it stands, just over half way through 2017, the only year recently with higher US retail store closures is 2008. By the end of 2017, the number of retail store closures is estimated to be higher than that in 2008 and 4 times what it was last year (The tsunami of store closures is doubling in size).

The increasing shift to online retail is the reason that Nike has teamed up with Amazon (Nike-Amazon deal may hurt sporting goods retailers). Sure Nike has their own online presence but they are a shoe company first, not a distributor. Buying directly from Nike online normally involves a shipping charge and a couple day waiting period. Buy shoes online as an Amazon Prime member means that in some cities you could have your running shoes in time for this evenings run. Amazon has worked very hard to be the first site consumers go to if they want to buy anything online, so you want your brand sitting on their platform.

The US Census Bureau estimates that only 8.5% of all retail sales are online, US E-Commerce Sales as Percent of Retail Sales. I have seen other estimates with a slightly higher percentage, in the low teens. The exact number is not the issue though, how will the retail space look when e-tail accounts for 50% of sales? How many traditional retailers will still be standing and how many property companies will be hard hit?

On the local front, e-tail is still a very small segment but they are busy weathering the recession storm. (I wonder if being in a recession means that politicians shrink their cavalcade's?) Talking to business owners across the retail spectrum, it is ugly out there. Store closures are imminent, increasing unemployment which puts further strain on retail sales and the cycle to some degree keeps repeating. South Africa is in desperate need of confidence and economic growth.

Locally the All Share was down 0.87%, with very few green spots on my heat map. Looking at the list of stocks at 12-month highs, there are none today. The market wasn't too impressed with 22% increase in HEPS for Curro, the stock was down 5% at closing.

Linkfest, lap it up

One thing, from Paul

Don't even think about becoming a full time day trader. You will (in all likelihood) lose everything. Read this guy's sad story - The Career Risk Traders Are Unaware Of

There is a lot of hype about possible job losses due to artificial intelligence and robots. In my view, that's all very premature. Have you seen how incompetent most robots are at doing anything other than routine and predictable tasks? Maybe people have been watching too many movies? Anyway, here is a short, funny clip, showing a robot with some state of the art skills. Don't give up your day job people!

Meet the JobTaker. pic.twitter.com/XmMdB2RXiI
— Roscoe (@dataduce) August 14, 2017

Byron's Beats

Clients often ask us what is going on at Amgen. These biotech stocks can be very complicated and sometimes difficult to understand. We chose Amgen because they have a big, exciting pipeline and are not overly reliant on one product. This article titled Where Amgen Stands after 2Q17 has an depth look at Amgen's impressive pipeline. It is long and complicated. Many of you won't read it. If you don't, be sure that we have.

Michael's Musings

In a capitalistic system it is good to see businesses talking with their spending. At the end of the day money talks louder than anything else - FNB CEO says he will not fly with SAA.

Probably more impressive was the move from Sygnia - Sygnia fires KPMG, as its CEO takes a stand against private sector involvement in corruption. How long until other South African businesses start taking a stand?

It is great to see these titans of industry using their wealth to better the planet - Gates Makes Largest Donation Since 2000 With $4.6 Billion Pledge

It is amazing to see the behaviour/psychological traps that we fall into when making decisions especially when money is involved - Your Brain on $.

"The brain activity of a person making $ on their investments is indistinguishable from a person high on cocaine. Financial losses are processed in the same area of the brain that responds to mortal danger"

Bright's Banter

How much trust do you have on your "Made in China" tags on your favourite item of clothing? Spoiler alert, your clothes might have been made in North Korea! - Are Your Clothes Really Made in China?

Those are cool socks you got there buddy. We only mention it because the latest fad on social media is dishing out anonymous messages of kindness. The Sarahah app, which means "honesty" in Arabic has over 20 million users within a few weeks of launching and is now the top free app on Apple's app store. Give it a go and give us some feedback please - Honesty App, A Self-Esteem Machine

What was Netflix's reply to Disney after Disney announced they will have their own streaming services by 2019? Poach their best superstar TV producer Shonda Rhimes. Rhimes in her 15 year career at ABC Studios (a subsidiary of Disney) has produced hits like Grey's Anatomy, Scandal (known as "The Fixer" here in RSA), and How to Get Away With Murder of which generated over $2 billion in Revenues - Shonda Rhimes Likes To Netflix And Chill

Home again, home again, jiggety-jog. Tencent numbers out later today, there are high expectations so expect to see share price movement in Naspers and Tencent. Then there are US crude inventory stats this evening which will set the tone for oil prices over the next week. Famous Brands are down 8% this morning on a disappointing trading update, their newly acquired UK operations are taking strain.

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Tuesday, 15 August 2017

WeChat Addiction

To market to market to buy a fat pig. Another good day for markets, both locally and in the US. The All Share was up 0.56 and the S&P 500 was up 1.00%, making it the strongest day for the index in over 3 weeks. One of the leading stocks in the US last night was Nvidia who were up 8%, remember they are the company producing 'shovels' in the cryptocurrency mining rush. Considering that the company is worth $100 billion, an 8% move up is no small feat.

Tomorrow Tencent report 2Q numbers, probably the most significant set of numbers for the JSE even though they don't even trade here. The numbers are out at around lunchtime. In Jozi that will set the tone for Naspers and by extension our market. I found this very interesting slide show talking about why Tencent is such an amazing business, Tencent's Wide Moat. If you don't fully understand why we think Tencent and Naspers are such great businesses this slide should help.

China might not be as rich as the US on a GDP per capita basis but they have 4 times the population who are very quickly entering the global middle class. Think disposable income to spend. With that in mind, do you think a social network with 1 billion users should be worth more in the US or in China?

"Average user spends 66 minutes a day on WeChat (more than Facebook and Instagram combined)... But a third of WeChat's users spend a whopping 4 hours a day or more on the app!"

If you are wondering how someone can spend 4 hours of their day, around 25% of their waking hours on WeChat, here is an example.

Linkfest, lap it up

One thing, from Paul

Stuart Theobald put it perfectly in yesterday's Business Day. Taxpayers and investors are pushing back against state capture in South Africa. The stakes are rising, as we approach our next electoral cycle - Money of activist investors and taxpayers finds its voice to oppose state capture

Byron's Beats

Starbucks is an incredible success story. Their unique approach to retail has been one the main reasons for their success. Everyone loves a good Buzzfeed list. Here are 17 Fascinating Facts About Starbucks That You'll Drink Right Up.

Michael's Musings

Given my economics background, seeing how countries develop fascinates me. These photos point toward the shear size of China and the natural beauty the country has to offer - 17 Drone Photographs Reveal How Urbanization Has Changed China

As wealth grows people are becoming more selective about what companies they are invested in. Capital growth is no longer the overarching goal, having your money in a company that has a positive impact on the planet is a consideration - Millennials are Investing With a Purpose, and It's Changing Wealth Management. I wonder how much Tesla has influenced the returns of the graph below?

It may not always seem like it but the world is continually improving. Remember that in 1992 there were 2 billion less people than today, so in percentage terms the number of undernourished people has dropped by more than this graph indicates - Undernourished persons

Home again, home again, jiggety-jog. Later this morning is the High court's ruling on the SARB. Will they change their inflation targeting mandate to something that focuses on the "socioeconomic well-being of the citizens"? No change is expected. Asian markets are all in the green this morning and Tencent is up another 0.3%, so expect a green ALSI on the opening bell at 9:00.

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Monday, 14 August 2017

Everyone Loves Chips

To market to market to buy a fat pig. Following the big sell off in the US on Thursday, Asian markets and then our markets were down on Friday. The All Share finished down 0.98%, with the biggest loser being the big and heavy Naspers, down 3% to R2 757 a share. Two or three strong days in the share price will see it breaking the R 3 000 a share mark for the first time, Tencent is currently up 2.8% in Hong Kong so today could be one of those strong days.

The US markets seemed to forget all about any tensions brewing on the Korean peninsula and were back to their merry way. As you were! The Dow was up 0.07%, the Nasdaq was up 0.64% and the S&P 500 was up 0.13%, meaning that 16 out of the last 17 trading days, the market hasn't moved more than 0.3% in a single trading day, just that little hiccup on Thursday.

The price of a Bitcoin crossed the $4 000 mark for the first time over the weekend. The currency/commodity is up 280% this year and up 524% over the last 12 months! I think there is no doubt that blockchain (the backbone of crypto currencies) and digital currencies will play an increasing role in our lives as we go forward. The foreign exchange system is ripe for a shake up. SWIFT is an ancient system and banks fleece customers in fees and poor exchange rates when doing a forex transaction.

The question to ask though is, "what is the intrinsic value of a Bitcoin or any other crypto currency"? The most common argument that I have heard is that there is a finite supply of it which gives value to what has already been produced. Like gold but unlike modern currencies. My reply is that not everything that is rare is worth something and there is a good reason we moved away from gold as our currency. If you don't know what something is worth how do you deal with extreme price movements?

The underlying demand for Bitcoin seems to be from people that are trying to skirt regulations. In China one of the ways people are getting cash out of the country is through Bitcoin. There have also been recent hacks where the hackers have asked to be paid in Bitcoin as ransom. Also don't forget the criminal organisations that were using it to launder money. I'm sure that increased regulation is on the horizon, what will happen to the value of the currency/commodity then?

I agree with the opening line in this article, The case for $5,000 Bitcoin. "Bitcoin is either an enormous bubble or has a lot further to run.". So what to do? As the saying goes, the surest way to get rich during a gold rush is to sell shovels. In the case of cryptocurrencies, the shovel is a GPU and the companies selling them are Nvidia and AMD (Nvidia and AMD have very different views on cryptocurrencies (NVDA, AMD)). See below, Byron has written on Nvidia's most recent set of results where Bitcoin mining gets a mention.

I personally think we are in bubble territory. Every time I go online I see an ad for buying Bitcoin and we have been getting increasing calls from clients, who might still be running Windows 98, wanting to buy Bitcoin. I am mindful that the extreme exuberance in the late 90's, had internet stocks in bubble territory for around 2 years before the bubble finally popped. So we might be a few years away from 'peak Bitcoin' or we are just getting started with an asset that the next generation will use. Either way I am much happier owning Nvidia.

Company corner

Byron's Beats

Last week we had second quarter results from high flying Nvidia. As is often the case with stocks that have done incredibly well over a short period of time, expectations were high. The results also coincided with a sizeable tech sell off last week. The share price is off over ten percent since the results were released, trading at the same levels they were at 1 month ago. That should give you some perspective.

Revenues were up 56% from last year to $2.23bn. Earnings per share were up a whopping 91% to $1.01 for the quarter. Expectations are for the company to make $3.71 next year and $5.47 in 2019. That is a possible 48% growth in earnings off what is already a fast increasing base. At 42 times next years earnings, the market has high expectations but you can see why.

A quick refresher, Nvidia manufactures Graphic Processing Units (GPUs). These are specialised electronic circuits used for image processing on a display device. They are more efficient than CPUs at processing more complex algorithms due to being able to do multiple processes at the same came. Nvidia actually termed the phrase GPU after creating the first of it's kind in 1999 used for gaming.

The demand for GPUs has exploded into all sorts of industries. In the Nvidia results they breakdown demand into 5 sectors. The image below lists these 5 sectors as well as recent developments within those sectors. You will notice collaborations with many well known business giants.

The biggest division is still gaming which contributes about 53% of revenues. Datacenter is the next biggest, contributing 19%. Pro visualisation contributes 10% and automotive contributes 6.4%. It is unclear which division mining cryptocurrencies falls within but Goldman Sachs estimate that these revenues exploded in the quarter and represent nearly 10%.

Cryptocurrencies, self driving cars, Internet of Things (IOT), robots, cloud storage, gaming, video, website hosting, Artificial Intelligence (AI) and Virtual Reality (VR). Nvidia chips are key to the success of all these exciting industries. Although the stock is expensive, we feel that the company will continue to grow like gangbusters. The ride will be bumpy, this is buy rated for clients with tolerance for volatility.

Linkfest, lap it up

One thing, from Paul

This week: Trump vs Jong-un is all bull****, Sentula Mining reborn as a Unicorn, hit Chinese movie filmed right here, and a "driverless" car spotted in DC - Blunders - Episode 68.

Michael's Musings

Here is a look at how the US market has fared this year - The Best and Worst Performing Sectors in 2017.

One of the biggest wealth transfers in history is still in its early stages but will start to pick up momentum as the 'silent' generation and 'baby boomers' pass their wealth onto Millennial's. The graph below is a good breakdown of where wealth currently sits.

I was surprised to see typewriting was still a course offered. I was more surprised when Google told me that there are still companies producing them - End of an era as typewriting tests phased out in India.

Home again, home again, jiggety-jog. Asian markets are green this morning, following on from where the US markets finished off on Friday evening. There was economic data out of China this morning that was worse than expected but still very healthy growth numbers. Earnings season starts in South Africa this week, noticeable companies reporting this week are BHP Billiton, Standard Bank, Curro and Anchor. The Rand seems to have settled in a new range around the $/R13.40's.

Sent to you by Team Vestact.

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Friday, 11 August 2017

Priceline Is Just Fine

To market to market to buy a fat pig. The 15 day streak of the S&P 500 not moving more than 0.3% in a single day came to a spectacular end yesterday, finishing down 1.45%. The tech heavy Nasdaq, was in even worse shape finishing down 2.13%. It seems the tensions between the US and North Korea took a day to settle in before having a significant impact on the market.

Three exciting companies had numbers out last night. Blue Apron, the recently listed food delivery company missed expectations and are down 18% in after hours trade, meaning that they are now down over 50% since listing date. Snap Inc also recently listed and also missed expectations pushing their share price down 17%. Nvidia was down 4% along with the rest of the market and then dropped another 7% in after hours trade due to their results, even though they were a beat! More on Nvidia next week.

Talking of red markets, this week marks the 10 year anniversary of the start of the market meltdown leading to the 'Great Recession'. The official start of the crisis is marked as the 9 August 2007, when BNP Paribas blocked the withdrawl of funds from three hedge funds due to "a complete evaporation of liquidity". The peak of the S&P 500 was 2 months later on the 11 October 2007, topping out at 1 576 points and then a steady drop until the fateful 15 September 2008, when Lehman Brothers didn't open business on Monday morning. It is worth noting that the cause of all the pain was the housing market bubble that had peaked in 2006 already, the delinquency rates started to rise in August 2006. It took one year for the effects to start to show on Wall Street and two years for Lehman to go bust, which then lead to debilitating fear and an absolute shutdown of the cash circulating around the banking sector. No cash moving around meant healthy businesses couldn't access credit for their daily operations. At that point a Wall Street problem became a Main Street problem.

If you bought an S&P 500 ETF 10 years ago at the official start of the crisis you are up, before dividends, by around 70%. Considering that inflation has been near zero for the last 10 years I don't think you can complain about 70% ? To get a 70% return over 10 years the market only needs to grown by, wait for it, 5.45% a year. That is all, reminding us about the power of compound interest. Yes, 70% over 10 years is not an amazing return but it is not bad either and if we continued at the same 5.45%, over 21 years we would have tripled our money. 'Not too shabby hey Nige?'

Locally our market was down 0.5% yesterday even though we started the day off in the green. Just about every sector was in the red except for gold miners, who were up 6% thanks to a weaker Rand (no-confidence vote) and higher gold price (missile comparing contest in the Northern Hemisphere). Unfortunately the only stock sitting on the right side of the 12 month high list is South32, on the wrong side are some former market darlings like Taste, Ascendis Health and Anchor Capital.

Company corner

Michael's Musings

On Tuesday night after the market close, the world's biggest online travel company, Priceline reported their 2Q numbers. They had revenues of $3 billion up 18%, ahead of expectations and net income of $720 million up 24%, also ahead of expectations. As is the case with any company, especially fast growing tech companies with high expectations, the past period is of less importance the then next quarter. Their guidance of earnings growth of between 4% and 10% was a bit lower than the market expected resulting in the stock selling off 8%. It is still up over 30% for the last 12 months, so where you draw the line in the sand matters.

The absolute size of this business amazes me. They have a $90 billion market cap yet most people have never heard of them. Through their sites there were 170 million room nights booked over the last quarter or around 1.9 million rooms booked per night, up 21%. Lastly, their spend on getting customers to come to their sites, they spent around $1.4 billion in the last quarter on advertising and marketing (most of it going to Google) out of a total $2.06 billion in operating expenses.

As more people want to travel and feel more comfortable using the internet to design and book their trips, Priceline will continue to see the cash rolling in. A recent study shows the dominance of their business (Expedia and Priceline now own 95 percent of the Online Travel Agencies market), I don't think the researchers included Airbnb in their numbers though? A company with high growth expectations will always have a bumpy share price, hang in there and book your December holiday on Booking.com.

Linkfest, lap it up

Byron's Beats

MTN has been through a very tough period but with a brand new management team and a recent sponsorship of the resurgent Bokke, things are looking optimistic. Financial Mail did a nice piece on their latest results titled MTN the bright spark once more? A few interesting stats that caught my eye were that out of 232m customers, only 72m have access to data. Still huge room for growth! They also expect their current target population of 700m to grow by 45m in the next 4 years. Sounds like an opportunity to me.

Michael's Musings

E-sport is a fledgling industry, have a look at lifetime career earnings of the best in the business. It is around the same as what golfers or tennis players make for winning one major tournament - The highest paid eSports player has won almost $3 million in prizes - one chart shows the world's top earners

I wonder how much a ticket for this flight costs? - The shortest scheduled flight in the world only takes 90 seconds

How big do you think the batteries will need to be for long haul trucks? The trucking industry along with the taxi industry seem set to be the first industries to be impacted by self-driving technology - Tesla developing self-driving tech for semi-truck, wants to test in Nevada.

Thanks to faster internet connections and better quality cellphone screens we have seen the growth in video consumption sky rocket. Facebook is now moving more directly into the video space where they will be a type of Netflix/ Youtube hybrid - Facebook is packing its first original video series lineup with annoying reality shows.

Bright's Banter

Here's a quick update from The Visual Capitalist on where the U.S. market is year-to-date on the returns front - Who's Thriving And Who's Diving

If you're thinking about a career in investment banking, make sure you join the right bank. Middle market and boutique firms seem to offer the best work life balance as well as the best pay compared to the Big Banks - These Are The Best Paying Investment Banks

Home again, home again, jiggety-jog. Markets in Asia are also red this morning following on from the US. Tencent is down over 3% so expect Naspers to probably be down more than that. Later today there is a CPI number from the US which is expected to be an increase by 1.7%, below the Fed's target rate of 2%, meaning that there is still no pressure to raise interest rates in the US too quickly.

Sent to you by Team Vestact.

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