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BRIC FDI flows, not all that it seems

March 27, 2013 in Uncategorized

“But back to that story about BRIC investments not being foreign, but rather dressed up as FDI with internal money. So just as rich Americans are looking to have investment companies in the Cayman or Bermuda, rich Indians are able to do the same into India. And the risks to these places, these small economies with large financial centres are essence at risk, if the home base tax authorities decide that this is a definite no-no.”


To market, to market to buy a fat pig. We finally caught a bid here in Jozi, partly because we had been drifting lower in the face of better and better global markets. The Dow Jones Industrial Average closed at another all time high last evening and the S&P 500 ended the session within a fraction, a point and two thirds away from the all time high. The top ten companies in the S&P 500 are nearly 21 percent of the overall index. And Apple is a whopping 4.44 percent of that, at the end of the LAST quarter, not presently. So, if Apple was at 700 odd USD a share, that would imply that the S&P would be around 24 points higher than we are now. And that record would have been surpassed. It is amazing really how those individual companies can make that kind of difference. Equally, amongst the other big constituents, Exxon Mobil peaked at 95 odd Dollars in late 2007, it is currently just above 90 Dollars a share. Exxon Mobil is a 3.25 percent constituent of the overall US market, with a market capitalisation of 403 billion Dollars. Or, in local currency terms, at an exchange rate of 9.28 to the US Dollar, 3.739 trillion Rand. If you take all the stocks from places 6 on the ranking tables down to place 25, from MTN all the way through to RMB Holdings, the collective market cap of those businesses are 2.744 trillion Rand. This is still a whole one trillion Rand less than Exxon Mobil.

I have purposely excluded the top five listed companies on the exchange, because British America Tobacco might be a trillion Rand market capitalisation company, but of the shareholder base only around 14 percent are South Africans, check out page 100 of the 2012 annual report, the exact number is 14.03 percent, excluding treasury shares. So roughly 140 billion Rands, a very significant value, is owned on the South African register. BHP Billiton have been excluded because of course there is a listing in London and Sydney, a plc and limited, but here we reflect the London listing. So whilst BHP Billiton on the local share register might look like a smaller entity than BATS, that is not actually the case when you add the two. If you check on Google finance the market cap of BATS ADR it is around 103 billion Dollars, 67.9 billion Pound Sterling, but if you add the two ADR programs of BHP Billiton in New York (BBL and BHP) you get to 173 billion Dollars.

BHP Billiton is a much bigger business than what is reflected here in this market. Their detailed annual report does not give me the information that I need, but Blackrock as their biggest shareholder own around 5 percent of the overall business. I had not had too much joy, so I called an investor relations contact in London, he said roughly one third UK and Europe, one third US investors, one third Aussie investors, five percent South Africans and five percent Asia/other. So we have good reason to exclude that, BHP Billiton too. SABMiller, that has a market cap of 55 billion Pounds, roughly at 14.04 to the Rand is equal to 772 billion Rands. But, and this is actually a big but, Altria (an American listed company) owns 27.39 percent of SABMiller, BevCo Limited (the holding company of the Santo Domingo Group, the Colombian business empire) own 14.98 percent. BevCo, I wonder where that is domiciled? From a little snooping, it looks like BVI. Ha! A little more on that very issue later!

But as you can see quite quickly, SABMiller is not a South African owned business anymore, it has global reach. The PIC however still is a significant shareholder, but “only” owns 4.49 percent of SABMiller. And then Anglo American, you will recall from that piece that we wrote last year, titled Anglo American and their platinum headache: “See that!!! Nearly two thirds of Anglo American shareholders are either from the UK, North America and Europe. Those people actually own the business. As a business owner, you have a right to appoint the best person for the job. And if the best person happens to be South African, to take the business forward, then by all means, choose that person.”

Anglo American is not really a South African owned business either. And then Richemont, where locally we get the opportunity to own global depositary receipts (GDR), 10 GDR’s equals one share in Zurich. According to the Annual report from 2012, page 40, roughly 21 percent ownership is from our shores. It is fair then to say that Richemont is NOT a South African owned company either, and we should be so lucky that we have access to these global giants.

So, having taken those five companies out of the reckoning the entire rest of the market capitalisation of the companies sixth to last on the ranking tables tallies up to nearly 5 trillion Dollars. What is so very sad then is that Exxon and Apple market caps combined are probably worth more than the entire equity holdings of South African investors, given what I have just explained above. The two biggest US companies by market cap are more valuable than our entire stock market wealth. Perspective, sometimes not altogether fun.


What is good enough for Warren Buffett/Berkshire Hathaway is good enough for me. Or is it? Because around here at Vestact we are sceptics when it comes to being investors in big financial institutions. They are prone to more than just a few problems, provided of course that they can suck it up, then you should be fine. Is a trading loss of 6 billion plus dollars equal to a mining project gone wrong and the associated write downs of the project? Same thing? Different types of risks associated with these businesses means that you should expect volatility from time to time, but surely even mining companies have a greater deal of clarity than perhaps a single person and a position worth billions of dollars?

That is perhaps a different argument altogether, and perhaps there is no clear cut answer, rather invest in something that you understand well. Berkshire made available funding to Goldman Sachs at what looked like very attractive rates for the Omaha based conglomerate, back in 2008. In the middle of the crisis. It was a time of need for the under pressure financial powerhouse, pressure from Washington DC, and pressure from all sides in credit markets that were essentially in the deepest ice age perhaps ever seen. Buffett stepped in, understanding that a then 139 year old institution was better run and better capitalised than their market peers. But who was to know in a time when normal didn’t apply. So when Goldman Sachs struck a deal with Berkshire, back then, preferred stock yielding 10 percent, and convertible warrants at below current market prices! If you read this WSJ article: Berkshire Set to Get Big Goldman Stake, you will see that the deal is good for all considered. Which is good I think, you always need a balance. So Matt Taibi, what do you think about that? Please write a 100 page piece that not everyone is going to read, but rather quote bits and pieces of how evil Berkshire and Goldman are. Thanks Matt, keep writing your clever stuff.


Wow. This is pretty amazing. At least I would like to think: Most foreign investment in BRICs isn’t foreign at all—it’s tycoons using tax havens. Just a little aside, just as we thought a few days ago, Russian PM, Dmitry Medvedev was quoted (Reuters story) as saying in a meeting with government officials in Russia: “The stealing of what has already been stolen continues”. Wow. Tough and strong words I guess from a fellow that I thought would follow that line, that is why I thought the Cypriots looking to the Russians for help was a long shot. Hope.

But back to that story about BRIC investments not being foreign, but rather dressed up as FDI with internal money. So just as rich Americans are looking to have investment companies in the Cayman or Bermuda, rich Indians are able to do the same into India. And the risks to these places, these small economies with large financial centres are essence at risk, if the home base tax authorities decide that this is a definite no-no. I know that the Indians put the Mauritians under scrutiny in the past, dare we even speak about Cyprus? Yes, because I am guessing that the governments of these BRIC group of countries could not really care that someone is looking to avoid the local tax authorities. Phew, but I can also imagine business connections have strong political connections. And as such, we will have to watch these things closely. But then I am often reminded that companies like Apple, Microsoft and Cisco have more than three quarters of their cash offshore, outside of the US.


Crow’s nest. We were trading up strongly at the open. Not anymore, perhaps some Italian political manoeuvring and a little more clarity for the Cypriot depositors. And locally we had the government suggest that Eskom is going to struggle through the winter here. How should we say, not good.


Sasha Naryshkine

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by sashan

Russian cocktails

March 20, 2013 in Uncategorized

To market, to market to buy a fat pig. No. That is what the Cypriot government voted, a tiny parliament (56 members) voted no, well 36 of them. 19 abstained, there must have been one person missing. But what now? I suspect that this is just political posturing, but there is hardly any time left. In the second quarter of this year there are principal and interest amounts of around 1.6 billion Euros to pay to the bond holders. And in the third quarter this year, the amount is 0.8 billion. Again, in a world where we talk about the Fed balance sheet being trillions, 2.4 billion Euros is hardly sizeable, but when your whole economy is around 18 billion, that represents a hefty 13.3 percent of their GDP. Around there. So, that becomes very significant. Seeing as the French finance minister said that there was no plan B, it is not immediately apparent where to next for the country. I suspect that this is simple political posturing, looking for more from the Eurozone. Check it out, I uploaded the photo from an official Eurogroup document written last year:

According to the WSJ, in this piece, titled Cyprus Rejects Rescue Plan, the government is working closely with the Russians for further loans, in return for possible equity stakes in their newly formed gas industry and banks . A 2.5 billion Euro loan is due to be repaid to the Russians in 2016, that amount is not included on the list above. What might happen is that the Russians could use this as a bit of a leverage tool over the Europeans, and why not? But CNBC suggests that the Russian money might be unsavoury to the Kremlin, and the Cyprus finance minister might be there to tell them that they are considering a 20 to 30 percent levy on their deposits. Gee, sounds like they are upping the ante here.

So, a little posturing, looking for perhaps more from the Europeans, in the coming days we will see who blinks first. The small matter of civil servants needing to be paid is, how should we say, a pressing matter? How do you say debt restructuring is almost inevitable, and is perhaps the next step. The horror of it all, I wonder who owns Cypriot debt? The pressure for the politicians in Cyprus must be completely unbearable. A pretty good look at the situation and “money” in general from Cullen Roche: Some Monetary Lessons from Cyprus. I am 100 percent sure that if there was a central European banking regulator, this would not have been allowed to happen. Time to move quickly in that direction, which of course is happening already.


Market participants are either treating the size and scale of the problem in Cyprus as it should be, too small really to worry about in the bigger picture, or were perhaps not giving it enough attention. Either way, markets locally drifted mostly lower through the course of the day, a big sell off in resources, and a sizeable sell off in Richemont. Sizeable, because in Europe the stock sank over four percent. Why? Well, it turns out that Goldman Sachs were hired to do a bookbuild, that went off well, of around 7 million shares, quite a large shareholder I guess. 520 million shares in total, is 7 million a lot? I guess it is. But the fact that the bookbuild went well suggests to me something that as is always the case, for every seller, there is also a buyer.

On the local jobs front we managed to add 22 thousand folks in the formal (non-farm) sector in the fourth quarter. See this: Quarterly Employment Statistics. See page five for the long and short of which sectors added for the quarter and which ones did not. Mining was essentially flat, construction jobs were shed (5000 in total), retail and services are where the jobs are being created. Government created a lot of jobs year on year, but shed jobs in the quarter. And in terms of gross earnings, it turns out that the best job to have is one working in the “community, social and personal services industry”. What is most interesting however, is that the employed salaries have risen significantly over the last four years.

At the same time we have seen local inflationary data this morning, and I am afraid to say that we are now starting to press towards the top end of the range. 5.9 percent. For the full release, check it out: Consumer Price Index February 2013. What amazes me about these numbers is that it is heavily weighted, as one would imagine, to the folks with higher incomes. But inflation is a problem that impacts on poor people the most. Because in the contributions segment, the pressure is being exerted by the food, transport and housing and utilities groups, as well as the services sector. Petrol, public transport, beer, electricity and vegetables all registered 10 percent plus year on year increases. Scary. We wait for the MPC announcement at midday.

In New York (New York), where the folks are urging the summer to arrive earlier, it seems cold there, markets essentially had a nowhere session. The markets have been hot, last evening however was another lukewarm session. Markets started off really well with another sliver of housing news that was pleasing, this time in the form of building starts and building permits, both rising to multi year highs. Excellent. Which means that more people building homes and applying to build those same homes which essentially means that the consumer confidence levels have to be more elevated than in the last few years. You would not embark on an expensive exercise if you felt the future was less certain.


Byron’s beats the streets The banks used to own and run Visa in order to link banks with different card issuances. When it listed in 2008 the banks each got a portion of the company. Some of the banks sold, some of them held on to them. The ones that held on have obviously done very well as the share price has gone from the listing price of around $64 to $156 today. Since the reorganisation in 2007 Visa and Visa Europe have operated independently because the members (banks) in Europe decided to keep it as a non-profit association and pay Visa Inc royalties for their services.

Why am I telling you this? Because when the agreement was structured the European members were granted a perpetual put option which allows them to sell at some stage. The WSJ has reported that the Visa Europe board will discuss in April the option of selling to US based Visa Inc. The price will be determined by a formula within the put option based on forward price earnings of the business and other such ratios.

The sale would raise billions of much needed Euros for the 3700 struggling members and would also be beneficial for the purchasing parent company. They can now focus on running this massive region for profit as opposed to relying on just the royalties. There will be lots of potential synergies and Visa’s network will just get bigger. It is one of those businesses where the bigger your network, the faster you can grow. The bigger you are the more merchants will be forced to accept your cards otherwise they will lose business. When that happens the more valuable you become to the client because your service is more accessible and the client will have preference for your brand over others.

That is why we have chosen Visa because they are the biggest transaction processor amongst the lot. Of course the business model is fantastic. I am told that transactions in Italy are still predominantly cash so as to avoid taxes but the government is now forcing electronic payments on their citizens in order to monitor the movement of money. Banks are doing the same, incentivizing electronic payments because moving cash around is risky. It is a no brainer.

Whether the deal will go through or not is speculation at this stage. But having announced a $2.9bn share buyback and having 0 debt, I am confident they will have the capital to finance a deal. We continue to add to this stock even though it has done well recently, the potential going forward is huge.


Crow’s nest. Who knows what is going to happen next, always something “interesting” on the go. The MPC decided to keep rates on hold, which was the right thing to do. What I do however know is that tomorrow is a public holiday.


Sasha Naryshkine and Byron Lotter

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Squeezing the pips out of Cyprus

March 19, 2013 in Uncategorized

“Of course nobody knows what the benefits were for the country of being inside of the Eurozone, I wonder if that would be easy to quantify? Surely Russians, who are around 30 percent of all the deposits would NOT have flocked to Cyprus if their deposits were in Cypriot Pounds. They would have found some other place to park their funds. Surely loans would not have been extended to Greeks over the seas if they had been denominated in Cypriot pounds? No, those would have been taken elsewhere …”


To market, to market to buy a fat pig. We learnt more about a little island in the Mediterranean than we knew before. Perhaps this decision, which has not yet actually been passed, will set a dangerous precedent, perhaps it is a lesson that the rest of Europe want to dish out. In reality, being in is better than being out. It is an election year in Germany. I am pretty sure that all sides have bailout fatigue. Oh, dash it all, the one Cypriot that I actually know, she has parents that live there and I saw her at the school dash this morning and forgot to ask her if she had chatted to her parents. Just to get a sense of the mood on the ground, which I am sure is more than a little frigid!

But surely it cannot be worse than nationalizing private pension funds, which has been done before, as someone pointed out on the twitter thingie, old, but relevant: Hungary Follows Argentina in Pension-Fund Ultimatum, `Nightmare’ for Some. Both are just too awful to bear, but I suspect the government nationalising your savings because they couldn’t get a grip on their finances, that is much worse. But how would you feel if the government dipped into your cash savings? Outraged. Crazy oligarch Russian money and tax avoidance deposits from Greece aside, this is dangerous. But I think a once off, this is NOT likely to happen in Spain, Italy, Ireland or even Greece for that matter. And seemingly, a spokesperson for the parliament suggests that this might not actually pass.

I also suspect that the Cypriots, the ones where the power lies, will bash this out until they reach a firm conclusion. Today and tomorrow have been declared bank holidays, parliament will make this decision. A very unpopular one. And no doubt will haunt them for the rest of their careers. A few little facts that Bloomberg neatly compiled in this article: Cyprus Bank Assets Dwarfing Economy to Make Aid Exception. Amazing stuff in there, really informative. The three biggest banks took heavy hits as they wrote down their Greek bond holdings, like everyone else. I am afraid that the quality of their loan books are more than poor, but someone would pay for that. The book I mean, if the banks went insolvent.

Depositors are seemingly guaranteed up to 100 thousand Euros per individual, per bank, as per this Deposit protection scheme from the Central Bank of Cyprus. But who would make good for these deposits, if the banks failed to get the necessary funding to stay afloat? No really, think about it for a second. What is missing and something I keep asking is, where are the regulators in all of this? Turns out two are British and one is Swiss: Independent Commission on the Future of the Cyprus Banking Sector. Or is this just a special commission? Turns out that they may have their work cut out for them. The banking system is outlandishly big. Too big relative to their economy.

Would this have happened if there was a central banking regulator? I guess not, because they would have been a whole lot stricter. Cyprus would not have been allowed to have done this, allowed their banking system to be 7 times the size of their GDP. Is there an alternative? The French finance minister just this morning suggested that there is no plan B. Nothing. A little bit of history is worth noting though, the Cypriot economy was worth 9.31 billion Dollars in 2000, to a whopping 25.3 billion Dollars in 2008. Mind boggling, that sort of growth. But of course nobody questioned that, that is expected! Byron pointed out something interesting, via the Motley Fool: Cyprus’ Unprecedented Bailout: More Common Than You Think. That one key paragraph:

    “If Cyprus had its own currency, it would be dealing with its economic problems by printing money. That would eventually cause inflation. How much? I don’t know, let’s say 6.75%. In that case, those with cash deposits in Cypriot banks would lose 6.75% of their money in real terms — the same amount being directly confiscated on most deposits through the IMF bailout.”

Of course nobody knows what the benefits were for the country from being inside of the Eurozone, I wonder if that would be easy to quantify? Surely Russians, who are around 30 percent of all the deposits would NOT have flocked to Cyprus if their deposits were in Cypriot Pounds. They would have found some other place to park their funds. Surely loans would not have been extended to Greeks over the seas if they had been denominated in Cypriot pounds? No, those would have been taken elsewhere, perhaps Ireland, but the language most certainly helps. This is not a new problem, I saw a paper written last year in July, through all my trawling, titled: Macroeconomic imbalances – Cyprus. It is truly the most insightful thing I have read over the recent days on the country. And don’t say you were not warned, it was here already. Note one sentence that almost puts it all into context: “The total private indebtedness (as a share of GDP) in Cyprus is the second highest in EU, with debt of non-financial corporations being the one that stands out.”

Too much reliance on tourism, productivity levels have fallen, government has become bloated, banking sector got out of whack, too much exposure to Greece, too late to act decisively. And why were the folks over at the EU too late to act? Well, there were more important things to deal with last year. Greece. Italian and Spanish bond yields. Various programs designed to strengthen the Euro. Ironically if the economy was bigger it might have taken a closer front stage. I suspect that the recent push back will see a watered down proposal when eventually parliament does vote. Of course what you won’t see is rich people marching in the streets in Moscow to demand that their government takes a look at this proposal. You are NOT likely to see that. The same could be said with rich Greeks, you are not likely to see them attract attention to themselves either. This small story continues to evolve, recent news suggests that those with under 20 thousand Euros pay nothing by way of the levy. Save the folks with smaller deposits.


    Byron’s beats the streets I am still reading those Warren Buffett annual Chairman’s letters in my spare time and enjoying it immensely. If you are interested in investing, these letters that Warren Buffett has written to Berkshire shareholders every year are better than any financial book I have ever read. Plus they are free and available on the Berkshire Hathaway website. Here is the link, from 1998 onwards you can download the pdf version and sync it your iPad like I have done.

    On Sunday I was reading the letter from the year 2000. The tech bubble popped in August 2000 but leading up to that period Berkshire had been criticized for not embracing the future of technology and missing the huge surge in those share prices. On the back of this very interesting period in the market where many lessons were learnt he came up with a very good analogy about distinguishing the thin line between investing and speculating. It was so good I had to share it with our readers.

    “The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities, that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future , will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.”

    Now I am not saying that we stick to the Berkshire philosophy 100%. Warren Buffett would not invest in many companies we hold, especially the technology ones. But it is a great guideline, especially when you are feeling a little overconfident and need to be brought back down to earth. You see, their philosophy is very conservative. They will not touch a business that they do not understand 100% and do not go near speculation at all. In Buffett’s world almost every South African business would not make his mandate because of their location. The theory that Africa is the next big growth story is far too speculative.

    Here at Vestact we are flexible. We tend to amalgamate a whole host of theories and apply what we feel are the important parts. We are conservative but not to the point where we would abstain from investing in a company like Naspers because they have a high valuation. Sometimes I feel being able to look at the bigger picture can be more important than the intricate number crunching details which are usually based on presumptions. Of course we are still learning as we go along and that is what is so fascinating about working in the industry. It is great to have mentors like Warren Buffett to guide you along.


Crow’s nest. The Cypriot parliament is closer to actually triggering a technical default than I guess we think. Not being able to pay peoples pensions and government officials salaries will sink home quite quickly. Ironically people will have to dip into savings. I genuinely feel desperately sorry for everyone here. I really do. But the alternative is much worse.


Sasha Naryshkine and Byron Lotter

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They are nuts

February 6, 2013 in Uncategorized

“Those crazies in North Korea are threatening something worse than a nuclear test. Bozos. If I could hope for one thing in my life it would be freedom for the people of North Korea. Right there is the best example of socialism (communism) and democracy (although not entirely) next to one another. How a more and a less liberalized economy has benefitted the people. If any crazy communist tells you of the collective and how it works better, just ask them the simple question, how many people crossed the Berlin Wall from the West to the East?”


To market, to market to buy a fat pig. Gee, that was quicker than I thought. Equity markets bounced back pretty hard yesterday, in part due to some better than anticipated services data out of Europe. The US number was a meet, and that was good enough. A bounce back this quickly suggests that there is more than one fellow fielding at back stop. With Dale Steyn seemingly you don’t need that! We were there Saturday to watch the most amazing bowling spell in a while, but my kids dragged me around looking for hats and ice creams, so I didn’t quite catch all of it.

Away from the cricket there was the confirmation that Michael Dell, a private equity crowd and Microsoft money wants to take Dell private. This was a poorly kept secret anyhow, the WSJ reports: Dell to Sell Itself for $24.4 Billion. The FT’s take is similar, the price is fair relative to where it has been recently. Although as we explained yesterday, it all depends where you drew your line in the sand, the last one, five and ten years have been poor for stockholders. So why now? If approved by shareholders this would be the biggest ever tech buyout and the largest deal since the financial crisis. That stinky period. But, again the FT reports (Daring $24bn deal to make Dell relevant) that none of the investors have presented a proper plan of how they would turn the business around.

So, how would this make you feel as a long suffering Dell shareholder? Particularly in a world where Walt Mossberg of the WSJ just suggested that the newest Microsoft product has an average battery life and is more than a little clunky? Why is that relevant? Because Microsoft are pretty much in the same boat as Dell. Business Insider have a great piece showing what Dell could do: EXCLUSIVE: Here’s The Secret Private-Equity Plan For Dell… A truly great piece from Henry Blodget. Whatever your take is, the fact that a deal of this size is taking place, that fills me with confidence. Deals only happen at this sort of scale when folks are confident about the future.

Those crazies in North Korea are threatening something worse than a nuclear test. Bozos. If I could hope for one thing in my life it would be freedom for the people of North Korea. Right there is the best example of socialism (communism) and democracy (although not entirely) next to one another. How a more and a less liberalized economy has benefitted the people. If any crazy communist tells you of the collective and how it works better, just ask them the simple question, how many people crossed the Berlin Wall from the West to the East? 5000 odd people defected to the West from the East and 136 died trying to cross over. I can’t find any stories of people trying to escape across the Wall into the arms of communism. If you find, please share. That tells me all that I need to know about socialism. And perhaps the most understated fact was that 2.5 million skilled folks left East Germany for good in the lead up to the wall being built. Extreme socialism, it really is a downer for economic progress. The state cannot do a better job than private money. Impossible, remove the profit incentive, remove willing and able human beings.


Jozi, Jozi 26o 12′ 16″ S, 28o 2′ 44″ E Platinum stocks weighed on the overall market, Impala Platinum specifically, that stock was down nearly three percent on the day. The stock is slightly lower over 12 months, up a lot over six months, around 23 percent, but down 38 percent over five years. Phew, if nothing the Implats ride has been really volatile. Perhaps someone at the Mining Indaba in Cape Town did not like what they saw there. Wild. This morning there are results from Sappi, another volatile stock, and the market is not taking too *nicely* to the numbers. Personally it is not a sector that we either consider a growth area, or one that has steady and reliable earnings. Sappi has neither and judging from the short term outlook, debt is going to continue to increase, and earnings are going to go sideways for a while. I quite like their specialised cellulose business, and the applications associated with the product, those look decent enough. It is also a market that they are making a bigger part of their business. But the old legacy assets that they have, man, I just wouldn’t touch it with a borrowed barge bowl.


MTN have been in the news over the last week or so, we should have expanded on what looked like a rather important announcement. Here is the very best SENS from the MTN investor relations website: MTN — delivery of report by Independent Committee. We were waiting for this, and I am sure that in recent days the stock has been lifted to higher levels on the basis that the allegations of an individual might actually be dismissed. That would obviously leave Turkcell with some egg on their face, if it was the case. Remember that this was the internal MTN investigation findings. Before you say, yeah right, I knew that was going to happen all along, bear in mind that Lord Leonard Hoffmann is chairman of this board tasked with looking into these allegations and his very good reputation is at stake. The next date to watch out for then is closer to the middle of this year, where the US Supreme court will decide whether or not it has jurisdiction or not. We will keep a close eye on this one.

The other newer and fresher piece of news is that MTN have announced this morning that they have increased their interest in MTN Cyprus to 100%. And there we thought all along that it was the odd one out, if you know what I mean. Odd one out in the sense that the GDP per capita in Cyprus is a great deal higher than their other operating territories. I suspect that MTN will continue to use a more mature and developed market, Cyprus, as a sign of things to come. The announcement does not even say how much half of the MTN Cyprus business is going to cost them. Small enough to not be reported, but I guess nevertheless an important market. I suspect that all markets are important for MTN, including Iran, where they are seemingly always up to some strange things. Including plastic jet fighters and sending monkeys to space. Real or not, this is what folks I read think of it: Iran’s New ‘Super’ Stealth Fighter Jet Is Totally Fake.


    Byron beats the streets. This morning we received a trading statement from Vodacom for the quarter ended 31 December 2012. Group revenue was up 1.7% but within this sales number there were lots of moving parts. Group data grew 23.3% while data customers grew by 33.8% to 18.5 million. People sure are lapping up those smartphones. The international operations grew 22% whilst group customers grew 12.2% to 51 million. Of those customers, 30.6 million are from South Africa where clients grew 11.7%.

    South Africa is still comfortably the biggest revenue driver with R15.5bn of the groups R18.3bn. This is certainly a concern and a risk. I would not go as far as to say the South African market is mature because I think current subscribers still have a long way to grow. But I do feel that the opportunities north of our borders are more attractive.

    In SA data revenue grew by 17.2% to R2.3bn. It is now 15% of sales and growing. Data traffic grew 29.8%.I have said many times that the better smartphones get, the more data will be consumed. In Africa growth is coming from both avenues, new smartphone users and more consumption through better phones. Pricing for data dropped 13.5% but this was compensated for by increasing traffic.

    I have already seen negative comments about the ARPU’s which have dropped from R161 in the 4th quarter last year to R134 this quarter. I am not concerned about this because a whole new business has emerged in the form of data which is making up for the fall in ARPU’s. Ironically the use of data is cannibalising profits from voice and SMS’s through services like Whatsapp and Skype and is the reason ARPU’s are dropping. If you look at the developed world’s ARPU’s I would reckon that ARPU’s in SA will bottom out and start to pick up as the country becomes wealthier and more developed.

    The international business has been growing well and if you exclude a once off sale and currency movements, service revenue increased 22%. Customers grew 12.9% to 20.4 million, data doubled to R306 million while data customers also nearly doubled to 4.7 million users. This was lead by 72.6% growth in M-Pesa which is their mobile payment business that has been so successful in Eastern Africa.

    This is what I take from the numbers and how I feel they will look going forward. Subscribers are still growing double digit. This will continue in the rest of Africa but will slow down in SA where we will still see decent subscriber growth. Data will carry on ploughing forward and will become more and more significant in the earnings mix. This will more than make up for the slowdown in ARPU’s. After a while I feel ARPU’s will start picking up again, especially in SA as more data is consumed thanks to more efficient phones. In telecommunication, when prices drop due to competition, people just consume more and spend the same.

    This means that these companies are far from ex growth. We still prefer MTN because they have access to more subscribers and more potential subscribers but Vodacom is still a good investment with good growth prospects and great dividends.


New York, New York. 40o 43′ 0″ N, 74o 0′ 0″W This level, that level, we often say around here that the index level is just a number. Everyone has been getting excited about Dow 14000. Because it has been here before, two days ago, but more importantly for the first time since October of 2007. It breached these levels again last evening. But what is more important is earnings, and the market expectations. Jeff Miller from “A Dash of Insight” explained it pretty well in his recent blog post: Dumb Money. The part that I was most interested was the table at the bottom, and I have hacked the first two rows and inserted a forward multiple:

Ok, that means if I apply the same multiple to the current market then I get to an S&P 500 level of 1862, which is 23 percent higher than where we are now. So, at the height of overconfidence the market would re-rate to those sort of levels. We are not even close and earnings are expected to continue to improve from here. So what am I really trying to say? I agree with Jeff I guess, the levels are pretty irrelevant from a historic point of view, earnings are more important. Equally, Mr. Market can simply re-rate lower in a low growth environment, I suspect that is what we have just emerged from.


Crow’s nest. What is quite interesting is that there is a significant gap that has opened up between the gold and the platinum price, largely due to two things I think. The premium that gold attracted when the outlook was dodgy, well, that is slowly diminishing. And perhaps the major reason is that the platinum market is expecting the first shortfall in over a decade. Certainly not new news, this has been knocking around for a while now. We are higher here again, another record if we close at these levels.


Sasha Naryshkine and Byron Lotter

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Yum! not so tasty

February 5, 2013 in Uncategorized

“It has been a very tough quarter for Yum! Brands who saw fourth quarter earnings slip 5.3%. It dampened what was going to be a fantastic year for the company. Well it still was a very good year. Full year earnings grew 13%. But were it not for the government report in China which questioned the quality of their chicken, it would have been a lot stronger.”


To market, to market to buy a fat pig. Global markets sold off yesterday, the bears finally had their day in the sun. Punxsutawney Phil over the weekend suggested that it wouldn’t stay that cold for much longer. Perhaps that was enough to make the bears emerge from their hibernation. I suspect however that the root cause of the selling was actually not market related as such, but rather led to selling of Spanish bonds. And aggressively at that, the worst day since September last year. This does not look good for Spanish Prime Minister, from the FT: Rajoy storm blasts Spanish bonds. Pfff….. a slush fund, a politician, abuse of public funds, well I never! Sorry, I forgot to include sarcastic alert. Many in a position of power in public service have the inability to separate what is ours from mine. Public funds are not “mine” OK? Along with that, and Paul mentioned it yesterday was the news that Silvio Berlusconi’s party is polling better. He invited everyone to his infamous shindigs suggested that austerity under him was bound to be a thing of the past. Sadly people respond a whole lot better to something that affects your back pocket rather than the long term reality.

So, weakening Spanish and Italian bonds, as well as the French finance minister suggesting that the Euro was too strong led to a pretty broad sell off in European markets. No, correction, a big sell off in European markets. I guess the short termers have had an itchy selling finger, looking for an event. France’s CAC40 ended the session down three percent, Germany’s DAX sold off two point five percent. Italian markets down 4 and a half percent and lastly Spain kicked in the chops too, down three and three quarters of a percent. Political shenanigans derailing a fragile European equity market recovery.

I took a medium term look at markets in Europe and the results were not that surprising. The healthiest market in Europe, the DAX is up around only 13.5 percent over the last five years. From the lows in March of 2009, it has doubled however, so sometimes it depends where you draw your line in the sand. The CAC40 in Paris is down nearly 24 percent over five years. The Spanish index has been hammered, the five year performance unfortunately points to a 38 percent fall from grace. But it gets worse. The Italian market is down a whopping 50 percent over the last 5 years. Err…. Forza Italia? So, as ever it depends what you look at and from where. If you have decided to be a European equity investor from the time that the ECB president, Mario Draghi brought out “the Mask” bazooka, markets have improved substantially. Six months ago. I guess that this is a series of speed bumps along the way in the great European integration project. The list of Europeans conflicts on Wiki is a long and sorry one, here is hoping that over time, because of economic ties the list becomes history.


Jozi, Jozi 26o 12′ 16″ S, 28o 2′ 44″ E At the beginning of the session we touched an all time high, but from there it was slip sliding away. For the reasons mentioned above of course, Spanish and Italian anxiety of a different kind. Which is much more difficult to predict, with uncertain outcomes post such an event having taken place. Our president suggested closure of mines in South Africa, Amplats specifically, that is tantamount to blackmail. I am not too sure what he means, but Amplats is not SAA. The taxpayer does not backstop Amplats. When the company is in financial trouble because of unprofitable mines, there are difficult decisions to be made, and unfortunately shareholders suck those up. Those shafts were sunk with shareholder funds. I can assure you that shareholders want those to work just as much as all stakeholders, if not more. For it is shareholders that entrusted the company with their savings to grow them, this is as big a disaster.

If shareholders decide that their capital is better allocated elsewhere, then I suspect there will be fewer projects going ahead. That is in fact already the case, Amplats have cut back their capex plans for the short and long term. This means fewer jobs, which means lower government revenues in the long run. If I were to force any business to continue to operate unprofitable shafts to benefit labourers at the expense of capital, that is not a sustainable model. What is the definition of a shareholder? “Shareholders are the owners of a company. They have the potential to profit if the company does well, but that comes with the potential to lose if the company does poorly.” The balance of course for governments is to make companies profitable enough to contribute taxes to the government coffers, as well as provide gainful employment for folks in society. Who in turn are being taxed themselves.

Investopedia have a really good explanation of what it means to be a shareholder. “Shareholders’ equity comes from two main sources. The first and original source is the money that was originally invested in the company, along with any additional investments made thereafter. The second comes from retained earnings which the company is able to accumulate over time through its operations. In most cases, the retained earnings portion is the largest component.” Of course, the folks who originally invested in Anglo American, I doubt many of them would still be shareholders. The risks that shareholders assume are high, and if they are not willing to continue to commit their capital to a specific company then I suspect the selling will push the equity value lower over time. And investors will be fewer. This great anxiety of attracting outside investors when there are perfectly capable investors here at home perplexes me. This time last year, corporate cash deposits were sitting at a record. And we have multi decade low interest rates. In short, companies are and continue to be paralysed by mixed messages around investment in South Africa.

Let me challenge you a little. If your business is in the fortunate place of sitting on a whole lot of cash, that you are at a wits end of what to do with it, why are you not either expanding your business or hiring more staffers? What is the simple number one reason that you are doing nothing? Please write in and we can publish your comments either anonymously or if you want to include your name. Many thanks and be absolutely sure to include your suggestions to change these things.


New York, New York. 40o 43′ 0″ N, 74o 0′ 0″
W
Stocks registered their worst session of the year so far, after having in recent days threatened to have got closer to the all time highs. The news again resurfaced around Dell going private, hey, whatever happens Dell has been an awful investment over the last one, five and ten years. In fact, the last good year for the stock was 1998 and 1999 which were heroic. And the price from the crazy NASDAQ highs is down nearly 75 percent. It depends for how long you have been holding the stock of course. If you have held it since they listed your gains have been enormous. Huge. Your return from the late eighties is, as per Google finance, 1206263.64 percent. In life, timing is almost everything. At these levels Dell trades on less than ten times historic earnings, perhaps the cheapest the stock has been since their listing around 25 years ago. Michael Dell himself has around 243 million shares of the 1.74 billion odd shares outstanding. The effective listing price (adjusting for all share splits) is 1 cent. He, Michael Dell that is, has definitely been winning.


    Byron beats the streets. It has been a very tough quarter for Yum! Brands who saw fourth quarter earnings slip 5.3%. It dampened what was going to be a fantastic year for the company. Well it still was a very good year. Full year earnings grew 13%. But were it not for the government report in China which questioned the quality of their chicken, it would have been a lot stronger. This announcement turned sales sharply in the last two weeks of December.

    Earnings for the full year came in at $3.25. Management reckon that same store sales in China will drop as much as 25% in the first quarter of 2013. That means that earnings for 2013 could come in lower, around $3.10. Trading at $60.48 (down 5% from the announcement) the stock trades at around 20 times.

    Most analysts feel this is a comfortable rating for a company like Yum! and when this China issues fades away earnings growth in 2014 will come off a lower base due to a once off. That is of course assuming the issue does go away. Our experience with this kind of news shows that these issues pass and the lure of KFC coming from the “trusted” Western World will prevail.

    Because it is an important issue I will copy paste what Yum! had to say about the issue in the release.

    “KFC sales in the last two weeks of the fourth quarter were significantly impacted by the intense media attention surrounding an investigation by the Shanghai FDA (SFDA) into poultry supply management at Yum! China. The investigation was prompted by a report broadcast on China’s national television (CCTV), which aired on December 18, 2012. The report showed that a few poultry farmers were ignoring laws and regulations by using excessive levels of antibiotics in chicken. Regrettably, some of this product was purchased by two poultry suppliers of KFC China. The investigation caused further media attention, including social media commentary, and this negatively affected consumer perceptions of poultry safety, and KFC in particular.

    On January 25, 2013, the SFDA concluded its investigation and released its recommendations. We appreciate their thorough and diligent review. The SFDA identified issues and provided “Supervisory Recommendations” to Yum! China to strengthen our poultry supply chain practices including refined voluntary self testing procedures, improved reporting and communications and enhanced supplier management. Our team in China has taken a comprehensive review of our current system and is in the process of incorporating all of the SFDA’s recommendations. We have always recognized the importance of building a world-class supply chain in China, which is why we have implemented a wide range of quality assurance and testing practices over the years above legal and regulatory standards. The SFDA’s recommendations will further strengthen those practices. The SFDA did not bring a case against Yum! China and no fine was assessed.”

    To put things into perspective of how important China is to Yum! let’s look at some stats. China is responsible for nearly 50% of profits for the company (not sales, margins in China are better than most regions). Of the 1976 new stores opened last year, 889 were in China. It is a huge part of their growth strategy because its return per store in China is fantastic. It is why they have outperformed the likes of McDonalds but also creates a risk of being too exposed to one region, and that risk unfortunately has resulted in a big drop.

    The share price has dropped dramatically. From $75 to $60 today. We feel the negativity is already priced in and probably oversold. We will add during this weakness.


Crow’s nest. We are slightly flat here to begin with, can you believe it. A whole lot of European Services PMI numbers look like a solid beat to me this morning, but retail sales across the region look like a miss. There is a US services number later, that should be interesting!


Sasha Naryshkine and Byron Lotter

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Amplats, it’s tough out there

February 4, 2013 in Uncategorized

“And production this year is expected to be around where it was last year, 2012, between 2.1 and 2.3 million ounces. Cash costs per ounce back in the year 2002 was 3599 ZAR. That is around 4.5 times higher now than it was back then. Sadly, back in 2002 total PGM production was 3.947 million ounces. Now. The pattern emerging here is exactly the same between Harmony Gold and Amplats. Lower production, higher costs.”


To market, to market to buy a fat pig. Whilst the jobs number in the US was more a meet (and greet), it was enough to see the “bluest” blue chip index, the Dow Industrials reach 14 thousand for the first time since October of 2007. Back then people were starting to get anxious about subprime mortgages and the general state of the housing market in the US. Cracks were starting to appear. And all these cracks were exposed as too much leverage, too much risk taking and not enough oversight coupled with perhaps an overly friendly central bank in the US. Back then most sectors were overvalued relative to today, check out figure 18 from this long piece: Earnings, Revenues, & Valuation: S&P 500 Sectors. Industrials (scroll to page 17 at the top) are trading at under 14 times forward earnings, back then as the S&P 500 topped out at 1560 (there and there abouts), industrials were trading at closer to 17 times forward earnings. Which was more expensive than the long time mean. Take a look at how cheap tech stocks are, perhaps collectively as cheap as anyone can remember. Healthcare looks cheap, financials not that much.

On a relative basis however, if you scroll down to page 18, longer term “cheapness” is laid bare. Not too sure that I would stake any meaningful allocations towards the financial sector, but that being said there are probably only two stocks that should catch a rebound in the housing market, JP Morgan and Wells Fargo. But know for the record that Vestact as a house is not in favour of complicated financial services companies as “safe” investments, if there is such a thing. If you need a single graph to show you what I mean, scroll forward to page 20, the page titled: S&P 500 Sectors Forward Earnings. Find the financials graph and then immediately below it see healthcare. Which one looks “safer”? Add to that mix that the powers that be in Washington DC are more bent on making the banks more utility like in the long run, and perhaps the heydays of the middle part of the last decade might be a thing of the past.

So, what am I trying to say in a convoluted way? The markets, at the same sort of levels as they were all those years back in October ’07, are cheaper on a forward basis now. All we have seen over the last few months, leading into the fiscal cliff and beyond is multiple expansion. Meaning that ordinary investors are willing to pay more for the market now than they were six months ago. Normally you should be keen as beans to get a discount, and not the other way around. I suspect that the sunny outlook does flow into an improved confidence, confidence that politicians can get the job done, hiring can begin and generally trade can start to expand again. That is all that we have seen, folks are willing to pay more for the same thing.


Jozi, Jozi 26o 12′ 16″ S, 28o 2′ 44″ E OK, this morning there is a set of quarterly numbers from Harmony Gold. And this is also for the first half of their financial year, we will focus on these. Why should we, here at Vestact and specifically me, care much for these numbers? We do not hold any of the shares at all. We do not encourage our clients to own any gold companies. Well, I guess sometimes you need to look at the numbers in order to crystallize why we are not invested in single commodity stocks and specifically gold companies. The issues around higher costs, a seemingly unhelpful government and militant labour unions does not exactly add up to a pleasant investment outlook. Cash operating costs for the six months increased by 15 percent, to breach 300 thousand Rands per kg for the first time that I can remember. Excluding Kusasalethu, cash costs improved on the quarter. That tells you why the mine is being shut. Ten years ago, if you were approaching 100 thousand Rand per kilogram you were in trouble. So, in short, cash operating costs have more than tripled in a decade. In fact, I checked, just to be sure that Mr. Memory was not too fuzzy.

It is sadly a lot more, for the same quarter a decade ago, cash operating costs were 68,302 Rands per kg, cash costs have increased four times over. Back then, for the half to end 2002, ounces produced, 1.57 million, the yields were 3.5 grams per ton, the gold price was 103,362 Rands per kg with a very weak Rand at that point, assumptions were for 10 ZAR to the USD. Presently, fast forward (DeLorean DMC-12 style) to these numbers, ounces produced for the half were 613 thousand ounces. WOW, that puts “things” into perspective. If you annualize that lost production you get to roughly 1.9 million ounces of gold no more. I guess that part is all you need to know about the declining gold production picture in South Africa. The ounces produced however are of higher quality I guess, underground recovered grades improved in the quarter to 4.77 grams per ton. Now listen in closely, the gold price received for the half is 460,244 Rands per kg. The Rand gold price is nearly four and a half times more than it was a decade ago. But, cash costs are about four and a half times more than they were a decade ago. And as you know, production is wildly lower than it used to be.

The share price is up over six percent this morning to top 60 Rands, but that is only half the story. The ADR price in New York over ten years is down nearly 58 percent. Ten years. Down 58 percent. As they say in the classics, that is all you need to know. And what about Wafi-Golpu? Out in the middle of nowhere, environmental issues, social issues, grades are average, I am not too sure if this is the saviour for now. I don’t know what to say other than we continue to avoid the stock, the company is stuck in a difficult downward spiral.


A company with problems of their own, not too dissimilar to the ones mentioned above is Anglo American Platinum Limited. The opening lines are unfortunately the long and the short of what was a year to forget: “In a year that was marred by illegal and violent industrial action across the mining industry, and where continued high levels of inflation and a subdued macroeconomic environment, particularly in Europe, led to severe margin contraction, Anglo American Platinum today reported an operating loss of R6,334 million for the year ended 31 December 2012. This represents a 180% reduction, from a profit of R7,965 million in 2011.” This notion that mining companies have billions of Rands, perhaps someone should send those two short lines to the powers that be.

The reason why the company continues to point to Europe is that motor vehicle demand has been awful. See the latest: Declining January car sales sink European upturn hopes. Sadly. So in the short term, a combination of austerity, short term policy uncertainty and tax compliance issues in Europe have seen lower consumption of Amplats core product. This major issue is lost on many people locally, including politicians and Joe Public.

I wanted to do a similar thing, as I did above with Amplats now versus ten years ago, and highlight how their costs have risen and their production is much lower, just so that many people can see all the issues that are facing South African mining companies. So let us start with the numbers today, production in a troubled year was 2.22 million ounces, down 8 percent from the year prior. Let us use the cash costs projection: “between R16,000 and R 16,500 per equivalent refined platinum ounce” And production this year is expected to be around where it was last year, 2012, between 2.1 and 2.3 million ounces. Cash costs per ounce back in the year 2002 was 3599 ZAR. That is around 4.5 times higher now than it was back then. Sadly, back in 2002 total PGM production was 3.947 million ounces. Now. The pattern emerging here is exactly the same between Harmony Gold and Amplats. Lower production, higher costs and no doubt much smaller work force has been the order of the day. Lower capex going forward also means that fewer jobs are/can be created. I have not seen a detailed costs breakdown over the last decade, but I suspect the usual suspects. And now Eskom want further increases.

I saw this morning an interview with the Chamber of Mines (involving Chris Yelland, and Brian Kantor from Investec) in which the Chamber guy said Eskom would have all the excess they needed in 2018 at the current escalation rate, implying that mines aplenty would be closed. I have always said that if government want to lend a helping hand, this is a possibility here. If you want to know why South African mines and industrial South Africa in general is under pressure, search no further than this table: Average price increases. Wow. And I guess that is all to say about that.

Sad face. Business cannot go along absorbing the costs all the time, if government want them to maintain full employment. It is pretty well known that Eskom employees are pretty well remunerated relative to the other SOE’s. Which themselves are comfortably above the private sector. This has been the mainstream line: Eskom hike for salary increases – report. Average salary over at Megawatt Park currently (average!!) 633 thousand ZAR per annum. I am not too sure what you think about that, but I would rather this amount offset the outstanding debt, after all, what major risks are these employees taking? And where is the competition? Exactly.


    Byron beats the streets. This morning we had a very interesting announcement from Aspen which has put them under cautionary.

    “Shareholders are advised that Aspen is currently engaged in discussions with MSD (known as Merck in the United States and Canada) in respect of a possible transaction comprising the acquisition of an active pharmaceutical ingredient facility situated primarily in the Netherlands and a related portfolio of pharmaceutical finished dose form products.”

    Now remember that Aspen already have a fantastic relationship with GlaxoSmithKline, a global healthcare company based in the UK. Glaxo own 18.6% of Aspen which they acquired in a deal which allowed Aspen to supply their products in SA. A second deal was struck which allowed Aspen to supply GSK products in Australia. This was bought for cash though.

    Although the details of the Merck deal are not given one would expect that something similar is being struck. Merck have some great products but like Glaxo their focus may not be on Africa, South America or Australia. You see Aspen take the responsibility for marketing and selling these goods in return for either shares or cash. You’d probably find that since they became larger they would prefer to pay using cash and debt as opposed to equity. Although when you lock in a client with equity your interests do become aligned so we could see a bit of both.

    Another interesting observation is that the acquisition is taking place in Europe. This could be Aspens entrance into a new continent. Why Europe you may ask? Well they entered Australia to gain access to Asia so this may be another gateway to gain access to the products and bring them to the developing regions where Aspen operate. At the same time Europe has an aging population, cheap debt and big growing populations to the east.

    This time around they are looking to buy a production facility. When these deals were first struck they would not have been able to afford a facility. But again this may have been forced upon them by Merck. It is also interesting to see Merck divesting from Europe. Do they see Europe as a place to get out of? I wouldn’t take that as a negative for Aspen, they strive on underappreciated, noncore assets. There are still lots of unanswered questions which I am sure we will get the answers to soon. As always we back what is often considered the best management team in the country to make the right acquisitions. If history is anything to go by, this will be an exciting development.


Crow’s nest. We are higher here again to begin with. Another record high. Although we are slipping.


Sasha Naryshkine and Byron Lotter

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Jobs Friday

February 1, 2013 in Uncategorized

“Expectations today are for around 160 thousand more jobs to have been added for the month of January. I am always amazed that so much emphasis is placed on the number when you consider the sheer size of the numbers. 160 thousand new jobs when compared to the overall labor force is only 0.1 percent. But I can promise you that if the number is 220 thousand, market will rally. And if the number is 80 thousand, the markets will fall, and hundreds of billions of Dollars of market capitalisation will be added or deducted from listed companies. When in reality, not too much (in the big economy that it is) has really happened. But like I pointed out, that market trades like crazy.”


To market, to market to buy a fat pig. Chinese PMI numbers released this morning, although above the 50 mark and indicating growth rather than contraction, have disappointed somewhat. That was the official data, which had been better than the HSBC PMI, but this time around it was the private institution that printed a much better number, in fact a 24 month high. I see….. now which one suits you better? I see some people are worried about the recent Chinese employment numbers, suggesting that we could see a hard landing in the second half. What? Same old stuff over and over. Get this now, the Chinese economy is not going to grow at next to eight percent forever. It is impossible. Growth will slow as the country grows economic output. In around two weeks the Chinese will usher in the year of the snake. I’m no snake, I am a dragon. And then in March the Chinese will officially change their government structure, the once in a decade Communist party changeover has taken place already, just around the same time as the US elections. Poor Chinese officials, I read in the FT that festivities associated with New Year are to be scaled back from the normal lavish celebrations to much more muted affairs. From sizzle to fizzle. Anyone here taking note?

The whole day today will be about Biff. I mean, the whole day today will be about non-farm payrolls. The most eagerly anticipated numbers for almost anyone who watches markets closely. There are 12.2 million folks in the US without a job, but because the country is so large that “only” equates to an unemployment rate of 7.8 percent. The civilian labour force in the US is 155 and a half million folks. The participation rate (the measure of those actually working out of the Civilian noninstitutional population, which is 244.3 million strong) is 63.6 percent and has been hovering around that area for some time now. There are more men in the civilian labor than there are women, but it seems that women are better at keeping their jobs than men.

Expectations today are for around 160 thousand more jobs to have been added for the month of January. I am always amazed that so much emphasis is placed on the number when you consider the sheer size of the numbers. 160 thousand new jobs when compared to the overall labor force is only 0.1 percent. But I can promise you that if the number is 220 thousand, market will rally. And if the number is 80 thousand, the markets will fall, and hundreds of billions of Dollars of market capitalisation will be added or deducted from listed companies. When in reality, not too much (in the big economy that it is) has really happened. But like I pointed out, that market trades like crazy. Like gang busters. Employment Situation Summary is where you must tune in around 15:30 our time this afternoon, if you don’t already have the telly and your favourite business channel on later this afternoon.


Jozi, Jozi 26o 12′ 16″ S, 28o 2′ 44″ E Stocks managed to eke out a tiny gain, financials dipped but industrials gained just enough to see us into the black. There were some strange moves, FirstRand sank, all the other banks gained marginally. Gold stocks took an absolute pasting as the bullion price sank a little and Rand firmed up a touch (better than anticipated trade numbers), back below that nine to the US Dollar mark. Harmony Gold took a lashing at the close, ending the day down a whopping five percent. Whilst some stocks look to beat or near all time highs, I am sorry to say that Harmony keeps testing multi year lows. I suppose a combination of costs, the Eskom outcome is one that everyone will be watching really closely. A story from last evening, by David McKay over at Miningmx lays it out: Eskom tariff is ‘tipping point’ for mines: Cutifani. Government is hell bent on declaring coal a strategic asset that they kind of forgot about their customers. Power generation cheaper at a micro level? Well, we should encourage Sasol to provide solutions to these businesses, but that might mean competition. And efficiencies. Hell no!

There was a surprisingly strong update from beleaguered mining company Lonmin, indicating that they have had at least had time to reflect on that infamous day etched into our memories forever. The company is important to this country, they are after all the third largest producer of platinum on the planet. And the company has answered the questions around their social issues that plague so many of these mines, who operate often away from urban areas and employees are from afar. It is certainly not a place that mine workers can call home. Migrant labour must be certainly the one of the trickiest issues that any company has to deal with, not just here, but globally, look at the issues that Foxconn had in China with riots and suicides around their working conditions. The production report themselves were also ahead of expectations, sending the stock 12 and a one third of a percent higher.

Sometimes things are cheap-cheap for a reason. That is just so poor, sorry. Rainbow Chickens released a trading update for the 6 months to end December and it looks pretty tough out there for the chicken producers. We knew that issues around imports and higher feed prices were biting, but perhaps not to this extent. The company explains: “The lower than anticipated earnings are mainly a function of the two major issues facing the local poultry industry, namely record levels of imports and escalating feed raw material input costs. The resultant oversupply in the local market has meant that the price of chicken in retail bears little reference to its cost of production, and has resulted in significant reductions in chicken margins.”

The only good news I guess is that in the last 6 odd weeks the Rand has weakened significantly to the Brazilian Real. By around 8 odd percent. So, local producers are now competing against chicken imports that are far cheaper. We will have to wait to see what Mr. Market is going to do this morning when we open up, 65 to 85 percent lower on EPS and HEPS suggests that in the middle of the range the company is likely to earn around 17 cents per share for the first half. Dividend could be in question this year. So they will probably make around 50 million Rands for the half. All that effort. Over one billion chickens are consumed in our country every year, it is a massive industry, but feed prices have been volatile at best. Perhaps the weakening currency will lend a hand in the second half, we will have to wait and see. Typically we have always avoided these businesses, because they are unfortunately prone to disasters from time to time. Oh, and I can imagine that their tax contribution will come tumbling down, not good…..


We should make entrepreneurs (and the newly created ones) a strategic resource. Government is not going to change the jobless situation in this country. Unfortunately there is a lack of skills, evident in the huge amounts being spent on consultants and more importantly a complete lack of resources. There would however be more resources should the tax revenues increase because of increased economic activity. Too many walls for business to negotiate around, the lack of skills is also a serious problem that we have around here in South Africa. So why coal? Well, I can understand, the vast majority of our power production comes from coal fired power stations. And we are in the process of building another two. A favourite client (you are all favourites) in Botswana told me what we knew, these were the last two ones ever funded internationally. Botswana, sorry about that, and apologies that you have massive coal reserves, enough to power Eskom for the next thousand years or so. I suspect that the Beijing smog and pea soup is just a reminder why we can’t go on burning fossil fuels forever. But coal as a strategic resource. And putting a tax on exports? Was it you who created the external demand, or do the coffers just need to be filled so that inept folks can take their place in society at the expense of job creation in the private sector. That is what it all boils down to me……


New York, New York. 40o 43′ 0″ N, 74o 0′ 0″ W Stocks sank on Wall Street, but still managed to close out January with an incredible gain, year to date the S&P 500 is up just over five percent. I saw that the BusinessInsider had found a graph of how the year ends up if January is an up month. I am not too sure that applies to logic around here, but it was interesting nevertheless. The one tweet overnight that struck was when Josh Brown (who mixes well on Wall Street) said the following: “Rolling with the bankers – Four Seasons to Phillipe – trust me NYC is in the grips of bull market fever” That is interesting. Because the common thread that I am getting is that the professionals are the worried ones, but the flows into equity markets are strong, very strong. The economic news is OK, that big miss in GDP as a result of perhaps two anomalies were perhaps exposed a little later.

Like I said however yesterday, isn’t this what we want, more private sector, less public sector? Less government spending on behalf of the people, more people creating business activity in the private sector. Libertarian type James Pethokoukis had this interesting post: More on the supposed austerity threat to growth. In which he clearly tells you from which side of the aisle he stands in the debate around government involvement in the economy: “We should want economic policy that enables private-sector growth, not prop up GDP statistics through government spending. I also pointed out that from 1994 through 1999, GDP growth averaged 4% a year. But government spending added, on average, just 0.3 percentage points to that total. The rest came from private sector growth. So to the extent the fourth-quarter GDP report reflects a shift in composition to the private sector away from the public sector, so much the better” I agree with him. So many examples could apply here too.


Crow’s nest. We are higher to begin, markets at another record high.


Sasha Naryshkine and Byron Lotter

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by sashan

Facebook. 67 bucks a user.

January 31, 2013 in Uncategorized

“The valuation at current and even next years levels is still difficult to wrap your head around, a 50 plus multiple. And that is for two years out. You are not buying fresh air here. You are buying a business that grew really, really quickly. Growth rates in terms of absolute subscribers will slow. I can’t think of anyone who has not got a Facebook account.”


To market, to market to buy a fat pig. European markets this morning are slightly lower, perhaps the lower GDP did not help, Spain is off two thirds of a percent, perhaps the El Clasico draw in the first semi final of the Copa del Rey is tugging peoples hearts. Oh wait, that came on the evening of the day that Catalonia seeks 9 bn euros from Spanish bailout fund. Simple solution. Sell Messi and Xavi and hey presto, problem solved. Any idea of a Spanish break up seems to have been rubbished with this idea. At least that is the way I see it. Or (oohhhh, this is very controversial) give Messi and Xavi to Real Madrid and that cost is absorbed at a national level. No, no, that would definitely cause a civil war, easier just to accept the bailout and the terms. Even if it means hardships.

The Israelis bombed Syria on the same day that it was announced that their long serving central bank governor, Stanley Fischer would be stepping down. Perhaps the country of his birth, Zambia, falling out of the AFCON in the group stages was too much to bear. And about the bombing, gee, don’t ask me on these matters I have no idea and it is seemingly dangerous to have an opinion. New Blackberry phones, models Z&Q 10 were released, with much fanfare. And RIM now is to be known as Blackberry. And not the tablet that they launched, remember that fine piece? I never even got to see one. The name change makes sense, the lack of apps does not necessarily help the case, and the lack of a keyboard, I thought that is why people liked that phone. Apple’s giant hedge fund cash reserves are enough to buy RIM 20 times over. The market participants after a bit of a tear sent RIM down 12 percent in the spot market and a further two percent after hours. Poor Thorsten Heins is battling on. But I guess the market speculators/participants told me what they think.


Mayday, mayday. Yesterday we regurgitated an Atlantic Wire piece that was from the AFP that suggested that Zimbabwean finance minister had made a comment that the country had run out of money. Apparently somebody, somewhere got that wrong. The reason why I know this is because a journalist friend told me that there was an interview on CNBC, the political exchange show that Karima Brown hosts. The long and the short of it is that I suspect Zimbabwe have a whole lot more than 217 Dollars left, or whatever it was suggested. A pretty big accusation of calling AFP wrong, if that is the case. Here goes: State of Zimbabwe’s Finances with Minister Tendai Biti.

“Rubbish story”. Not enough money to fund the referendum. I laughed at the way that Minister Biti compared Zimbabwe to South Africa and Nigeria, not close sir, not even close. Only by continent and border. What do you feel about Zimbabwe asking for a cash injection? Minister Biti suggests this is closer than you think. How do you feel about that? If the election and referendum is going to cost 200 million US Dollars, Zimbabwe’s “part”, as Minister Biti said, what is the full amount that he is looking for? He can’t unfortunately give details. Who would fund an election in Zimbabwe? Are you kidding me? Well done to Karima for having pushed him so hard. Poor Biti unfortunately is government and the opposition MDC, so I am not too sure whether he took kindly to the insinuations that the “bailout” money would be spent on other things. The fact of the matter is that Zimbabwe cannot afford either the referendum or the elections right now. And I am guessing that there is only one fellow (clue: fit as a fiddle) who is smiling now. Again, how do you feel about funding a (potentially farcical) election?


    Byron beats the streets. Last year City Lodge came out with a trading update which suggested that normalised earnings per share for the six month period are expected to grow between 20% and 35% from the previous comparable period. That is great news but the estimation is wide. Yesterday we got some more clarity from the company.

    “Further to the announcement released on the Stock Exchange News Service of the JSE Limited on 12 December 2012, shareholders are advised that normalised headline earnings per share, which excludes the costs and effects of the BEE deal, are anticipated to be between 27% and 32% higher than the previous year.

    Diluted / undiluted headline and basic earnings per share for the six months ended 31 December 2012, which include the costs and effects of the BEE deal, are anticipated to be between 60% and 65% higher than the previous year.”

    Ignoring the effects of the BEE deal, Normalised headline earnings per share for the 6 month period to December 2012 came to 224c. Let’s take the middle of the range 30% and we get half year earnings of 291c. Last year the second half was very similar to the first half earnings wise. Historically though, the first half which includes the December period is usually much better. However, as this trend shows, the company is growing fast and I think it would be safe to say that as the company continues to grow, we may see a similar thing happen this year whereby earnings are similar for the two halves.

    To predict forward earnings I will double this figure of 291c. Like I explained above by doubling this figure I am assuming growth in the weaker period. That gives us 582c earnings for the year. The share price has done really well over the last 6 months having been as low as R75 in June last year to R108 today. This means the stock trades at 18.5 times current year earnings predictions.

    This probably seems expensive but as we have pointed out many times about this stock, it has a property underpin which the market cap regularly trades at a discount to. Probably not at the moment, let’s check it out. In last year’s financial results released in June directors current estimated replacement value of their property was R3.8bn. According to the listed property index, property has grown 20% in the last 6 months. Add 20% to R3.8bn and we get R4.56bn. At the current share price the market cap of the company sits at R4.7bn.

    So you can assume that movement in the share price is attributable to both earnings and the property index. Interestingly it also shows you why the property market has picked up, higher occupancy means higher yields, so earnings and asset value come hand in hand for the stock. We are very glad we were patient with this one and continue to use it as a good entry into the property market. At the same time it is also a nice indication that locals are travelling (as Famous Brands suggests) as well as foreign travellers visiting our beautiful country.


New York, New York. 40o 43′ 0″ N, 74o 0′ 0″ W There was good news, bad news, middle of the road news, but mostly enough for the daily participants to “take some off the table”. Which is not code for anything. After what has been a terrific rally over the last month, with the S&P 500 up 7.1 percent from the last trading day of 2012. Fiscal cliff averted, all has been saved. I suspect that the re-rating is justified seeing as politicians have been at each other’s throats for some time now. There is seemingly the thinking that with politicians doing what is in the best interests of America, that is a positive. Because much of the concerns around policy decisions guiding the direction in the short term, at least the lawmakers are sitting around the table and talking.

What certainly got the tongues wagging was a big miss in GDP by the US, a negative print. Yes, – 0.1 percent. That was the bad. The biggest part of that was a monster fall in defense (American English) spending, which accounted for a 42.4 billion Dollar reduction. 42.4 billion Dollars annualised is 169.6 billion Dollars. Now, in the context of a 15.676 trillion Dollars economy, that is not that much. But…… Here is the ranking tables of countries in that output, I have hacked a table from this Wiki entry, List of countries by GDP (nominal).

OK, but Rick Santelli had a little thrombosis when Steve Liesman said, oh, if you exclude this, or include that. The reason for another Santelli outburst is for one reason only, he reads the headline print. GROSS DOMESTIC PRODUCT: FOURTH QUARTER AND ANNUAL 2012 (ADVANCE ESTIMATE) is the .pdf link. Here is the video of that Santelli outburst: ‘Let’s See You Spin This One Into Gold!’ I agree with Rick, if government defense spending is lower, it is lower. On set, Mark Zandi, who is a regular guest, he is also shaking his head. Liesman says that the things that matter are business and consumer spending which are trending better. I guess in the long run Liesman is right. I strangely thought, this is what people want, not so? Government to spend less on stuff like defense?

But the US economy is huge. An overall 2.2 percent increase in money terms is 289.7 billion Dollars. Which is nearly the entire economic output of Greece. Yes, read that line again. For all the anxiety about Greece last year, the year before, and the year before that. So, in a sense (this sounds crude) Greece could actually register zero economic output and the net outcome would be zero. Of course it is about the debt, both countries have plenty of that. A negative surprise is not welcome however, this is sort of like putting lipstick on a cute piglet. Bill McBride does a nice summary: Comments on Q4 GDP and Investment. Nice conclusion, but that is working off a relatively low base.

The only good news from yesterday was a positive ADP read. ADP of course are the payroll people who are always the first to report the monthly job changes, and a tantalizing entree to the real labor (again, Americaa English spelling) department numbers which will be on Friday. Excellent. For the full report, visit this page: ADP National Employment Report Shows Solid Job Gains Adding 192,000 Jobs in January. December however was revised down by 30 thousand jobs, that was not really encouraging. Most of the additions were “main street” additions, small and medium business added the bulk whilst big businesses actually showed that they shed 2000 jobs. The summary that you need is from the el-chiefo at ADP: “U.S. private sector employment got off to a good start in 2013, as 192,000 jobs were added during the month of January,” noted Carlos A. Rodriguez, president and chief executive officer of ADP. “According to the ADP National Employment Report, private sector employers created an average of 183,000 new jobs per month during the last three months. This is an encouraging sign of steady improvement in the job market.” Yes, agreed, encouraging signs against the poor GDP numbers.


Facebook had their annual and fourth quarter numbers yesterday. Like Amazon.com this is a company that is on a crazy upward trajectory, so sometimes it might be difficult for some to judge the stock reaction. Both the instant numbers (which is a little like drinking instant coffee, you can tell, I am a snob in this department), top line and bottom line beat expectations, but there was a marked surge in costs. Costs that were increased by adding more infrastructure as well as more staffers in order to be able to continue to innovate. Because ultimately that is what you are buying here. Costs and expenses increased a whopping 82 percent in the quarter. The company on a GAAP basis made nothing last year, on a per share basis it clocked one cent. A penny for 2012. On a non-GAAP basis the company earned 56 US cents per share. So, basically the multiple is infinite. For the time being.

What folks were looking at were ad revenues from their mobile business (remember the angst around that) and that had grown 40 percent plus. As you were. Facebook Reports Fourth Quarter and Full Year 2012 Results, is where you can find the nice blue and white layout. Nobody wants anything from you, there are no ads there, it just lays out the basics. More and more people are using their mobiles to access Facebook, 680 million in total, a massive 57 percent year-over-year increase. That was pretty telling. It of course means that folks have also upgraded their handsets across the globe. And not really to the Blackberry, which has lost market share. I do hear that the Facebook app on the old generation Blackberrys did not work that well either.

The most difficult question to answer is how do you value a company like this? Uniquely, Facebook knows more about their audience than anybody else out there. They know what you like, where you have been, who your friends are, what photos you post, who is in those photos, what your activity is, what mood you are in, who you are in a relationship with, your birthday, and the list goes on. The simple burning question is, how do you monetize a user base of one billion plus people? One billion folks use their Facebook accounts at least once a month, “active accounts” according to the company. The market is paying roughly 67 Dollars per user, the market cap of Facebook of course is one billion times that. I suspect that people who are really active, committed to the platform types are going to make all the difference. There are 618 million active daily users, roughly one in 11 folks on the planet. An advertisers dream. Like the ebook adoption, advertisers and payers for the services of targeted groups alike will take time to adapt to the platform. I suspect that the classified section in future will almost likely appear on this platform.

The valuation at current and even next years levels is still difficult to wrap your head around, a 50 plus multiple. And that is for two years out. You are not buying fresh air here. You are buying a business that grew really, really quickly. Growth rates in terms of absolute subscribers will slow. I can’t think of anyone who has not got a Facebook account. But then again, there are loads of people being born all the time. Maybe not in Japan, but elsewhere in the world. Even in the US, population growth rates are 3 million roughly per annum, those people will all need Facebook accounts, when they are old enough of course. Obviously the user fatigue, onerous (or lax) security issues and risk of competition still apply. But it feels like a Microsoft type scenario 15 odd years ago. Everyone has an account, like Microsoft dominated software in the PC market. The stock is not for everyone. Heck, Buffett (in the words of Taylor Swift), is never, never ever going to get together with this stock. Let alone back together.


Crow’s nest. Lower here, that US GDP miss is leaning on us here. Lower to start with and waiting for earnings to continue to roll in. All those anxieties about earnings, remember those?


Sasha Naryshkine and Byron Lotter

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by sashan

NASDAQ nowhere near, Dow in the zone

January 30, 2013 in Uncategorized

“There is a ticker on CNBC, during Fast Money that shows that we are now only a percent and a half away from the highs on the Dow Jones Industrial Average, three and two thirds of a percent away from the all time high on the broader market S&P 500 and of course I would not expect the NASDAQ to show up there. “


To market, to market to buy a fat pig. Markets globally continued the run upwards, a PE expansion story if you will. Not PE as in the place they call the friendly/windy city, but rather a price to earnings multiple. With confidence returning globally, and even individuals are getting involved now, companies have without doing too much just managed to get re-rated by the broad investment community. For very long everyone has been chasing yield in a time of uncertainty. Certainty equalled something that you could trust, and if that meant sovereign bonds there were very, very few countries that you could trust, Germany and the United States, along with Japan were the few places that folks were happy enough to just park money.

There is a ticker on CNBC, during Fast Money that shows that we are now only a percent and a half away from the highs on the Dow Jones Industrial Average, three and two thirds of a percent away from the all time high on the broader market S&P 500 and of course I would not expect the NASDAQ to show up there. The NASDAQ closed at 3153.66 last evening. January 29 2013. The all time closing high is 5048.62. So, that is only 1894.96 points to go, or roughly another 60 percent gain for the tech heavy index. That might take another ten years, but who knows, tech stocks were valued to infinity back then, they look cheap to me. Amazon.com released results after the market, we will have a look at those tomorrow, too much to cover today. We can have a look at the Caterpillar results from two sessions back.

On the local front we referred to the Minas Rio write down yesterday, we will expand on that front today and then just this morning there was a first quarter trading update from African Bank, of course we will have a look at that too. To the north of our continent Egypt is on the brink once again. Yes, it certainly seems like their peak was millennia ago. And this is the same place where I saw their finance minister on the box, just last week suggesting that Egypt was a great place to do business. Sigh. He must be pulling his hair out.


Jozi, Jozi 26o 12′ 16″ S, 28o 2′ 44″ E Stocks eked out a marginal gain, led mostly by the resource stocks. Although it did depend where you looked, the gold stocks sank over half a percent, mostly led by a drop in GoldFields shares, down one and a half percent and Harmony, which was down 1.8 percent. This is the lowest levels (share price) for Harmony Gold since September of 2008, which was at the point that we were right at the beginning of the {expletive} storm. The Rand is weak, but the gold price, after a 12 year run is seemingly going sideways for a while. The bulls are still there and suggesting 2000 Dollars per fine ounce, personally I have very little understanding of the inner workings of the gold price fundamentals.

Is it Indian households, central banks or just good old fashioned speculators? Combination of all of the above, a store of wealth as a result of human behaviour historically (108 billion folks said to have walked this planet) and more recently the only “fiat money” as a result of the excesses of central banks and governments. The idea that humans cannot create value and that printing out of thin air is possibly the most disgusting thing you can do, there is something there that does not stack up for me. You can build a house and sell it for something to a buyer. Have you created value out of thin air? More difficult to explain would be a service based industry that would be worth something to many people. Stay out of the conversation, there are too many crazy people with long hair telling us about the end of the world and how their gold will be sought after. You had then better get a deep bunker and a whole lot of shotgun shells to protect that bunker from zombies. As they say in the classics, if you don’t understand something, steer clear.


    Byron beats the streets. This morning we received a very informative trading update from African Bank for the first quarter of their fiscal year ending 31 December 2012. As expected trading conditions in the furniture industry and unsecured lending market remained challenging. Credit disbursements were flat for the quarter due to risk reduction measures. Leon Kirkinis has been very vocal about pulling back on loans to avoid a bubble. They did this by reducing both the average size and duration of the loan.

    But still their overall book grew by 8% to R57.3 billion as loans with longer durations still sit on their books. This also includes growth from their credit card facility (R509 million). They indicate that competitor growth has also slowed down significantly. They still expect total advances to grow 23% for the full year.

    Importantly for investors, Non-performing loans as a percentage of advances improved marginally. Then they clarify the impact of the strikes which as an investor is very interesting.

    “The fallout from labour unrest increased the bad debt charge slightly. ABIL’s exposure to sectors that are currently experiencing labour volatility is limited, with its exposure to platinum and agriculture less than 3% and 1% of advances, respectively. NPL coverage on both of these books is prudent based on the expected performance, and is substantially higher than on the overall portfolio. The industrial action, while disruptive to the economy, has also resulted in substantial wage increases in those sectors of the economy. The overall impact of the labour unrest and potential retrenchments will become clearer over the next few months. The group has intensified its focus on collections in the wake of the current trends in the market.”

    So there it is. The exposure is small and although they are feeling the effect, don’t forget that strikes more often than not result in higher wages which of course benefits ABL.

    Retail on the other hand looked very slow. Ellerines is definitely losing market share in a difficult furniture market. Merchandise sales decreased by 8%. I have said this before,the main benefit of the retail segment is the access to credit seeking clients through the kiosks they have built in the stores.

    To conclude we are still happy to be buyers of the stock, the price fundamentals are still very attractive, even at these slower growth rates. We have been right about earnings growth for this company, unfortunately the share price hasn’t followed suit. We remain patient.

    Coincidentally and very much connected to what Abil had to say, Cashbuild also released an operational update for the second quarter of their fiscal year. It was disappointing and the market has been ruthless, the share has dropped 7% so far today and is down 18% from the highs in August last year of R167.80.

    “Revenue for the company was up by 1% on the second quarter of the prior financial year. Stores opened since 1 July 2011 (new stores – 7 stores) contributed 2% of the increase, whilst existing stores (187 stores) decreased by 1%. This, together with the growth reported in quarter one, equates to an increase in revenue for the half year of 2%.”

    For a retailer this is disappointing. Not as disappointing as it would be for a Shoprite or a Mr Price who are priced at 18 times next year’s earnings but still disappointing for a company trading on 14 times forward earnings.

    But why the slow growth? The housing market is picking up and home improvement is one of the first things people spend on when they have extra disposable income. On top of that competitors like Massbuild showed 10% growth in this quarter and Spar’s Build It reported 17% growth for the year last year (they haven’t released an operational update for this quarter yet).

    I do have a few insights into why. Firstly Cashbuild are more situated in the rural areas whereas the competition who are experiencing good growth are focused on affluent areas. The rural areas are the ones who got hit by the strikes. But more significantly, what we have just heard from Abil, unsecured lending has been pulled back. Cashbuild rely on cash sales. Clients will go to Abil, lend R10 000 and build a wall using Cashbuild goods.

    I think it is a good thing that Cashbuild do not rely on credit for sales, they do not have that extra risk on their books. Plus Abil still stated that their book is poised to grow 23% this year. This quarter has been a hiccup thanks to sentiment due to the strikes. This is hopefully a once off. And again I will repeat what African Bank had to say. Strikes result in higher wages which means more spending at Cashbuild. For their size we still see Cashbuild as great takeover target for the likes of a Shoprite, Pick n Pay or even an African Bank. We will buy into this weakness.


I knew that the longer that I thought about it, the more that it would eventually come to me. This extreme angst over the Rand having traded independently from all other currencies and that it is all us. We are terrible, no good and the world is starting to shun our financial assets. You have heard of Poland. The country. Cold, potatoes, vodka, invaded many times because of where they sit geographically, that place you know. Well, since the country threw off the shackles of communism, not too long ago in fact, you would have expected them to have made many advances. Yes, read that clearly, since the shackles of communism have been thrown off, life has on balance been better. The country is close to becoming part of the European Union. GDP since communism ended is up 9 fold, over nearly 25 years. In fact a path not too dissimilar to ours, since apartheid ended and everyone (the majority) was included in the formal economy. Where am I going with this? Well, quite simply I plotted the Polish Zloty versus the Dollar, and then the Rand to the US Dollar and this is the graph that I get:

For the permanent link, follow this: US Dollar ($)/Polish Zloty (PLN) and US Dollar ($)/South African Rand (ZAR). My point is simple. Having seen that graph, over the last five years, is all our angst justified or is it just the case of exiting emerging markets that were high yielders and now steering more to what looks like beat up equities with better prospects. If you are going to spend your life trying to understand currency movements, you are going to lose hair, that has got gray already.


Anglo American was once the titan of the South African business landscape. As was Barloworld for that matter. Not that they are not now, but the simple truth is that they are no longer the giants that people remembered them for. Yesterday there was an announcement from Anglo American that most people expected: Anglo American confirms Minas-Rio capex and records $4 billion impairment. 4 billion Dollars after tax. Wow. We were expecting to see iron ore shipped in this half right now, that was supposed to be now. Soon. Those expectations have been dashed. Well, they were already, 13 November we already saw an update from the company, we wrote about it back then: Anglo American updates on their iron ore business.

I saw red when I read this quote from Cynthia Carroll: “We are clearly disappointed that the diversity of challenges that our Minas-Rio project has faced has contributed to a significant increase in capital expenditure, leading to the impairment we have recorded. Despite the difficulties, we continue to be confident of the medium and long term attractiveness and strategic positioning of Minas-Rio and we remain committed to the project.”

I can imagine (and this sounds incredibly harsh) that there will be a Mr. T sucker fools celebration come 1 April at Anglo, as the very last month of Ms. Carroll’s tenure at the helm comes to an end. A bad chapter in the Anglo American history. That said however, hindsight is a much better science than predicting. It really is. It would have been better to allocate those same resources to what is clearly a much better iron ore business here in South Africa. But the temptation and steer to diversify geographically was too much to ignore. The only person that benefitted (and big time) was Eike Fuhrken Batista. Sadly I read the first line there and I could not help but think that he, Batista was in the right place at the right time: “Eike Batista is one of seven children of businessman Eliezer Batista da Silva, who was Minister of Mines and Energy.” Coincidence? Not on your nelly (Nellie?). But hey, most people who got rich quickly or even slowly knew someone or something. I say most.


New York, New York. 40o 43′ 0″ N, 74o 0′ 0″ W Stocks again barrelled higher as a combination of less fear, more broader participation, an improving outlook as well as being supported by improved earnings starts to grip market participants. There were many things noteworthy, Facebook got crushed, after one of the most heroic comeback rallies in recent history. Depending on who you are, history for a day trader might be two hours ago, for a speculator that could be last week, but for an investor that might mean World War II. Facebook actually have results today. I can understand the anxiety. Over the three months the stock is up 40 percent. Over six months the stock is up 30 percent. Since listing however, less than 9 months ago, the stock is down nearly 19 percent. As ever, it depends where you draw your line in the sand.


It seems like an age ago, but it was only two days. Refer back to that point about history. Caterpillar reported results on Monday before the market opened. At face value, because one only sees the numbers flash up on the screens it seemed a miss. But as ever the detail is where you find it all. A pie tastes better than it looks. Imagine never having seen a pie before. A rectangular brown thing, how tasty could that be?

Pies and tastiness aside, this is the small matter of full year numbers. And fourth quarter. This was the best sales and profits numbers ever from Caterpillar. 8.47 Dollars a share worth of earnings, despite an 87 cents per share impairment related to their Siwei acquisition in June of 2012. Pronounced Sea Way judging from the media that I have watched. That amounts to 580 million Dollars. Of a business that they have just bought. WHAT? OK, first the company appeases investors by explaining that the business that they bought, Siwei is very important for their expansion plans in China, specifically in the coal markets. On the CAT website there is a short explanation, Siwei is “manufacturer of longwall roof supports” and most of the mining in coal in China takes place underground.

The folks who are happy to dish out stereotypical examples will have more cluster ammunition capabilities than the US airforce. The Siwei financials before the deal was done were changed and fiddled with in order to conclude the transaction favourably for the Chinese shareholders. WTF were the powers that be at Siwei thinking when they manipulated financial statements and presented false information? Did they honestly think that they would get away with it? Turns out that of course the execs did not/have not: Caterpillar fires Siwei senior execs for suspected fraud

OK, that nasty stinky sort of surprise aside, the results were good: Caterpillar Reports Record Sales and Revenues and Profit for 2012; Inventory Reduced $2 Billion in the Fourth Quarter. 2012 started well, but then faded, much like 2011 for the company. Slower demand in the second half led to a higher inventory, and so of course the company did what they do, and that is to react to the situation. Notwithstanding the slowdown, revenue still increased by 15 percent.

More importantly, the price reacted positively as a result of the outlook. Caterpillar have a fairly good idea based on their sales orders as to the state of construction and mining globally. But their range is so wide that they could actually drive a monster truck through guidance. 7 to 9 Dollars worth of earnings is being anticipated this year on a equally wide revenue range of 60 to 68 billion Dollars. At the bottom end of that range that would mean revenue would be ten percent less than last year. The reason that the company have done this is because the last two years have been choppy. Europe is still flat, whilst the outlook for both China and the US have improved. If the top end of the range is hit, then the company will register another record year. The stock is trading near highs last seen in May last year, the stock hardly looks expensive. We continue to accumulate the stock, the longer term urbanisation and continued resource intensity trends increasing remain intact.


Crow’s nest. You might have remembered a couple of weeks ago, a TV interview in which AMCU’s Joseph Mathunjwa suggested that South Africa should follow Zimbabwe’s example and let the state take a 51 percent stake in mines in South Africa. A very poor online article, Zimbabwe based is all that I have found: Follow Mugabe and Indigenise Mines: Union. Don’t get me wrong, I am not against empowerment, done the right way, getting the employees to participate, that is tops for me. The government of South Africa obviously realises that mining is a very tough business. Hard, very hard. Like many, he was of course reacting to the Amplats news with disgust. That is why when I stumbled across this article this morning: Zimbabwe Is Down to Its Last $217, I thought to myself, this is what happens when a government is militant towards the people that pay the bills, business of course. What? Zim have 217 Dollars left. And that is it. How they are going to pay everyone next month is a mystery to me. Unless the Chinese decide to tighten the noose of you owe us big time in the future, Zim are going to scramble. Never mind the fact that 100 million Dollars is needed for elections, as the article points out. 2013 seems to be tougher for our northern neighbours than many envisaged when they Dollarized their economy.

Our markets have opened up. Earnings season in full swing, there will be some attention turned to the simple economic news. ADP data a little later, this should be fun. Because it will of course give us useful insight into the biggest economic point of the month, non-farm payrolls on Friday.


Sasha Naryshkine and Byron Lotter

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by sashan

Apple. That sucker trades. Like a lot!

January 25, 2013 in Uncategorized

“Apple was a huge drag on the broader index which eventually ended as close to flat as one could possibly imagine. Down a whopping 12 percent is where Apple finished, we are reminded that this is a very widely owned stock and if the majors are pushing and getting out at any level, it will have an impact. 52 million shares traded yesterday, that is around 5.4 percent of the entire outstanding shares (938 million) of Apple. 5.4 percent? In one day? At that run rate the entire share capital of the company would swap hands in less than 19 trading days.”


To market, to market to buy a fat pig. Whilst folks in Davos tell us how cold it is, the fellows in the Northern North America are also finding the weather tough. Colder. And the fellows over in Northern China are also seeing tankers getting stuck in the ice in the sea. And over here in Jozi, the “real feel” as per the phone apps was somewhere close to 40 degrees, even at 4 in the afternoon. Yip, Robin Williams once had a few lines in a movie of how hot it is. “Fool, it’s hot! I told you again! Were you born on the sun?” Remember that line? This message is PG, so the rest can’t be repeated.

When last did you hear about the issues in Europe? Yeah, I am talking about the same old sovereign debt issues that plagued the area for the better part of three years. Paul and I were looking at bond yields of Germany and Italy, and it is extremely surprising that during the height of the financial crisis that Italian bond yields still carried a “you can trust this one” rating. The 10 year was yielding 3.71 percent in the middle of October 2010. But then in late November a year later the yield was over 7 percent and everyone was freaking out. And now? The yield is back to around 4.2 percent. Wow. There is an election in March, there is undoubtedly going to be a coalition and no doubt Mario Monti will be part of the new government, if the polls are to be believed. Silvio Berlusconi might pull a rabbit out of the hat, but I suspect that is a long shot.

I think that we can stay talking about peripheral (Europe) bond yields. Portugal ten year government bonds were yielding over 17 percent this time last year. Yesterday? 6 percent. In July last year the Spanish ten year government debt was yielding 7.6 percent, two weeks ago that was under 5 percent. It is a little higher now, over 5 percent. There were some sensible people who did not join the seething masses of zombies and villagers who were chasing after each other oblivious that they were in a collective group. Grexit this, Spain bailout that, Italy finished here, France even under threat far over there. What everyone forgot was that Europeans want this to work. So badly that the ECB governor got the ball rolling with his now famous “we will do whatever it takes” speech. So the problems have not gone away. But anyone who thinks that they are not going to be chased away with a rather large stick with bazooka capabilities is wrong. Same problems, committed to fix them. And that is why the zombies and villagers have gone back to lie down. Will it flare up again? Perhaps. Should you think that it is the end of the world. No. Turns out the collective biggest economy in the world is committed to working it out!


Jozi, Jozi 26o 12′ 16″ S, 28o 2′ 44″ E Our local market rocked to another all time high as the Rand weakened and global markets kept re-rating in the absence of any bad news. Less bad news equals fewer nervous folks. And now the polls are starting to suggest that folks are really bullish on equities. Really? What did you eat over the festive period? Human nature certainly dictates whether or not something that seemed expensive yesterday might seem cheap today. Locally the stocks that caught a serious bid were the likes of SABMiller, Naspers, Richemont and British American Tobacco, buoyed by a weaker currency. That is good for stocks, but not good for the ordinary folks on the street. Err…. surely that is you and I?

There were some strong warning shots fired by the MPC, led by the master on the bridge, reserve bank governor Gill Marcus. The full
Statement of the Monetary Policy Committee can be viewed at the SARB website. They need a little sunshine over there in Midrand, when you issue lines like these in the statement: “Downside risks to the outlook persist as the structural problems in many countries, and in the Eurozone in particular, are still unresolved.” But we just spoke about that….. A bit later in the message the bank suggests that the Euro region economic growth will remain stagnant, and do actually recognise that lots has been done. I wonder, what that confidence does to real people?

Sadly, the governor tells it like it is here in Mzansi. If you think that that is slang, then try out the Wiki entry for Mzansi and see where that resolves. “The inflation forecast of the Bank reflects a further deterioration in the inflation outlook for 2013 compared with the previous forecast.” Sniff. Why? Well -> “The rand exchange rate continues to pose an upside risk to the inflation outlook.” So, the moral of the story is that you must be careful what you wish for! I was just saying to Byron that for some quarters of local manufacturing this does a lot to counter cheaper imports. Sadly for many consumers, the cost of imported goods rises.

“…financing of the deficit may be more challenging despite relatively high domestic nominal bond yields, as sentiment towards South Africa has deteriorated, and non-residents already hold over one-third of the stock of outstanding government bonds.” So there you go, even though the line from the government is that South Africa is open and welcoming (but we may or may not talk about removing your mining licences) people are voting with their feet. And foreigners have been selling local equities. Well, at least in January, in November and December there were foreign purchases. Schizophrenic flows.

The manufacturing and mining sectors are still under some pressure, and that is set to continue. But there is nothing new in there. These however are the two lines that the business sector will run with in South Africa: “The MPC is mindful of the danger of a possible wage-price spiral and further employment losses should unaffordable real wage demands be granted while economic growth remains constrained. The risk to inflation should this scenario play itself out are significant in the absence of productivity gains.” So, whilst the unions in South Africa counter that argument that economists put forward that productivity is at a multi decade low, the Reserve Bank suggests that Loane Sharpe and his mates are right. Loane’s presentation of the facts are always hilarious, the way he can do so with a toned down expression. I have only ever spoken to the guy a few times, but he seems like a really likeable chap.

So, in the short term the MPC are worried about inflation, as we should all be. Because inflation is the scourge of the poor, it erodes their purchasing power. And with current relations between business and labour stretched to breaking point I suspect the unemployment situation in South Africa is not going to get better any time soon. I am still looking for some government department to come up with wholesale suggestions for small business creation and various breaks for small business creation in South Africa. Why doesn’t that exist? Small businesses is the life line of many an economy. There are large underserviced areas from a small business point of view. We can leave it there.


New York, New York. 40o 43′ 0″ N, 74o 0′ 0″ W The S&P 500 crossed the 1500 point for the first time since it slid below there in December of 2007. Five years plus ago. Apple was a huge drag on the broader index which eventually ended as close to flat as one could possibly imagine. Down a whopping 12 percent is where Apple finished, we are reminded that this is a very widely owned stock and if the majors are pushing and getting out at any level, it will have an impact. 52 million shares traded yesterday, that is around 5.4 percent of the entire outstanding shares (938 million) of Apple. 5.4 percent? In one day? At that run rate the entire share capital of the company would swap hands in less than 19 trading days. Talk about making up your mind!

But on closer inspection I saw that Apple trades on a normal basis, 19.72 million shares. True story, check out Google finance, where I have circled:

19.72 million shares trade each and every day? That is 2.1 percent of the volume trades each and every day. According to the NYSE Number of Trading Days 2013 pdf, there are 252 trading days in a year. So, if I multiply the average volume by number of trading days in a year I get to 4.969 billion shares trade a year. That is roughly 5.3 times the number of shares of Apple, which swap hands. Without using an enormous amount of expletives, WTF are people doing? Over what I consider a medium term as an investment, 5 years, the shares would have traded over 26 times their outstanding shares. No wonder those people who are hard wired to chopping and changing their views and flip flopping all the time. Nonsense. Idiots. Morons. Churning washing machines. Outrage. We continue to stay long. And all you folks doing market messages, please don’t ever talk about investors again. These are short term market participants looking for what, I am not too sure. Perhaps their clients should ask them the same questions!


    Byron beats the streets. Earnings season has brought us another set of numbers, this time from Starbucks who have been a lot more resilient than the other fast food/drink type businesses. The numbers were for their fiscal first quarter. Here are the financial highlights: Net revenues increased 11% to a record $3.8bn. Comparable store sales increased 6%, regionally the company saw 7% in the US, 11% in China and -1% in Europe. Importantly margins increased by 40 basis points to 16.6% thanks to a drop in the coffee price. This all amounted to an EPS increase of 14% to 57c. 212 new stores were opened globally including 3 stores in India (in my last message about Starbucks I mentioned that the queues at the Mumbai Starbucks were so long that hawkers were selling tea to the people waiting in the queue).

    Earnings for 2013 are expected to come in at $2.14, $2.66 for 2014 and $3.23 for 2015. That is strong growth but the share price certainly expects it, trading at $54.58 which is 16.9 times 2015 earnings. So why so expensive? The growth story is a no brainer. People love coffee and the margins are massive. It is still new to the Asian culture but is becoming more and more integrated as people work more and crave that caffeine boost. It is also an aspirational brand. I always say this but did you know that in China, people make sure they drink their Starbucks coffee with the brand facing outward so that others can see they are drinking Starbucks?

    They are also a company with strong ambitions and innovation. Their loyalty programmes have been very successful and recently they have entered the tea business. They are also using their leading brand in coffee to compete with the Nespresso machines. These have become extremely popular amongst the aspiring masses, especially here in SA. The model is great, sell the expensive coffee machine and then lock in clients with the delicious coffee pods. The Starbucks version is called Verismo, check it out here it looks great. They have sold 150 000 machines since the launch.

    Here is what CEO Howard Schultz had to say: “Solid growth in our U.S. retail business, further expansion of our Channel Development initiatives and continued successful execution against our expansion plans throughout China and Asia Pacific all contributed to the record results we announced today. Starbucks has never been better positioned to achieve the goals we have set for ourselves around the world and I have never been more optimistic about our future.”

    After looking at these earnings are I am very happy to carry on adding to this stock. It has also sparked a debate in the office after seeing this article in the WSJ the other day headed Is This the End of the Soft-Drink era? It talks about how soda sales in the developed world have slowed as people become more health and weight conscious. It is certainly a concern as Coke is one of our core holdings. In the office here none of us drink many soda drinks for that exact reason. But we do drink lots of coffee. It is certainly a trend I can see picking up momentum.

    After a lengthy debate we decided to start weaning down our Coke exposure and shift that into Starbucks. If you are happy with that idea give us a call and we will do the swap. Otherwise we will contact you in due course.


Crow’s nest. We will cover the Anglo production report over the weekend and have it in Monday’s message. The market seems to have received it really well, it looks like a big beat on all divisions. Excellent. Mr. Market is lower here after having had a ripper yesterday.


Sasha Naryshkine and Byron Lotter

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