Slasher's coffee beans

Jozi, Jozi. A mixed sort of a day, after all was said and done I was happy to see that we had added one third of a percent to close above that 29 thousand level for the first time since the end of April this year. And September so far has been a cracker, in fact the all share was at 27254 at the beginning of the month, so there has been 1800 points tacked on by the broader market. There was the most favourable inflation read in five years, with a CPI read better than the expectations at 3.5 percent. Yowsers.

What moved my Jozi markets? Session end the Jozi all share index clocked in at 29069, up 97 points or about one third of a percent. Resource stocks held the market back, down half a percent on the day. General retailers had a great time on account of an almost certainty of a rate cut at the next meeting. I still remember the Reserve Bank governor signing off with I will see you at the next meeting, if not before that. Do you think?

All I have heard since BHP Billiton put forward a price for Potash is that there is going to be a counter bid here, or there, or from this group or that. And yet, I have still seen nothing concrete. I said at the time (perhaps naively) that I thought that BHP Billiton were the ONLY company that could make a bid of that size. It was just too big for Rio Tinto, and their shareholders are shy of taking on more debt again and Vale had other issues of sorts, although they might find it easier to muster up the cash than Rio.

A couple of news pieces that interested me about the BHP Billiton Potash which struck me as worth sharing, oh ja, thought so: Sinochem struggling to mount Potash bid. Try and ignore some of the crazy Google adverts. Although the related links below suggest that Sinochem could be close to bringing together a few parties to make a counter bid. For the time being, if they had the money, or were looking seriously, that suitor is waiting for injury time before making an appearance.

And it turns out that Marius Kloppers visit to Canada has failed to impress the relevant folks, although I am sure that he will tell you otherwise in his strange Nathaniel type way. Do you see that from this article: BHP’s Courting Falls Short in Impressing Canadian Potash Stakeholders, that there is a specific law around deals this size. But like I said, as in the iron ore JV that is pending with Rio Tinto in the Pilbara area in Australia, I am sure that BHP Billiton have done their homework before they made the offer to shareholders official.

I don’t buy that a large multinational with the kind of resources that BHP Billiton have WONT be beneficial for Canada. Is that not a kind of thumbs up for your area and could mean that over time the size and scale of the machine BHP Billiton would mean more investment than a company the size of Potash Corp. Who one would think are constrained somewhat, when compared to the financial muscle of BHP Billiton. Point made, let us move on.

Yay, the stale local CPI data for the month of August was released at the end of September yesterday. I am being too hard on the fellows over at StatsSa, I think that they have done an amazing job at restoring credibility after some questionable statistics a number of years ago. You see, time heals all. In some cases, ask ex Governor of New York general Eliot Spitzer, you can get a TV show on CNN, just two years after resigning from public office. For, how should we say, being a client of a prostitute ring. I tell you, there was some parties on Wall Street back in March 2008, they did not like Spitzer when he was attorney general.

Anyway, here it is, the official release: Consumer Price Index – August 2010. Electricity which forms less than two percent of the overall basket is up 18.3 percent year on year. Yowsers. Medical services, which account for less than one percent of the basket is up 8 percent year on year. Education, which accounts for around one and a quarter percent of the basket is up 10.2 percent year on year. Communication, which accounts for 3.22 percent of the basket was down 3 percent year on year.

Clothing and footwear, at just over 4 percent of the basket only saw a year on year rise of a little over a percent. Transport accounts for a whopping 18.8 percent of the basket, yet was up only 1.1 percent. The other big contributor to the basket, Housing and Utilities, which accounts for 22.56 percent of the overall basket, was up I guess a slightly more worrying 6.3 percent year on year. That is about what the petrol price has risen over the last year, 6.4 percent. All in all, this is good and tees us up for another rate cut at the next meeting. Which the reserve bank website tells me is 17 and 18 November. Just a hunch here, but methinks that there might be an interim meeting.

Do you subscribe for the COSATU newsletter? You should, because it is always important to read everything. Yesterday I was particularly vocal and excuse me in advance used more than one expletive after I had read the rebuff to the Wal-Mart deal. But remember, I am a capitalist pig who only looks out for shareholder interests. And not the downtrodden working class of the country, but I think that these points that COSATU made about Wal-Mart is worth replying to.

So here goes, the points that they made and my replies alongside them:

“* Wal-Mart is a known anti-union company with training and toolkits for managers to keep the workplace union-free.” So what? The local unions have disrupted enough business here in the last year, that does not create ANY new jobs. Wal-Mart is protecting shareholders, good for them.
“* It took almost fifty years for workers to successfully get Wal-Mart recognise a union at one of their US outlets.
* It has closed down departments and stores in North America where workers have successfully unionise themselves.” Let me remind COSATU that is in America, where loose labour laws see the employment situation as completely horrible and dire, but the official unemployment rate is LESS than 10 percent. Here the official rate sees nearly one in four folks unemployed.
(I have deleted a whole lot of points, can’t answer to all of them)
“* In the US wage levels at Wal-Mart has been found to be between 26%-37% lower than the national average.” And? Didn’t you want to continue to say that you don’t need to be an engineer or investment banker to stock shelves and say that there is a special on diapers in aisle 39. Ouch.
“* In 2008 it was fined 2 billion US dollars for more than two million wage related violations.
* Recently it was compelled to pay 34 million US dollars in unpaid back wages.”
I can’t find anything that suggested that they ever paid the 2 billion, I have heard of the case: Wal-Mart Faces Fine in Minnesota Suit Involving Work Breaks. They actually settled later in 2008: Wal-Mart to pay $54 million to settle suit over unpaid work. Four individuals. 54 million Dollars. Nice for them.
“* Today in the US, it still represents the main opposition to a bi-partisan Free Choice Act that will allow workers to form and join unions easier.” Same answer as Charlie Munger (Buffet 2nd in charge) gave the other day about charity: “I believe Costco does more for civilization than the Rockefeller Foundation”. Meaning that the benefits for everyone are greater than any charity (handouts) can replicate.
“* It conducts illegal surveillance on its employees to root out any attempts to unionisation.” But the burning down of a Game store in Benoni is just fine.

And lastly, I heard that Wal-Mart is responsible for employing 2.1 million people. Who would otherwise have jobs at ……..? And in fact Wal-Mart are looking at getting to around 3 million jobs over the next three years.

I had a chuckle when I saw this, Tax cuts paid for? With job creation? Can’t get there from here.. You know that the rich people in the US have had a serious tax break for the last 10 odd years. The Bush tax cuts they call them, that is not fair because every member of the congress and house that voted for them has to take responsibility too, that list is just way too long though to call it the so-and-so tax cuts for the rich.

The author at the Angry Bear has actually worked out what sort of jobs the tax breaks would have created if the rich had actually created jobs with all their wealth. But they have not, as Mark Haines, the rude old lovable guy from CNBC pointed out, the Bush era created few jobs over the last ten years. In fact when taxes were higher in the Clinton era, more jobs were created. Politics? Mid-term elections?

Who cares that Moody’s downgraded Spain? And anyhow, why should we be surprised at how late Moody’s are, because it was laughable that Spain still had one last AAA rating. Fairly large marches across Europe yesterday against all the austerity measures that have been implemented along the way. Realistically, what do the unions suggest that the countries involved do? Borrow at much higher rates and fall foul of any new rules that the EU could impose and risk economic sanctions from the other EU members? Perhaps pull out the description from its union filing in the drawer marked “unintended consequences”.

My most favourite fellow from China writes a great blog, his last one basically is what China could do with their currency if they wanted to. Not that they are inclined to, even if the US House of Representatives passed a bill which could see signed into law (after the elections is when the Senate will vote) which could see the US impose restrictions and sanctions on trade with China. Hmmm… the Chinese retaliated and said that this violates World Trade Organisation rules.

Here goes the full article from Michael Pettis (who lives and works in Beijing) on what the Chinese could do: The politics of Chinese adjustment. I have included the table below (I hope he does not mind), this all looks like good outcomes for internal consumption. Which is what we want. What we don’t want with any revaluation is more expensive Chinese goods, but that is inevitable. For those who HAVE savings, these outcomes would almost all be favourable:

Stay tuned to the currency wars, there is something completely political about this as Prof Pettis and the commentary below refers, but a fascinating post. Nice.

New York, New York. Energy shares had a good time, BP topped 40 bucks again, first time since the big gains through July and early August. Not all the Fed is convinced that the asset purchase program (read artificially low rates) should continue, Fed Philly president Plosser is that person. Do you think that politics and the mid-term elections have anything to do with this? Plosser and Hoenig out on a limb here, good to have debate out there, don’t you think?

Session end the Dow closed 22 points lower to 10835, the nerds of NASDAQ down 3 to 2376 and lastly the broader market S&P 500 turned in with a loss of nearly 3 to 1144.

Currency and commodity corner The broader commodities complex has risen through this morning, the gold price clocking another record at 1315.9 Dollars per fine ounce, the platinum price last at 1663 Dollars per fine ounce. The oil price is higher at 77.97 Dollars per barrel. The copper price is last at 366 US cents per pound. The Rand is strong (what, again?) 6.95 to the US Dollar, 11.06 to the Pound Sterling and 9.50 to the Euro.

Up periscope. We have improved through the morning here and are trading comfortably in the green, thanks to the better commodity prices over the course of the morning.

Sasha Naryshkine
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Jozi, Jozi. Wow. I am astonished at the number of days where the index had closed near to where we opened. I count this as a fourth day in the last fortnight where the overall level of the market hardly changed versus the previous session. Aside from that, there was still a lot of action, the Rand continued to power ahead against the Dollar, but this was all to do with Dollar weakness and not really Rand strength. As my top currency reference guy (a real African, an Algerian guy who lives in London), Ashraf Laidi pointed out, to make my point: “Gold hit a 10-day LOW (not high) against Aussie earlier 1336.. to give an idea on AUD strength”.

You see that, the gold price might be printing new highs in Dollar terms, but against all other currencies it is a different story. Our reference point is that ETF, ticker GLD, which to remind you is a unit that is one one hundredth of an ounce, in Rand terms. And that price closed at 8820 last evening. In fact GLD’s high is back in June, just before the World Cup, where it traded as high as 9600. But still, in exactly a year you would have been up 21 percent, even in the face of a very strong Rand Dollar exchange rate. This time last year the Rand Dollar cross was 7.38, so a recent five percent surge is hardly anything to get excited about.

What moved my Jozi markets? Banks were marginally higher, broader resources were off one quarter of a percent, platinum miners were down one and a quarter percent, gold stocks added three quarters of a percent, retailers were up by about the same amount, and all this translated to a gain for the Jozi all share index of 13 points to 28972 points. We are now up a whopping 4.72 percent on the overall market for the year. We did clock through 29 thousand points briefly yesterday, the high for the year is 29565 on April the 15th.

The low for the year was back in February, 25733, by my count. I guess this is the least volatile year we have seen in a while. Sectors that have crushed all the others include retail (up 41.4 percent this year) and Food and Drug (up 37.2 percent this year). The losers are the platinum stocks (down 13.1 percent) and broader resources as a consequence (down 5.7 percent this year). And that in large part is why we have not made as much progress this year, the resource heavy index has held back the overall market.

One of the periphery favourites of the punters and market participants alike is a company called Capitec. A second tier bank that really has come to the fore over the last five years, taking on the majors and their competitors alike. Is it a threat to the bigger banks here? Not now, but they are really making a real fist of it, lowering their fees aggressively and being quite transparent in their advertising campaigns. Perhaps in five years time.

Here are the numbers for the half year to end August, headline earnings per share up 58 percent to 340 cents, the interim dividend at 85 cents (dividend cover slightly worse to four times), the client base has grown to two point five million folks, up 42 percent. There is a branch network of 422, the employee headcount has grown 24 percent (4726 at H1 end), the ATM network has grown 14 percent 439 outlets branded Capitec and 939 in partnerships.

The number of loans advanced increased by 46 percent to 2.6 million overall. Average size loan 2494 Rands. That is it. Not a lot you say, true, not a lot at all. But growing sharply.

OK, the prospects are about what you would expect from a company of this nature, aggressive, they have been nimble and have captured the attention of market participants always getting a premium above their peers. Good for PSG, who are still their biggest shareholder, they (PSG) own around 36 percent of the business. Prospects: “We will continue to open new branches, acquire more clients and grow our advances book while managing our capital requirements.” Cute.

The gross loan book is 7.8 billion Rands, that has rocketed 97 percent when compared to H1 2009. Provisions, they spell it out: “The provision for doubtful debts as a percentage of the gross loan book amounted to 7.1% compared to 7.0% in August 2009 and 6.8% in February 2010.” And “the gross loan impairment expense (before recoveries) for the six months increased to R447 million from R294 million for the same six months of the 2010 financial year.” That is to be expected with a book growing that fast.

Funding is key here, because the very important shift to wholesale away from retail represents a huge thumbs up. Notwithstanding that ramp up of wholesale funding, retail fixed savings and deposits have also increased sharply. The very attractive deposit rates are too juicy to ignore. Capitec emphasise the shift: “The mix of funding available to the business makes it possible to manage liquidity conservatively and ensures that funding is not a constraint on growth.”

It is one of those companies that have looked expensive every time you look at it, but has had a knack of earnings growing into the lofty share price. I cannot for the life of me say what it is that bugs me whenever I look at this one, perhaps it is the very fact that it is expensive relative to our preferred stock in the sector, African Bank.

Do you remember the questions that I asked yesterday, about whether or not the temperature had been turned up? It was basically prompted by the Anglo American downgrade by UBS. Here were some of your answers to these questions, but all in all, everyone agreed that the risks were up. There was one respondent that suggested that this was neutral and the creep had been happening all the way back through the era of Mbeki. Check it out:

“…I think one must acknowledge that although Thabo Mbeki implemented some terrific economic policies and was undoubtedly pro-active in ensuring SA’s appeal to foreign investors, he was totally ineffective and downright regressive in his approach towards domestic matters. He undoubtedly sowed the seeds for many of the problems that country has today, particularly the chaos that exists in some government departments because of his ‘centralisation’ approach towards procurement, etc. The corruption that exists too, is not a symptom of Jacob Zuma’s rise to power. It is a tendency that has been creeping in for over a decade.

And these are just folks opinions of what is happening and what has been happening out there, and are not the broad view. Bear that in mind, this is our collective audience, of which we are all part of. Check out some of his points (OK, let us call him B, his first initial) on how to advance our economy. These are B’s suggestions on how to solve unemployment and grow the economy:

“At the end of the day there are a few simple policy changes govt can make to encourage FDI, and keep current investors content. Amongst them:
a) Limit govt spending, esp on unnecessary extravagances ;
b) reduce govt ownership and control of property and businesses (Eskom etc) ;
c) reduce marginal tax rates ;
d) reduce cost and uncertainty of enforcing contracts (improving the efficiency of courts etc) ;
e) simplify and reduce the tariff structure on international trade ;
f) remove all international capital and exchange controls ;
g) restore freedom of choice to individuals and businesses in employment relationships (abolish the minimum wage, or reduce it if we must keep it) ;
h) reduce the bureaucratic costs of doing business.

I agree with B, but the unions will NEVER let this fly. This might be dismissed as some sort of capitalist propaganda, perhaps I am talking for them, make up your own mind.

I am sure that most of you out there would agree with all of this, but this is preaching to the business converted. I had a stronger view from a present employee of a major platinum mining company about the present landscape. He is on the battleground and this I guess is more real and personal and as such a much more emotive issue for him. Let us call him S, his first initial. This is what he had to say:

“Yes, the risks have increased – the Sishen Iron Ore/Acerlor Mittal debacle by the DMR is typical of the lack of capacity and knowledge of economics that a resource based economy, dependent on attracting foreign capital, does not need! Never mind the ongoing threats of nationalisation which the current leadership is too weak to dismiss. We are busy killing an industry in this country!”

Something that S feels strongly about clearly. He also pointed out that the mine where he works does employ 80 percent local, contractors are 90 percent local, sundries 70 percent local and stores about 40 percent local and 20 percent internal province. So business has contributed to the lives of the locals no doubt. But I guess if you took off your business cap and slapped on your socialist cap (a little black one with a red star) you would argue that if the state owned all of this, folks would benefit more. In theory chaps, never in practice, as I have often said, the most innovative nations on the planet encourage capitalist pigs. Advancements are made through individual discoveries not by collectives. My view entirely.

Another short sharp response from a fellow with the first initial N (let us be boring and call him that too) was as follows: “In response to your query, as a retired gold mine manager, I think “yes”, the risks are higher.”

I had a longer conversation with N thereafter and asked him about his views about the decline of Gold Mining in South Africa. I promise to share his views with you, once I have banged them out over the next couple of days with him. You know, the decline in output, rising costs, the dangers of mining here. It is after all an industry that is 124 years old in South Africa. Is that right? If you check on Wiki it will tell you of the History of Johannesburg. Edit that if you want to, just be nice OK.

A fellow, let us call him M, had the following to say: “YES, the risks are up. Not only nationalization as policy, but expropriation by stealth.” We had a conversation thereafter and he, like N, referred specifically to the Kumba Iron Ore, Sishen and the out of nowhere Imperial Crown Trading claim to the lapsed Arcelor Mittal rights. Now remember that Arcelor Mittal are looking to buy Imperial Crown Trading, that vote is sometime this week. The easiest money that some folks have ever made, ask the titans of South African business how they made their money. And then lastly a chap called H gave me a simple “yes”.

The tribe has spoken, DMR. In this reality exercise we can’t vote them out. Because they have ten visible immunity idols.

New York, New York. A lot of market commentators have been placing more and more emphasis on the mid-term elections as a potential catalyst to move markets higher. I get the distinct feeling and in fact it is almost a given that the democrats will lose ground to the republicans. And the uber conservative Tea Party types. Check out Larry Kudlow’s tweet from last evening: “Big U.S. business confidence is down for sales & jobs. Washington is the obstacle. Uncertainty vs. confidence? This election is everything.” But then again, he is a conservative all for big business. But I like him a lot, Larry that is.

And all the talk about Quantitative Easing part two is driving finance ministers to drink, the Brazilians unhappy with the strength of their currency. Washington putting pressure on Beijing to just do something with their currency. Float some more please. I laughed and said to Byron there should be one (Yuan) currency. The Dollar is still the king, the queen and the jack. And the Ace. Until fours are wild.

OK, apologies, many of the stories about Wal-Mart entering African through Massmart not making the major networks screens. They are picking it up now. But it was so lame on the Bloomberg version in New York, the Bloomberg reporter Sarah Eisen suggested that “yesterday Wal-Mart bought Massmart”. I see, as easy as that, no guys, a long way to go.

On the company front Walgreen rocked, as earnings were much better than expected. On the flipside of that was Monsanto, the agricultural business were smashed 8 percent after a too lukewarm outlook. In January this year they were at 86 bucks, now they are below 49 bucks. Yikes. Notwithstanding that, I quite like the company. The chairman of the board happens to be a fellow called Hugh Grant. How many times do you think he is confused for the real Hugh Grant? Or the other Hugh Grant.

Session end the Dow Jones closed at the top end of the range, up 46 points to 10858, the nerds of NASDAQ up nearly ten to 2379 and the broader market S&P 500 up five and a half to 1147.

Currency and commodity corner The Rand is power to the Dollar this morning, 6.97 is the level, 11.03 to the Pound Sterling and 9.47 to the Euro. The oil price is trading higher at 76.32 per barrel. The gold price is off its best, but near the all time Dollar highs, 1307 Dollars per fine ounce. The platinum price is last at 1649 Dollars per fine ounce. The copper price is trading at year highs, last at 364 US cents per pound.

Up periscope. We will start better today here, on account of the late Wall Street rally.

Sasha Naryshkine
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Jozi, Jozi. More and more folks are talking about participating on this wild and precious continent of ours. Wal-Mart are making real moves to have a go at our favoured retailer, the big black box retailer Massmart. For the locals it was a feast, Paul and Byron did a great video of what they thought about the Wal-Mart interest in acquiring Massmart. Check it out, my colleagues are funny, Wal-Mart makes a bid for Massmart. After the dust had settled at the ANC NGC, Anglo American was dished out with a downgrade in the Friday session in London. We missed that remember, all these holidays. I spoke to someone yesterday who moaned that we had to wait all the way through to December 16 before we have another public holiday. Hmmmm…..

What moved my Jozi markets? Massmart had a corker of a day, see below some more on that, dragging the rest of the retail sector much higher with it, the sector up 3.08 percent. Banks also had a cracker of a day, up nearly two and a half percent. The gold miners lost a little shine as the local currency firmed through the seven to one US Dollar mark. This as the Dollar continued to lose ground to the Euro. What a hoot, everyone was talking about Euro Dollar parity a mere half a year ago as the European woes escalated through the beginning of summer into June and beyond and now we sit with Euro Dollar cross at 1.346, having been over 1.35 yesterday. Back to Jozi, the local markets closed 244 points better to 28959, up around 0.85 percent.

Yesterday was in parts all about the Wal-Mart and Massmart deal, it failed to register on the major networks overseas, but was most certainly the top story here. There were of course the major publications like the WSJ and the FT making positive noises about the deal, so the print (can you still say that?) media had it top of their agenda. We watched the price of Massmart trade quite comfortably above the tentative offer price, at one stage Massmart traded above 153 Rands a share, but settled back to close at 149 ZAR, up ten and a half percent for the day. The lowest it traded on the day was 148 and a half Rands.

Did you get a chance to see the Grant Pattison webcast, I suspect this was done on Sunday evening after their board meeting. It was great that this could be a new form of media dissemination, and again underscores how important the web has become in our lives. Check it out, I still think that ours (above) is better, this has been served via the Moneyweb Youtube user: Walmart non-binding expression of interest Q&A with Grant Pattison. Hah. But then again I would think that ours is better.

One of the most interesting factoids about the deal is that this is the biggest purchase (remember, if it were to happen) by Wal-Mart in around a decade. So, if you needed any sort of vote of confidence for your country, no bigger vote of confidence than this. I guess.

Hot on the heels of the purchase of a little known flame grilled chicken business called Giramundo comes an announcement from Famous Brands that they will be buying up a little known Bakery business called Vovo Telo. Apologies to all the residents of Newton Park and Richmond Hill in Port Elizabeth and those folks who know the outlet at 44 Stanley in Jozi, near the Gas works. Near UJ. You know, over there. So an interesting almost new strategy from the dudes at Famous Brands. Again, the theme is familiar, buy an established brand and then roll out a massive network. The price is undisclosed, I suspect that it would be around the same as the grilled chicken business acquisition, take a 51 percent stake and let the manager slash owner run with it.

So what about that Anglo American downgrade by UBS on Friday? Surely it is nothing new? The report suggests that there is “rising political risk” and points out that there has been “random application of mining laws”. I guess that they are referring to the Sishen Iron Ore and Arcelor Mittal rights with the Imperial Crown Trading entity that appeared literally from nowhere. It is laughable and scary at the same time. In fact we are welcome holders of BHP Billiton in light of much of the recent events, I would agree that there is heightened political risk. Ironically this comes after the radical thoughts of the ANC Youth League were basically told, we will look at nationalisation, and that is about it.

What do you think? Do you agree that in light of recent events from the DME that the political risk temperature has risen. And as such, local mining assets should attract a discounted valuation relative to their international peers? Perhaps the question being asked itself is the answer that we are looking for. We are giving this serious consideration here in our many daily discussions. Sometimes I reckon we should stick in a webcam here, so that folks could check out what we do here. Send me back a mail with a simple, yes, the risks are up, or no, they are the same.

I have been having several thoughts about the NHI, the national health insurance that is mooted to be phased in all the way through to 2025. I think that it is a very noble idea. Everybody should have universal health access. The biggest problem is how do you pay for it? Extra taxes and levies is the answer. Burden the taxed with more taxes. I had some suggestions about where it should be collected. And it is not going to be popular. Lifestyle choices, bad ones should pay a much higher price. Place more taxes on sin items, but broaden the net. If we are thought to be an obese nation (check South Africans among world’s fattest people, survey finds) then tax the source more.

Because surely if the items that cause folks to become sick in time are allowed to be sold without assuming the bulk of the blame, that is wrong, right? Or am I thinking like an oddball again? And one of the real reasons that the finding delivered was that unhealthy food was cheaper than healthy food. Really? Is a vetkoek cheaper or easier than a salad? Will have to work than one out, but sadly a vetkoek might actually be cheaper and fill you up more than a salad. But if you taxed the ingredients for such an item, then no. And if you taxed cigarette and alcohol consumption a lot more than present, that would solve many a lifestyle and social issue. But methinks that move would be wildly unpopular.

We have no more money to pay civil servants. That was the line from government. But. We are going to import thousands of doctors in the coming years. Huh? I was reminded by my mother that I had completely free healthcare in Mozambique, I had my appendix out at the university hospital in the eighties. The fellow who did the op was a Chinese doctor. We did not pay a cent. Look, I survived and the whole thing was an experience that I will never forget, neither awful, nor good, just a wild experience. Plus I (my parents) did not pay a cent. The clerk when approached by my mother to settle the account told her that this is how we do things in our country. A nice Chinese doctor. Perhaps this is what we are talking about.

Lastly, on the NHI, how are we going to afford the massive upgrades, which the minister of health, Dr. Aaron Motsoaledi said would be more than we spent on the World Cup? Or am I just moaning too much here about the affordability aspect? Just putting a few questions out there, when government has been firm to the unions saying that we can’t pay them more, but these are projects and these are our ambitions. The Development Bank of South Africa said that they would be the preferred partner and could possibly finance the projects.

Research in Motion have finally unveiled their tablet called the Blackberry Playbook. Engadget has done the down and dirty including all the specs that you would want to know, although perhaps a little too technical, quick mom, don’t read the specs: RIM introduces PlayBook — the BlackBerry tablet. BlackBook? I suggested BlackPad too, but no, RIM settled on the PlayBook. The name will grow on the users no doubt. The only question that I have is, will the business community develop the necessary applications and create the same hype around this product as the iPad release did.

The operating system is not the clunky normal Blackberry operating system and in fact is the QNX operating system. They, RIM, bought QNX back in April this year, at the time folks thought not too much of the unknown entity, QNX. Well, this has most certainly thrust them into the limelight.

If you don’t want to follow the link above to see what Engadget think of it then check out the pictures from the RIM website, you know that you want to: You have never seen Blackberry like this. I am not convinced, but then again my colleague Byron would remind me that I am biased towards the Apple products. Which I am. But I still wonder if Henry Blodget is right, this is from the beginning of the month from the champs over at the Business Insider: BlackBerry Is Doomed, Says Another Analyst — Even In The Enterprise.

New York, New York. Stocks slipped in the last half an hour off about an even keel for most of the session. A CNBC poll suggested that we were not too far away from a QE 2, not a ship but rather more quantitative easing round two. There was a little M&A activity, some in the airline industry where Southwest said that they would be buying a company called Airtran Holdings with a monster premium. Airtran is a holding company for a Florida based airline, but Americans live in their own little bubble that this was bigger news than the Wal-Mart acquisition of a little company in Africa.

Unilever having a go for beauty products company Alberto-Culver, wanting to pay around 3.7 billion Dollars. Nope, still smaller than Wal-Mart slash Massmart and nothing on that. Session end the Dow had fallen 48 points to 10812, the nerds of NASDAQ was off by 11.45 to 2369. The broader market S&P 500 traded lower by 6.5 to 1142.

Currency and commodity corner The oil price is lower at 75.67 per barrel. The gold price is lower at 1289 Dollars per fine ounce. The platinum price is also lower at 1610 Dollars per fine ounce. Dr. Copper says we are lower at 355 US cents per pound. The rand is steady at 7.03 to the US Dollar, 11.11 to the Pound Sterling and 9.44 to the Euro.

Up periscope. Lower at the get go with the fall off on Wall Street last evening and with futures pointing lower across the board.

Sasha Naryshkine
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Jozi, Jozi. Thursday was a million miles away. Well actually around 100 hours since the JSE last printed a price. The electronic printing of prices, there hasn’t been a tape for years, yet our industry still has quirky sayings like, “don’t bite the tape”. Meaning, don’t shout at the prices if you don’t like them, it is not the tapes fault. After all was said and done Thursday the tape said that we had a nothing sort of a day. That makes it three for September where the markets day ended so close to where it had started. And two in a row.

What moved my Jozi markets? The Jozi all share index closed at 28714, down a whopping 7.95 points, or 0.03 percent lower than where we started. Hah. The gold stocks were up, the platinum stocks were lower, the banks were a touch higher and the broader resources index countered that. Awesome, a low volume day with the end result being a bit of a snore. Friday however was where all the action was, we are going to catch up today.

I don’t like public holidays. Don’t get me wrong, I love spending time with my family, but they do nothing for our competitiveness. Check out what I wrote at the end of August: “There are seven public holidays in China. Here, like in Greece actually, there are 12 public holidays (a year). We lose a whole working week to China as a result of observing all these public holidays. In the US there are ten. In England there are only 8 public holidays this year. In Portugal there are 14. Are you starting to see some sort of pattern here? In Vietnam there are only 8. Now you have a clear picture.”

Want to start being more productive? Slash public holidays. So you don’t lose two percent per annum of working time to the workaholics in Asia. OK, talking of time away from the battle lines, the interim ANC National General Council did produce real events including perhaps the most important, the National Health Insurance plan. And a full on battle between the president of the country and a president of another sort, of the youth wing of the ruling party. This seems to be getting a little ugly and won’t go away.

It finally HAPPENED! Wal-Mart have made a bid for Massmart, our favoured retail stock. In the post results interview with CNBC Africa the chief of Massmart Grant Pattison suggested that the premium of a Wal-Mart type bid had been around for the better part of 18 months. Yip. True. And the stock has looked expensive for that long, but hey, don’t fight with the market. Here goes the relatively thin on detail SENS announcement:

“Shareholders are advised that the Company has received a non-binding proposal from Wal-Mart Stores, Inc, (‘Walmart’) which could lead to Walmart making a cash offer to acquire the entire issued share capital of the Company for a price of ZAR148 per share (‘the Proposed Offer’). In the event that a firm offer is received the board of directors of Massmart will obtain an independent opinion and express a view on the firm offer to shareholders.”

A due diligence will take place and there will be a period of exclusivity. From both parties, suggesting that Wal-Mart were and are looking at other businesses in South Africa, that part is interesting. By my count there are 201.5 million shares in issue. Multiply that by 148 Rands a share and you get to 29.825 billion Rands. So South African shareholders are thrilled. And I say that lightly, because there are many more international shareholders than locals, because, you know, the stock looks expensive to most here. It does not trade at the long term averages, they say. Oh yes, the long term averages back when the 90 percent of the population was denied credit, those long term averages.

Check this bit out from a message that we sent recently to clients after the analysis on Massmart, this part about shareholders and a bid specifically. Here goes, some excerpts from our message on the 10th of September 2010: Is Massmart overvalued at R129 per share?

One reason often mentioned to justify the elevated share price is the idea that Wal-Mart, the world’s largest retailer, is looking to enter the African market, and may do so by acquiring a local company. The two most likely candidates are Shoprite (bigger African footprint) and Massmart (similar business model). Wal-Mart have confirmed their interest in global expansion, and senior executives from Bentonville Arkansas have toured South Africa extensively, but nothing has been announced. In fact, Massmart management have confirmed that there is no deal on the table. Or under the table. Or even under consideration.

Another possible explanation for the high share price relative to earnings is the fact that Massmart has a very high percentage of foreign shareholders, who consider it to be correctly priced compared to similar companies in places like Mexico and Turkey. Take a look at this chart:

Pie chart of shareholders



CNBC’s Stephen Gunnion interviewed the Chief Executive of Massmart, Grant Pattison, last week (back then) on these and other issues. Click here to take a look at the YouTube clip, courtesy of ABN Digital.

In fact, we are not that uncomfortable with the current market valuation, and expect Massmart’s earnings to grow into the share price in the year ahead. Here at Vestact we depart from the point that share prices are “right”, insofar as they reflect the aggregate view of the current value of the future earnings flows that will accrue to a company’s shareholders.

So far this morning, as at ten fifteen this morning the stock is up around 10 and a half percent at 149 Rands a share, and the stock has traded a whopping 192 million Rands, a whole lot more than the average 65 million a day. Who are the thrilled local shareholders? The PIC with over 18 million shares (old established holding), Stanlib with around 14 and a half million shares at the beginning of the year, I hope they still have them. But this one when I first received the shareholder register made my jaw drop.

As per a SENS announcement 31 August, when the chief Grant Pattison exercised a few options, check this out: “After the abovementioned sale, Mr Pattison still holds 1,921,389 Massmart shares or options.” Wow, that is shy of one percent of the company. He is by my count, the tenth biggest shareholder overall. Wow, I guess he will be voting in favour, or would he vote in this case? Probably not. I don’t know the answer to that. Did your jaw drop too?

In a videocast on the Moneyweb website, Grant Pattison said that the first bid actually happened on Friday, the board of Massmart met over the weekend. Like he said, first things first, the due diligence needs to take place first.

From the buyers point of view, 4.2 billion dollars is NOT a lot of money for Wal-Mart. Wal-Mart has a market cap of 196.66 billion Dollars. They trade on less than 14 times earnings at the 54 dollars a share level. Quarterly revenue of 100 billion dollars for Wal-Mart. Let me put it this way, Wal-Mart paid 2.3 billion Dollars worth of dividends in the first half of this year, and are going to replicate that in the second half. Their dividend flow alone for this year is more than the whole deal is worth. Size and scale of Wal-Mart, who employ around one percent of the American population.

And the most exciting thing that could come out of this, we could add to People of Wal-Mart. We must have some legends that hang out at Woodmead Makro. Sis, that is just plain ugly.

Remember on Thursday when I said “pay attention”? All the time. Pay attention to the trends. I was thrilled to see a story of sorts that refers to this exactly, the contrasting worlds of Netflix versus Comcast. And how folks are starting to dis cable in favour of consuming their media via the internet. The WSJ story is as follows: I’m OK, You’re Not OK, Say Television Executives. The story suggests that home users are going to start giving up their home subscriptions. As strange as this sounds, I saw something real time this weekend, that made me believe that we are closer than you think.

I saw an Apple TV set top box in action, at the house of my wifes school friend. The fellow, let us call him Fred, showed me what it was all about. And it is so impressive that I was ready to ditch my satellite TV, because it is like TV on demand but really on demand. The cable companies in the states have had this for a long time, but this changes it all. In fact, because of the competition in the US, this device is one of the cheapest Apple devices, but as far as I have seen, the most impressive. The biggest problem is that you have to have an App store account in the US. Which Fred did, he “lives” somewhere according to his iTunes account.

New York, New York. What is shaping up as the best September since pre the second world war for Wall Street, Friday was the icing on the cake as all major indices roared ahead. In part the improving environment and mergers and acquisition activity, but more about the durable goods orders, which were ahead at the core rate. And the core rate is ex transportation, you know, without big ticket items like motor vehicles and more importantly Boeings. Orders were up 2 percent, double what the economissed economists surveyed thought it would come out. New home sales were flat month on month. KB Homes be liking that.

All major sectors advanced led by industrials and financials, the Dow Jones Industrial Average added 197 points to 10860. The nerds of NASDAQ added 54 to 2381 whilst the broader market S&P 500 was up 23.84 points to 1148.

Currency and commodity corner The oil price is trading higher at 76.59 Dollars per barrel. Dr. Copper is trading near the year high, 359 US cents per pound. The gold price is last at 1299.3 dollars per fine ounce. The platinum price is ages away from its all time Dollar high, last at 1639 Dollars per fine ounce. The rand is firmer this morning, last at 7.00 to the US Dollar, 11.09 to the Pound Sterling and 9.43 to the Euro.

Up periscope. On account of us missing a great day Friday on Wall Street we will start a whole lot better.

Sasha Naryshkine
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Jozi, Jozi. Whilst perhaps the most important news from a country point of view is dominated by what is happening in Durban, Jozi is still home to capital markets. One week ago the market nearly closed completely flat, it almost happened again yesterday, although the margin was not that slim. The gold price was making a real go at 1300 Dollars a fine ounce whilst the Rand was firming through the 7 to the US Dollar mark. It is not about the Rand, but rather about the Dollar flows. If you know what the US Dollar is going to do in the short term, then you know where the gold price and local unit is going. Nothing sinister about the local unit.

What moved my Jozi markets? Session end the Jozi all share index has lost a mere 2 points to close at 28722. The stronger record level for the gold price did illicit some reaction from the gold companies, the sector was up one and a quarter percent after all was said and done. More on the Gold price a little later.

The Potash Corp. board are suing BHP Billiton for what looks like a serious accusation. Reuters Canada reports Potash Corp sues BHP as takeover struggle escalates. Wow. BHP say absolutely nonsense and Potash are just trying to deflect the fact that there are no counterbids of any sort.

I heard from a friend of a friend in the fertilizer business that the Potash Corp. board are keen to do the deal and extract the cash, they are just waiting for a slightly higher bid. And the Potash price trading at 146.33 Dollars a share tells you that. We wrote back in July of a Business Week story: Potash’s Doyle Would Get $445 Million From BHP Offer. At 130 bucks a share. So an extra 20 Dollars a share, an extra nearly 15 percent would net Doyle over half a billion Dollars. What would you do?

So how does one get “involved” with the gold price move through record Dollar highs. Read that last part, Dollar highs. Because in Rand terms the gold price is not at all time highs. So I went to the Kitco website, which has always looked like a Christmas tree, to check out all the highs in different currencies. Check out the last year, graph courtesy of Kitco of the gold price in Dollar terms:

The Rand price of gold in the last 24 hours has hit 9090 ZAR per fine ounce. But over the last year it has been higher, check out this graph, again, courtesy of Kitco:

See that, the gold price in Rand terms was much higher in June, over 9500 Rands per fine ounce. And even more telling is the Gold price in Euro terms, check this out, thanks again to the guys at Kitco:

Do you see that? A similar high for the Rand Gold price and the Euro Gold price back in June. The Euro price is around 80 Euros a fine ounce off their highs. So nowhere near the all time highs. And then there is the Swiss Franc, a much more interesting graph and altogether different dynamics that went with the Euro crisis earlier this year. These Kitco guys are great

The big spike that you see in the Swiss Franc price of gold is as a direct result of the PIIGS debt crisis earlier this year. Remember when Greece, Spain, Portugal, Ireland and to a lesser extent Italy were all toast? Remember that? Well, I guess there is still the distinct possibility of a country default in the Eurozone, but the members are standing firm for the time being. Besides, the original Masstricht Treaty signed in Feb 1992 did not allow for a country to exit the union. Everyone rushed to Swiss Francs, because you know, they are close and easy to understand. And remember that we were going to see Euro Dollar parity. Right now, the cross has just gone through 1.34.

This all does not answer the question however, how does one get involved with the upward trending Gold price in Dollar terms. Because here we own Rands and deal in Rands. You could buy the Newgold instrument, that trades at a slight discount to the 1/100th of an ounce Rand price. Last evening the share price of ticker GLD closed at 8875. So roughly 89 Rands for one one-hundreth of an ounce of gold. 100 units will buy you an ounce and cost you 9000 Rands call it. Now don’t confuse New Gold, the local ETF with the American company with the same name.

As per the ABSA capital’s ETF section on their website: “NewGold is the simplest and most cost-efficient method for investors to invest directly in physical gold bullion. NewGold continuously tracks the gold price and enables investors to invest in a listed instrument (structured as a debenture) in which each security is equivalent to approximately 1/100 ounces of real gold held in a secured stockpile of gold bullion.” Phew, this GLD product has been listed since November 2004 and is by far and away the biggest ETF in South Africa. As per a release last February, the physical gold is kept in the UK: “NewGold’s gold bullion has been transported to the safe vault premises of Brink’s in England where they have assumed physical control of the gold bullion with effect from 16 February 2009.” Brink’s have been doing this for a long time.

So, you can either buy a Kruger Rand and keep it safe somewhere, or you can have the luxury of liquidity of this instrument, which trades currently shy of 50 million Rands a day. And the gold companies? Would you buy them? Almost every single investment manager I have ever spoken to suggests that they would never touch any of the local gold companies. So I guess for the purest gold purchase, this is it, liquid and easily understandable. Sadly, the movements of the dollar and the anti dollar (the gold price) has the inverse reaction on the South African Rand Gold price. So if you are bearish on the Rand and bullish on the Dollar, this provides you with all the gearing.

Pay attention. All the time. Pay attention to the trends. I guess it is easier said than done if you are at a certain size and scale. It is widely expected that Blockbuster Inc. will file for bankruptcy with the burden of nearly one billion Dollars worth of debt too much to continue. The company was started in 1985. Videos were huge. DVD’s were too. Video night used to be cool. Then PS and WII and Xbox were too (Byron says they are still cool). But in much the same way that “Video Killed the Radio Star” as The Buggles prophesized in 1979, the internet killed the DVD slash video star.

In fact when you Google the simple line, “why did Blockbuster go bust?” most folks will talk about streaming from the likes of Netflix and Redbox. Those are the companies that chewed the video rental market to pieces. Oh dear. Yip, pay attention to the trends. Video stores are dead when you can download them online from home.

This latest move by the Chinese to limit exports to the Japanese has finally raised this latest squabble to serious. And all it is about really is a Chinese fisherman being held by the Japanese because he was fishing in disputed waters. So it is a fishing story that is already exaggerated. Fancy that. Goodbye Japanese imports of rare earth minerals. And hello heightened tensions. The New York Times global business section has a great write up on where I picked the story up, check it out: Amid Tension, China Blocks Crucial Exports to Japan. Yech.

The Chinese have said that this is not the case. Bloomberg reports that they called the Chinese authorities but they denied this. Amazing. Why would the NYT go with the story if it was not true, according to the Chinese authorities? Perhaps the decision was stopped at the last minute. For me this is not about the Chinese fisherman or the fishing waters, but rather another chapter in the long and uneasy relationship that the two Asian powers have had over the centuries.

All the while the currency battle continues between the Chinese and the Americans. The Yuan peg to the Dollar is making the US uncompetitive is the line from the Americans. And the Yuan is completely undervalued, that was echoed again by US Treasury Secretary Tim Geithner. Nothing new. Also nothing new is the Chinese premier talking last night in New York where he said that if the Americans had their wish and the Chinese currency were to appreciate 20 to 40 percent there would be an enormous amount of social unrest in China.

A quote from a Marketwatch story spells it out: “If the renminbi appreciates by 20% to 40% according to the requests of the U.S. government, we do not know how many Chinese companies will go bankrupt and how many Chinese workers will be laid off and how many rural workers will go back to homes and there will be major turbulence in the Chinese society.” Is the phasing in process then acceptable for the rest of the world? Eventually we want the Chinese worker to earn more and become powerful consumers in their own right, but we also want cheap goods.

And what makes matters harder is that the Japanese and the Americans are going to meet to talk about their uncompetitive currencies. I hope at the ANC NGC they are paying attention to these happenings. I heard George Glynos on the box, listen to the interview about the local currency with CNBC Africa: SA July Retail sales and SARB Quarterly bulletin Q2. Yip, it has nothing to do with us.

New York, New York. Stocks closed a little lower on Wall Street overnight, the bulls had held the upper hand at the beginning of the session, but that only lasted for half an hour, for the rest of the day the indices wallowed in the red. Microsoft announced in the prior session that they has upped their quarterly dividend from 13 cents a share to 16 cents a share, but that did not inspire anyone enough to buy the stock. Adobe was smashed, the yanks are ruthless when you miss, I commented that the stock had lost over twenty billion Rands in market cap in one day, down 19 percent.

Why? Mixed guidance after better than expected results. Guide lower at your peril. Strangely, this company is older than Blockbuster. Content management. Media. Software. Web and mobile, what is not to like? Ah, the fight with Apple, that is a bit of a rotten one. I guess the analyst estimates might have to rethink 213 US cents per share earnings next year, the stock trades at 26.67 and has a price target of 42 bucks. Good luck with that. Notwithstanding all of that, I like the company.

End of session the Dow closed 21 points lower to 10739, the nerds of NASDAQ down 14.8 points 2334 whilst the broader market S&P 500 dropped 5.5 points to 1134.

Currency and commodity corner The oil price is lower at 74.07 Dollars per barrel, the gold price is last slightly higher on the session to 1292 Dollars per fine ounce, the platinum price is also higher at 1636 Dollars per fine ounce. The copper price is higher at 355 US cents per pound. The Rand is slightly weaker at 7.06 to the US Dollar, 11.05 to the Pound Sterling and 9.42 to the Euro.

Up periscope. We will start lower here today again. And take tomorrow off if you are local to turn your favourite piece of whatever on the braai.

Sasha Naryshkine
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Jozi, Jozi. After all was said and done it was a nothing day for the purists. There was little in it from an absolute levels point of view, there was still an eye on the ANC NGC (at the Durban ICC) vand the National Health Insurance emerging. Any realistic ideas of how we are going to pay for that? There are some early suggestions that it won’t be as onerous as suggested. It is a grand and noble idea for everyone to have universal health access. Again, how are we going to pay for it?

What moved my Jozi markets? Resource stocks lagged the broader market, the Jozi all share index closed at 28725, up a WHOLE 14 points. Wow. Banks and industrials were up nicely, construction stocks enjoyed a good day after recent weakness. This paragraph is sounding like a boring market report. But that is what this paragraph is for. Tell me, do you really pay attention to the absolute levels of the all share index?

One that we missed yesterday, time was not on our side was the mid tier company Cashbuild. In their field they are the biggest, but Massmart through their Builders brand has made headway over the last half a decade. As per their SENS release, Cashbuild are “Southern Africa’s largest retailer of quality building materials and associated products, selling direct to a cash-paying customer-base through our constantly expanding chain of stores (189 at the end of this reporting year). Cashbuild carries an in-depth quality product range tailored to the specific needs of the communities we serve. Our customers are typically home-builders and improvers, contractors, farmers, traders, large construction companies and government-related infrastructure developers, as well as all other customers requiring quality building materials at lowest prices.”

These are results for the full year to end June 2010. Sales grew 6 percent to 5.369 billion Rands, gross profits were up 8 percent, the expenses column hurt them, costs up sharply. Heard that all before. As a results profits post tax down 8 percent, headline earnings per share at 721 cents per share. The dividend down 5 percent when compared to last year at 233 cents per share. The stock closed yesterday up three percent to 75 Rands, clearly it looks cheap. The stock is flat over a year, but up 63 percent in five years.

Ten years ago sales were less than one billion Rands. They actually lost money then. In the 2001 financial year at the lows of the market the share price fell to below one Rand a share, 95 cents. SMOKES!!! Today it is 75 Rands a share. And looks cheap. Clearly Pat Goldrick (the guy running the business) has just stuck to the knitting. The number of shares in issue over a decade has hardly changed.

This is a company that takes themselves really seriously and they do a fantastic job in my opinion. Their prospects column just about sums up their tenacity: “Management remains optimistic about the top line trading prospects for the next quarter. The first nine trading weeks since year-end have reported an increase in revenue of 5% on that of the comparable nine weeks. Gross profit percentage margins are expected to remain at similar levels to that achieved during the financial year under review.” Good company, unfortunately a strong set of shareholders means that liquidity is a bit of a problem.

South Africa’s version of the non-farm payrolls was released yesterday, the full release is here if you follow the link: Key estimates of employment and earnings for the quarter ended June 2010. So you can tell that it is quarterly, how did you tell? Here is the table, not mine, it could be better formatted, but hey, the folks drawing it up are statisticians and not graphic designers.

I have circled two parts, firstly the part where we have seen an increase of half a percent or 41 thousand folks in the labour force since March 2010. To June 2010. That is good not so? Annualise that, you get to around 160 thousand jobs created in the next year. In fact rather than me explain where jobs were gained or lost, the release does that:

“The quarterly increase is mainly due to increases in employment reported by the community, social and personal services industry (28 000 employees or +1,3%); the financial intermediation, insurance, real estate and business services industry (25 000 employees or +1,4%); the wholesale and retail trade; repair of motor vehicles, motor cycles and personal and household goods; hotels and restaurants industry (5 000 employees or +0,3%); the mining and quarrying industry (3 000 employees or +0,6%); the transport, storage and communication industry (1 000 employees or +0,3%); and the electricity, gas and water supply industry (1 000 employees or +1,8%).
There were decreases reported by the manufacturing industry (17 000 employees or -1,4%); and the construction industry (5 000 employees or -1,2%).”

The second circle I guess is more worrying from an inflationary point of view, a 14.6 percent increase in wages when inflation dropped to below four percent and the labour force decreased by 1.4 percent over the year. Even if you annualise the earnings in the last quarter it is comfortably outside of the Reserve Bank’s range. I am all for higher wages when productivity increases. The problem in South Africa is that the employed are getting paid more and the unemployed are being left out in the cold. The gap is widening. So I don’t believe that COSATU, who represent the middle working class is in tune, with the poor anymore. Am I completely off track here? Byron and I made a video yesterday, check it out: http://www.youtube.com/watch?v=k2obPLlDuus.

Could I have written the FOMC statement yesterday? It would have required some serious Fedspeak thinking, but I guess what I am saying is that it was as expected. Plus the 8-1 vote to keep rates at current levels is about what everyone expected. The dissenting person at the FOMC who has continuously argued that the economy is improving and as such the Fed has to raise rates is that fellow Hoenig. A Dr. Hoenig, who has been at the Kansas City Fed since 1973. Let us just say that he, like the other eight, know about central banking. That is why I get a little mad when folks diss the Fed. Collectively they have hundreds of years experience.

Here goes the full text of the FOMC 21 September Statement. Check out that first line, in 45 days “things” have slowed, call it a lazy summer, whatever you want, it is what spooked the market earlier in August. “Information received since the Federal Open Market Committee met in August indicates that the pace of recovery in output and employment has slowed in recent months.” Ironically on the day that the Fed’s statement reads: “Housing starts are at a depressed level.” we receive the housing starts for August, which blew expectations away.

But the Fed are right, the number of housing starts in January 1972 topped out at an all time high of 2.494 million units. This August last saw just 598 thousand housing starts. The number was first captured in January 1959, which registered 1.657 million housing starts. The number first fell below a million in October 1966, but by the following January, in 1967 was back above one million units. May of 1971 through to August 1973 saw every month register above two million units. Wow. Late ’74 and early ’75 saw three months again below the one million unit mark. The second half of ’77 and all through ’78 saw a similar housing start boom as there was earlier in the decade.

’81 and ’82 were tough years for the housing market, interest rates soared and inflation was from an American point of view out of control. There were 9 straight months of below a million units started. There was another 6 months blip of below 1 million units a month late ’91 and the first half of ’92. The end of communism as we knew it, remember that failed experiment (that ruined millions)? For most of the next decade housing starts numbered around 1.5 million units a month, which is about normal I guess, having searched the data.

2003 through to the first quarter of 2006 there was wild building. And even wilder credit extension. And then quickly contracted, the number fell below one million units for the first time (in this recent cycle) in May 2008, just as our local market topped out above 33 thousand points, and since then, has been below 1 million units per month. Only one month (June 2008) registered above. So, 25 straight months of lower than one million units clearly reflects the worst housing market since data was collected at the beginning of 1959. And this period registered the worst ever month in April 2009, with only 477 thousand units. So the Fed are right. In a historical context this period has been awful.

Inflation too is at the lowest levels and the deflation flags have been waving for some time. The statements suggest the Fed are not too concerned “… inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate.” One Twit (twitterer?) summed it up perfectly: “meh”. Which urban dictionary translates for nerds and geeks alike who don’t speak street speak as: “Indifference; to be used when one simply does not care.” I guess until anything changes, it will remain the same. Meh indeed.

New York, New York. Some encouraging home sales data and the FOMC sticking on the flippers, adjusting the mask and checking the tanks, ready for action, did little for broader market participants. In other words, pretty much a replica of what we had here, a slim pickings day at face value. There were some solid auctions in Europe, although for the governments the yields don’t look great, but hey, they managed to raise the money.

The gold price continues to print daily highs, this time over 1290 Dollars a fine ounce. Deflation? Inflation. Gold moves forward. I am sure I told you yesterday, a friend at a gold conference in Denver said that the attendance of fund managers had increased six fold in ten years. Amazing, when the price is up, everyone wants to hear about it. When the price (of anything) is much lower, nobody seems to care, once it spikes they come aflocking. Human nature I guess. Weaker Dollar = stronger commodity prices, that is good for us, but does take the shine off the local producers, as the currency strengthens.

Like I said to someone, local government should be raising so much money now whilst imports are cheap. Cheap. I have no view on currencies. I have no idea where or what currencies are going in the short to medium term. If you take measures as a company to take a view of sorts, you normally get carried out, or there is a windfall. Take your pick, for me it is just too hard.

Session end the Dow Jones Industrial closed at 10761, up 7 and a bit points, the nerds of NASDAQ lost six and a half points to 2349 whilst the broader market S&P 500 lost nearly three points to 1139.

Currency and commodity corner The local currency is power, 7.02 to the US Dollar, 10.98 to the Pound Sterling and 9.34 to the Euro. The oil price is last at 74.99 Dollars a barrel, the gold price is last at 1290.5 Dollars per fine ounce. The platinum price was last at 1628 Dollars per fine ounce. The copper price is last at 350 US cents per pound.

Up periscope. We will start lower.

Sasha Naryshkine
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Jozi, Jozi. We powered ahead in the second part of the day, closing at the session highs as the US markets opened strongly. I don’t buy this, “on no specific news”, but rather my theory is that the anxiety has subsided. Anxiety that Dubai would fall into the sea, or that people would run away. Greece would go bust next slash last week. Spain and Portugal would return to the middle ages, at least then they would be world powers. Ha! Those anxieties have subsided, even though in reality the truth is still ugly. People evolve and adapt to situations. Market technical analysis types do not. In fact I must concede that I do not know technicals because I do not care much for drawings on a wall with this moving whatsnot and that Hindenburg so and so.

What moved my Jozi markets? Session end the Jozi all share index had grabbed back 297 points or just over a percent to 28710. Banks were ramped nearly two percent. General retailers advanced up the ladder nearly two and a half percent. Does the ladder ever end? Nope. Does it bend when the fundamentals become flimsy. I guess, it becomes too steep and wobbly. The ladder of investing.

BHP Billiton has extended their offer to Potash Corp. shareholders to November the 18th. I wonder exactly how many people have tendered their shares at 130 bucks a share when the stock is trading 18 bucks higher. Any takers? Yes, no. If you have been out of touch, in the bush, in a coma (I hope you get better) or didn’t care but now do here is a refresher, quite a fun one: Potash vs. BHP: The Fertilizer War From A to Z.

It sounds like revealing the cards at Cluedo, acronym style, JZ from the ANC at the NGC. With a speech. I would be lying if I said I was not interested in the little bits at the edges, and only the economic bits. I am presuming that for this audience there are plenty of political commentators and folks to follow to understand the ins and outs of the speech, and not me. Follow on Twitter the likes of Stephen Grootes of the Eyewitness News Team or follow Verashni Pillay from the Mail & Guardian. They are there and tweeting what they think is important.

What I am interested in is what the ruling party thinks is the best economic policy. I was having a bad no sleep day induced by restless little people the night before (I am happy to say this morning that I am a fraction better rested) and was a bit of a cynic. Byron can attest to that, I was waving backhands at the TV when the president was talking and that ppfff thing you do with your lips. Ppfff! this and ppfff! that. Paul was out briefly and came back and I said to him, same speech, heard all of it before. Phew, needed to snap out of it!

The speech in full is available from the ANC website, with a LONG title: NGC 2010: Political report of the President of the ANC Jacob Zuma Durban, Kwazulu-Natal, 20 September 2010. I guess you can’t really shorten that. Unless you use some other choice acronyms. I will say this first and foremost, I am a very firm believer that business creates the best jobs. Governments job in my view is to create the economic conditions in which to operate. Unfortunately this is not what we believe here at the tip of Africa, even if the great Cuban experiment did not work.

So, having cleared my chest of that, here are some excerpts with some commentary from myself. The continent is a market of one billion consumers.” That is projected to grow to 1.9 billion people by 2050. “It is also an enormous source of raw materials that need to be beneficiated locally to create jobs and to ensure a modern industrial economy on the continent.” Agreed, another yes, but rather than talk about heavily taxing the companies that are producing (ala Zambia, who withdrew some serious reforms) and talking about nationalisation, how about using the minerals locally. Make free economic zones in PE where autocat producers can come and build factories, employ people. You know, it is happening already, but give companies flexibility.

The president continued: “there are enormous opportunities in the new green economy that we need to take advantage of. We need to position our economy to shift and create the hundreds of thousands of green jobs that are capable of being created locally.” We have an abundance of sunshine, solar energy is the smart solution. We have a whole lot of wind in the Cape, Eastern and Western, wind power. We have a lack of water, we are going to have to think of smart ways to conserve it. We have rough seas (Cape of storms, the Wild Coast), surely there must be some wave power technology that could be encouraged. If we honestly believe that these are going to be massive themes, then give the companies interested in these spaces serious tax breaks. No really. Five years, ten years, something.

And then this part, my response is probably longest to this piece. The president says (well his speechwriter) “But more importantly, the economic crisis has created a challenge for orthodox, one-size-fits-all policies. Developmental states have managed the crisis better than many in the old economies who followed rigid formulas. This creates space for South Africa to begin to develop policies suited to our circumstances, our needs and our people.”

What are our needs first? Simple. Eradicate poverty. Education is the key. For all his evil, the honourable Robert Gabriel “the shock absorber” Mugabe placed a heavy emphasis on education. And it worked very quickly. Sadly he didn’t believe in democracy. When Zimbabweans leave South Africa and wages explode here (they will, don’t kid yourself) there are more than enough skilled and educated Zimbos to rebuild that country.

More importantly, does developmental state work in an African sense? Does it? In South Korea everyone (well 99 percent) of people are from the same ethnic background. In Japan 98.5 percent of folks are Japanese. In Thailand 75 percent of residents are Thai’s. In Vietnam around 86 percent of the inhabitants are from one ethnic background. In China the Han make up 92 percent of the population making the Han the single biggest “tribe” for want of a better word on the planet. 78 percent of Singaporeans are Han. Almost all Taiwanese are Han. Dude, what is your point I hear you say?

I believe that what these developmental states have in common is the same common culture, the same general beliefs, the same common history and the same language. That is my simple point, perhaps with our hundreds of different languages and cultures in Africa, it is difficult to set out a common end point. Just making a point, don’t judge me. Especially not in this understandably Uber sensitive society we live in.

Don’t get me wrong, nobody loves the different ethnic backgrounds in South Africa more than I do, I love learning more about people, what they do and did. All I am saying is that the US has similar dynamics, loads of different cultures and backgrounds, the free market system seems to have served them well. Although the speech suggests this is not. Perhaps the speech writer and the president subscribe to the new normal.

OK, so should we pay attention to the recently released Index of Economic Freedom or should we not? We, as South Africans are a faller in this report. At the absolute bottom of the list are bastions of extreme socialism, Cuba, North Korea and basket cases like Zimbabwe and Venezuela. I despise socialism. It breeds ordinary people. I don’t like ordinary.

The measure is pretty broad, check out the ten criteria: Business Freedom, Trade Freedom, Fiscal Freedom, Government Spending, Monetary Freedom, Investment Freedom, Financial Freedom, Property rights, Freedom from Corruption and Labor (labour) Freedom. This is the present company that we keep:

I have no idea why we rank lower than Madagascar. Just remind me, a too young as per the constitution DJ runs the show? Is that right? Why have we fallen? Well here is the country report, read it: South Africa. Here are the highlights:

We are above average in business freedom, trade freedom, government spending, property rights, freedom from corruption (which has a low average) and financial freedom. We are about at average for monetary freedom. The three measures where we fall below average are fiscal freedom (which commands the most lofty average of all measures), labour freedom and investment freedom, where we are worst off.

Why is the most important measure, freedom from corruption so broadly low? The average is 40 out of 100. The top rated countries are the likes of the Scandinavian countries and big time democracies. We sit and rub shoulders with Italy and Greece, how should we say, where things work badly unless you have a few bucks. There are some ugly examples at the bottom of that list, Haiti, Burma and Chad. The DRC, Zimbabwe and Venezuela. Hey, this report sounds strangely like The Global Competitiveness Report 2010–2011 released a few weeks back. All I need to know is that we have slipped several places and NOT made progress. In the eyes of the world, not in the eyes of our own politicians no doubt. For the record I don’t like politicians almost anywhere.

New York, New York. Resistance level this and that, caution was supposed to be the watchword ahead of the FOMC statement today. What tools are left in the shed? Ah yes, quantitative easing, or for the pessimistic gold purists, money printing. Not paper chaps, money in the US is printed on cotton. To make it last longer you know, the one dollar bill only has a 21 month life span until it becomes worn out. And needs to be replaced. Gold however is FOREVER (say this with your deepest monotone hypnotic voice). Hey, talking Gold, I chatted to a fellow in Denver yesterday who is at a gold conference and he says that when gold prices were beat up ten years ago, there were only around 40 fund managers. Today (yesterday) there are around 240 odd folks. Hardly a big herd, and hardly a bubble of any sort, but getting momentum.

The National Bureau of Economic Research officially said that the US had exited the recession. Ah yes? In Cambridge, Massachusetts things move along at an academic pace. Check out the first paragraph from Business Cycle Dating Committee, National Bureau of Economic Research:

“The Business Cycle Dating Committee of the National Bureau of Economic Research met yesterday by conference call. At its meeting, the committee determined that a trough in business activity occurred in the U.S. economy in June 2009. The trough marks the end of the recession that began in December 2007 and the beginning of an expansion. The recession lasted 18 months, which makes it the longest of any recession since World War II. Previously the longest postwar recessions were those of 1973-75 and 1981-82, both of which lasted 16 months.”

Some impressive types there on the committee, but hey, what is this actually worth? For fun I guess and being able to tell your kids that you lived through times so tough that you could only afford an iPhone. Kidding. But as I often say to the checkout person at Woolies when they ask me whether I have a Myschool card, No, my kids must suffer. The look of horror is normally eased as I explain that when they become grandparents, they will will not be able to say: “in my day, things were so tough and difficult, because…..” if they have it too easy. Capiche?

Session end the Dow closed 145 points higher to 10753, the nerds of NASDAQ added 40 to 2355 whilst the broader market S&P 500 added 17 and a bit to 1142 and some more.

Currency and commodity corner The Rand is steady, trading at 11.02 to the Pound Sterling, 7.10 to the US Dollar and 9.33 to the Euro. But ask your favourite Forex person for those crosses and they will tell you that you are mad. Nuts. The oil price was last at 75.88 Dollars per barrel, the gold price is last at 1280.3 Dollars per fine ounce. The platinum price is 1620 Dollars per fine ounce, the copper price slightly higher at 351 US cents per pound. You know, the recession is finished.

Up periscope. Today will be our treading water day ahead of the Fed. People need to be told that everything is going to be OK. Now, would you like some orange sherbet? Say that with the same monotone hypnotic voice that you used earlier when talking about Gold.

Sasha Naryshkine
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Jozi, Jozi. From hero to zero Friday, if you were a bull I guess. Stocks slipped steadily through the day and closed in the red near their lows. There was little on the go as far as economic data was concerned, in the US there was CPI (seemingly a non event nowadays) that was lower at the core, flat month on month, but then slightly hotter on the headline level, 0.3 percent month on month.

What moved my Jozi markets? Financials and Industrials, lower by half a percent or so led stocks lower, resource stocks were marginally higher, banks were a touch better too. The gold stocks got trounced, down two percent, whilst the platinum stocks advanced over a percent. After all was said and done the Jozi all share index closed at 28413, down 51 points for the day. Or just shy of one fifth of a percent. Pioneer Foods have been on a tear, up six and a half percent Friday, last week the stock was up around 12 percent.

BHP Billiton have lined up their funding for the Potash Corp. purchase. That is all very well, but you have to have a willing seller first of course. Reuters reported Friday: BHP signs jumbo $45 bln Potash bid loan. As the story suggests, BHP Billiton plan to pay this back pretty soon: “The loan comprises a $25 billion, 364-day bridge loan to bond issue; a $10 billion, three-year term loan; a $5 billion three-year revolving credit facility; and a $5 billion, four-year revolving credit facility.
The 364-day facility includes a one-year extension option.”

Do I understand that right? 25 billion over one year, extended to two years, 10 billion over three years and two separate five billion Dollar revolving credit loans over three and four years respectively. As BHP Billiton said in their conference call at the end of the financial year just passed: “And as you can also see, we once again managed to convert those very healthy margins into strong cash flows. Second half operating cash flow rose by over 100 per cent when compared with the first half. What shouldn’t be lost on investors is the link between strong margins, superior returns, and the ability to regenerate and grow ones business.”

In response to the levels of gearing that are going to be taken on, you will remember from our recent message on BHP that this is the lowest gearing in the current format (of the company), that BHP is OK with this. Check out this answer that Marius Kloppers had on the conference call: “…we’re very comfortable that in any foreseeable scenarios that we’ve run, and we run extensive scenarios both to the up and down side, that what we’re taking on here is very manageable, uhm and we are genetically incapable of thinking about hedging.”

At the year-end BHP Billiton delivered net operating cash flows of 17.9 billion Dollars. Lower than last year and about the same as 2008. Their Capex bill last year was 9.3 billion Dollars, the year prior nearly 9.5 billion Dollars. I guess after all things considered, 45 billion Dollars might sound like a monster loan, but perhaps not as much as you think. What is laughable now is that their interest bill is so low, 421 million US Dollars, and you could bet your bottom Dollar that these facilities are about the cheapest that they could get their hands on. With the view, should the deal go ahead that there will be bonds issued in due course.

So, you need the money now, if the deal goes ahead, and then there will be restructuring in due course. That is all. And the parties providing the finance would probably get first dibs on any bond issuance. The Sydney Morning Herald suggests that the Sinochem rumour of them countering BHP Billiton’s bid might well be true, but they could fail at two points. One, first and foremost, it is too big to swallow a deal that size for Sinopec, secondly, the Canadian authorities would say no way. Check it out: Sinochem moves on BHP target. I still maintain that BHP Billiton are the only company at this size and scale who are able to do this deal. Perhaps Vale at a stretch.

In their field, I am sure that Exxon Mobil with a market cap of 309 billion Dollars, annual revenue of 310 billion Dollars and EBIDTA of 47.2 billion Dollars could buy it no problem. Wow. Wow. Wow. Last year Exxon Mobil paid their ordinary stock holders 130 US cents in dividends. There are 5.09 billion shares in issue, that is 6.6 billion Dollars worth of dividends. In 2008 (a monster year) the company had operational cash flows (and asset sales) of 65.7 billion Dollars. You see?

Why is that, Pioneer Foods up so much? The company has been trading under cautionary since February this year, and have all the while been fighting the competitions authorities, whilst the other bread producers just coughed up. I slated the fellows at Pioneer for being a bunch of mugs, but it seems that an apology might be in order. And I say that without knowing any details only that their lawyers and advisors might actually have been right all along.

Both Moneyweb and the Business Report reported the pretty low level story last week, but it has very wide reaching implications. Ann Crotty updated her original story and that appears in today’s paper (don’t kill trees anymore, but read it online) and it is titled: Ruling puts cartel cases in jeopardy. So whilst the competitions authorities have gone hard at companies, it might, unfortunately for the consumer, backfire on them. Check it out. This is why I think Pioneer Foods was on a tear last week.

At last, economic data you can trust read the headline, in reference to the volume of traffic that is gushing through the Mooi river toll plaza. We are talking about the Friday message and this graphic specifically:

Mooi River index – August 2010

Click on the image for a much larger view of the table and graphic.

So all looks good not so? I guess one could be forgiven for thinking that there is a strong pick up. But there are doubters amongst us. Quite a few, too many to ignore. Firstly a fellow that is in the shipping business had this to say:

“I think that it must be noted that this big spike in road hauls is largely due to the absolute abominable mess TFR are in at the moment due to a hangover from the strike and poor monopolist planning.”

Now that hardly sounds encouraging and sounds like folks using the roads rather. We come to that conclusion, first the supporting data.

And an economist that I sent the data to echoed the same sentiments:

“This is really interesting. To me it seems there is something other than economic activity driving this. Perhaps a little time will help unravel the riddle because I don’t think the economy is as strong as the data suggest.”

It suddenly dawned on me that there were two things missing here, access to the Transnet data which I did and do not have AND access to the ports data, which I DO have. I managed to get stuck onto the TNPA mailing list and glanced by their data at the beginning of month and suddenly was struck at how right these doubters are.

Check this out, ports data from August 2009 and then from August 2010. Because if the bulk goods are going out, they have to go out the ports and the opposite is true too. I have hacked and sliced the raw data to produce tables that I am looking for, to illustrate the point these guys have been making. First, August 2009 Ports data, I have circled the bulk number totals, these are all expressed in Metric tons:

OK, so total exports for the month of August 2009 including coastwise was 12.47 million metric tons and total imports including coastwise was 3.45 million metric tons for a total cargo handled through the major ports that numbered 16.25 million metric tons. This is a lot more revealing though, the August 2010 numbers, check out the same hacked table for that months data, again expressed in metric tons

Tada!! moment. Total exports are lower by nearly 14 percent when compared to last August. Total imports however are 21 percent higher. The total cargo handled was 5.2 percent lower. I guess this is only one month and almost anything could happen, we will do very well to measure up next month. Remember that exports dwarf imports by a factor of three and a half. More or less. All interesting and perhaps vindicating the above guys who perhaps have it spot on, perhaps the rail strike has a lot to do with the increased road traffic. And maybe it aint going back that way.

New York, New York. RIM was brought back down to earth, after having traded as high as 50 bucks pre market the stock closed marginally higher below 47 bucks. As Homer Simpson would say: Doh! And volumes finally returned, but it all had to do with four separate closeouts, something called Quadruple Witching. Which Investopedia has the definition: “A day on which contracts for stock index futures, stock index options, stock options and single stock futures (SSF) all expire.” For all ordinary stock holders this means very little.

There was a Consumer Sentiment Survey from the University of Michigan for the present month, in other words what people think right now. It fell short of expectations. I am not kidding when I say that this survey measures around 500 consumers and what they are feeling right now. So I am led to believe that this is a good view of what the average American is feeling right now. On matters like income, job prospects, the unemployment rate and economic growth. Wow, that is a lot to lump on folks shoulders.

Session end the Dow closed 13 points better to 10607, the nerds of NASDAQ were buoyed by Oracle to close 12 points higher to 2315, with the broader market measure, the S&P 500 up 0.93 points to 1125.

Currency and commodity corner The Rand last traded weaker at 7.13 to the US Dollar, 11.13 to the Pound Sterling and 9.32 to the Euro. The Gold price is firmer, clocking another record high to 1281 Dollars per fine ounce. The platinum price is also better, last at 1623 Dollars per fine ounce. Dr. Copper was last at 352 US cents per pound. The oil price is steady at 74.95 Dollars per barrel.

Up periscope. All markets in Europe are pointing to a higher start here. There are some problems with the Irish banks and their government finances. But then again you knew that already.

Sasha Naryshkine
sasha@vestact.com
www.twitter.com/sashanaryshkine
011 022 5440

Jozi, Jozi. The local markets were drifting around, popping in and out of positive territory all day long. There was a slight boost, albeit short lived in the form of US weekly job claims which were a whisker better than anticipated. Core PPI out of the US met expectations, the headline number was marginally hotter, but we are talking about numbers like 0.4 percent compared to 0.3 percent, splitting hairs. Although I am reminded that if you annualise such a number there is a big difference.

What moved my Jozi markets? Another modest decline on the day, the Jozi all share off 37 points to 28464. Banks had a bad time, off 1.4 percent and this downward move was countered by a move forward by heavyweights SABMiller, MTN and Sasol. Sasol moved northwards after a poor performance the previous session, but on balance has had a good week after results earlier in the week.

Investec released their normal briefing for this time of the year. The idea is to give investors an operational overview, get friendly with the team and see what they have been up to. They said that “Operating conditions within the group’s banking and advisory businesses remain mixed with low levels of economic activity and a difficult trading environment persisting in the first half of the financial year.” Patchy.

Check out (courtesy ABNDigital) the CNBC interview where Eleni Giokos speaks to Stephen Koseff: South Africa’s fifth-largest bank, Investec announced expects a slight uptick in first half profit. He raises some interesting points about Basel III, one needs to dig a whole load deeper to understand as he says what constitutes the classification of capital. I love it when he disses “the Nouriel”. And basically calls him a perennial bear.

Their outlook again is a copy of what most of the banks are thinking right now: “Operating profit continues to be underpinned by a solid recurring income base as well as a strong performance from the group’s non-capital intensive Asset Management and Private Wealth businesses….Weak economic growth continues to impact the overall demand for credit and levels of transactional activity, and the performance of the core banking businesses remains dependent on the sustainability of economic recovery and the normalisation of economic activity.” I have always admired management and the brand, the business, the people seem on top of their game, almost a Goldman Sachs type allure in the local markets. I think that is a fair comparison.

Spur. Not the kind that Cowboy Woody has, but rather the restaurant chain, which reported revenue of 348 million Rands, 6.5 percent better than the previous financial year. Does this mean that the world cup folks didn’t have a taste for life? Very interesting is that the group launched the first Spur Express in Botswana. Without knowing what it looks like, I am presuming by the name that this is to compete with Steers head on. A trial in Gabarone. Or Gabs.

Total income 64 million Rands which translates per share to 88 cents, and a full year dividend of 60 cents, second half 28 cents. Makes sense that the first half is better than the second, with the festive season trading. So what would you pay for a well established restaurant brand that offers good value food for a growing local middle class (and we all know South Africans love their meat) for a company that makes 88 cents a share and pays 60 cents worth of dividends? Very handsome payer I must admit. Well the price trades at 13 Rands, 14.7 times historic earnings and 4.7 percent yield. Is that about right?

The same noises about the consumer still being under pressure: “Although the economic environment is expected to continue to recover at a slow pace, management does not anticipate a significant improvement in consumer spending in the year ahead. We will ensure that our brands continue to offer an attractive and affordable proposition to our customers, and that franchisee profitability is managed carefully. We are confident that we will remain competitive through tailoring our menus, to keep them topical and competitive.”

When you think about it this way, I worked it out roughly, owning a franchise is a pretty tough business. All very nice to be your own boss, but this is a little crazy, don’t you think:

Obviously there are BIG Spurs and small Panarotti’s, but you can see what I mean, not so? Average daily turnover per store is twenty thousand Rands a day. You go to Spur and have an original Spur burger for R42.95 and a LARGE soda fountain is 16.95. And if that is all you have, you owe the store R59.90. And don’t be a cheapskate, tip your waiter/waitress. So, I divide the average store daily turnover by this meal and you get 318 of these a day. Which then sounds like a LOT of burgers and cokes.

Here we go, Mooi River Index time. Excellent, some real economic data, almost real time, this is for the month of May. I must admit that my lead indicator to this, our deep contact on the road traffic between Jozi and Durban and back again (depending on where you live is the important starting point) got it about right once again. He sent me an email at the beginning of the month with our banking fellow “Rhodes” saying: “The August numbers are in and they are confirming the recovery. Taking the year-to-date MRI/”Our Bank” ratio of 4.143/1, I project your guys to come out with a figure of 146,628 passes. So good news then.” We have protected the name of the bank to protect our source Rhodes. Ha-ha.

Now remember that this data is complied by a team at the Mooi River Greenfields farm nerve centre and was thought up by a fellow called Adam Kethro, who knows transport and shipping like few do. So credit to them on this stuff, here goes the graph with data from the beginning of 2007, another RECORD for the Mooi River Index and an astonishing 26 percent increase in heavy truck activity between Jozi and Durban and Durban and Jozi since August last year. Both ways. Yowsers. How come some of the data that we are seeing in the real economy (not that this aint real) is not backing this up. Hopefully August data will trump anything that we have seen so far this year, here goes:

Mooi River index – August 2010

Click on the image for a much larger view of the table and graphic.

And then all the data since the beginning of 2003, I have highlighted and circled the point in 2003, February where the number of five axle trucks were half of what they are now. It is astonishing that road traffic of that kind has doubled in the last seven and a half years. I have circled the previous record months in late 2007 (the old normal) and you can see that the last two months have trumped that. Check it out:

Mooi River index – Raw data January 2003 to August 2010

Click on the image for a much larger view of the table and graphic.

I have circled the percentage increase this year on last year, this is the strongest month of the year so far. I shall await commentary from the economist that I send it to, I want to hear his views on the matter. But as Rhodes says, this can only be good news for the economy. I finally found a cool picture of the kind of trucks that we are talking about, five axles or more, courtesy of the interwebs and Google images and I guess the US Department of transportation, the Federal Highway Administration. If only government departments around the world had shorter names:

You are only as good as your last public appearance in front of a live audience in politics, or is that sports? Yesterday I paused the interview on Bloomberg with our deputy president Kgalema Motlanthe, for Paul, because he went to make a cup of coffee. You must come and visit us, our coffee is tops, even if we are boring. Well, we are nerdy, get excited about matters that some folks find utterly dull.

Back to that interview, because with the benefit of hindsight I should just have left the PVR running. Because this is the most unimpressive interview that I have seen the deputy president involved in. He is usually MUCH better than that. And by the way has the most awesome “goatee beard” that I have ever seen. Tell me if I am being too harsh, here is the Bloomberg interview: Motlanthe Says S. Africa Won’t Adopt Inflow Tax Soon. Very cool channel setup, I guess this is where the Zuck watches “TV” because he doesn’t own a TV. No really.

Perhaps I am just being unfair, there were some sticky questions posted to him. We were shouting at the TV, Anthea (we watch so much business TV that we feel we know the anchors by their first names) ask him what his personal view is on the matters. So, it seems that he won’t be president again and that the inflows tax might be just a thought. But we encourage debate here, even if economics 101 is not encouraged.

I want to know who is on the ANC Economic Transformation Committee. I sent an email to Luthuli House asking them that question, let us see if they are as efficient as COSATU, who were top drawer in that department. Tito Mboweni used to be chairperson of the committee according to Wikipedia. When desperately searching for who the members of the committee are, I came across this statement, which was read out by President Jacob Zuma, who was ANC head at the time, 22 September 2008, when then President Thabo Mbeki was recalled, a passing shot of the statement: “We have made a painful and difficult decision, and we are convinced that it will bring about much needed stability in government and public life and enable us to focus on the challenges facing our country.” Hmm.. what do you think about that?

We are not referring to this George Castanza Youtube clip of a double dip, but rather what the famed investor and fund manager Bill Miller thinks of it. This is an interview that Paul tweeted: Insights from investment guru Bill Miller. You should follow Paul Theron, it is after all Friday. And Byron Lotter.

But interesting insights from the Legg Mason fund manager who crushed the S&P 500 and had a marvellous following, things went bad at the end of 2008 and rough at the beginning of 2009, and he was ridiculed. So in this industry as in sport, you are only as good as your recent track record. But he has made a comeback and raises some interesting points, including the one of a wasteland type environment. The aftermath where you might breathe a sigh of relief that you have survived and now are ready for the next long slog. Current confusion leads to uncertainty. And uncertainty leads to caution. I think that is where we are right now.

New York, New York. Selling at the start and buying at the end saw the major equity indices end comfortably near the top end of the day’s range. I guess partly jobless claims and partly you get the sense that the faith is starting to return. FedEx, which is supposed to be an economy barometer shipped one cent less in earnings for the quarter and guided a little lower for their third quarter (but OK for the full year) got little sympathy from the market participants. Session end the Dow closed 22 points higher to 10594, the nerds of NASDAQ added 1.93 to 2303 with the broader market S&P off a touch, 0.41 points to 1124.

Research in Motion or RIM beat the streets earnings expectations. After hours the stock is up nearly six percent. The whole business community who have been hearing that the other smartphones have been eating the Blackberry collectively breathed a sigh of relief. I have been hearing and reading a lot of “RIM is the next Palm” or “Why RIM is toast” and I must be honest I find it a little tough to believe. Henry Blodget thinks that this is the case. Those who use their product, love them SOOO much. I went to the football with a friend who is a partner at an audit firm (no name dropping, just company I keep dropping) and his skills on the Blackberry were a sight to behold.

Anyway, RIM registered a buck 46 for the quarter, beating expectations by as much as ten cents, and surging afterhours. 12.1 million units shipped last quarter and they expect anywhere between 13.8 to 14.4 million units for the current quarter. Nice. Three years to the day, almost, Apple is up 109 percent, Nokia is down 70 percent and RIM is down 42 percent. This should come with a warning, past performance is no guarantee of future performance. Quite. Interestingly RIM and Apple started moving in opposite directions only around Mid December 2008. Remember, when the world had ended? Right back then. Turns out the baked beans and shotgun types were wrong until the next date approaches and passes when the world ends.

Currency and commodity corner The price of a barrel of oil is last at 75.02 Dollars. The gold price last clicked through at 1283 Dollars per fine ounce. The platinum price is last at 1620 Dollars per fine ounce. The copper price is trading near the year highs, 355 US cents per pound. The Rand is trading steady, 11.16 to the Pound Sterling, 7.11 to the US Dollar and 9.34 to the Euro.

Up periscope. It is Friday and you need a little bit of lightness as you enter into the weekend. Check this out, Paul tweeted it: How the Financial World Sees Itself. You might need more than ten looks before you get it. And yes, we will start better here.

Sasha Naryshkine
sasha@vestact.com
www.twitter.com/sashanaryshkine
011 022 5440

Jozi, Jozi. Looking at the scoreboard almost nothing happened yesterday. Days like these almost NEVER happen. Where the overall market measure ends nearly flat, that is the beauty of my job, no two days will ever be the same. But it nearly happened yesterday, the Jozi all share index closed at 28502 points, 0.11 points lower on the day. That is right nearly one tenth on a point lower on the day. I can’t ever remember the market having got this close to the previous day’s close on a trading day. Can you? There wasn’t too much on the go from a economics point of view, there was an inflationary read in the Euro zone, in-line with expectations.

A manufacturing read in the form of the NY Empire State Manufacturing Index which was lower than the expectations. A mortgage application read in the US was also lower than anticipated. Lastly, there was a capacity utilization read (Forexpros defines this simply: the percentage of available resources being utilized by factories, mines and utilities) that was slightly lower than expected.

What moved my Jozi markets? Banks had a strong day here, perhaps basking in the afterglow of Basel III. Whether the new ratios are Basil Fawlty from the get go, only the next banking crisis will tell us. I believe that after each and every crisis follows a period of extreme caution and then the financial minds and building blocks get back to work. And new and ingenious ways of acting inside of the rules which bend normal practices then ensue. Mortgage backed securities are not new, they have been around for 40 odd years. Blame Gini Mae. Not a person, but rather The Government National Mortgage Association.

Was this event that we saw now the excess all the way through, or as they say in the classics, the first Wright plane did not fly, but that does not mean that they gave up. I believe that like other sciences, financial engineering tries to improve daily. Unfortunately there are very bad laboratory type blow ups. Back to those markets yesterday, moving in the opposite direction were the gold stocks, who were dragged lower by big daddy of the sector AngloGold Ashanti.

Aspen Pharmacare released results yesterday for the full year to end June. Remember that this second half includes the GSK tie up, because that part only had one month worth of the relationship. Of course there would be a dilution because there are over 70 million more shares in issue now.

OK, here are some of the key points. A twenty percent increase in revenue to top 10 billion Rands for the first time, headline earnings just shy of 2 billion Rands, 1.989 billion. Wow. That translates to a diluted basic headline earnings per share excluding the impact of a plus-minus 50 cent contribution from discontinued operations (Onco Therapies) to 444 cents per share. A twenty percent increase.

We worked out yesterday that there was roughly a 13 percent gain in the second half in headline earnings over the first half, as a direct result of having the new GSK tie up. International seems just fine, it is not easy going at the moment, but in our minds these will turn out to be great acquisitions in time. Remember of course that the Sigma acquisition down under is still rolling around and not complete.

The prospects column sees a pretty decent next year, even if the stock looks expensive now:

“Aspen’s South African pharmaceutical business is well set to continue to thrive as a consequence of the addition of the GSK brands and the people who promote and support these brands, the regulatory stability and government’s stated intention to support the local pharmaceutical industry.
South Africa’s difficult consumer trading environment has necessitated a focus on efficiency of structures which should stand Aspen in good stead when the retail cycle improves. Initiatives being undertaken in the sub-Saharan African region should result in an increased contribution to Group profits in the year ahead.
An upswing in results in Latam, continued organic growth in Asia Pacific and the benefit of a full year of contribution from the Global Brands acquired over the last year will be growth drivers for the international business in the year ahead.
Completion of the acquisition of the Sigma pharmaceutical business will add further growth momentum. The Group has the fundamentals in place to enjoy a thirteenth consecutive year of uninterrupted real growth in 2011.”

In due course we will have a bigger write up on the company. Hopefully early next week, maybe sooner. On balance the market participants seem about happy, the share price has crested 90 Rands a share in recent days, and is currently flat this morning, just above 91 Rands a share.

AngloGold Ashanti was smashed yesterday as the company announced they were raising a whole lot of money to close out their hedge book. The stock closed down nearly five percent, 4.88 percent down at 316 Rand a share. Because in the equity offering the placement is at ZAR308.37. They want to raise 686 million US Dollars in total. It is a lot more complicated than that, check this out from the announcement yesterday:

“AngloGold Ashanti announces the final terms of the offering of US$686,162,400 mandatory convertible subordinated bonds due 2013, which will initially be convertible into a maximum of 15,773,913 ADSs (and up to an additional US$102,924,350 principal amount of such bonds which will initially be convertible into a maximum of 2,366,087 ADSs pursuant to an over-allotment option granted to the underwriters) (the “Mandatory Convertible Bonds”) by its wholly-owned subsidiary, AngloGold Ashanti Holdings Finance plc (the “Mandatory Convertible Bonds Offering”). The Mandatory Convertible Bonds are fully and unconditionally guaranteed by AngloGold Ashanti on a subordinated basis. The Mandatory Convertible Bonds will be convertible into ADSs (or, in certain circumstances, the cash value thereof), and pay a coupon of 6.00% per annum.”

Now you are an expert. Sounds a little complicated. The company are going to apply to list these convertible bonds on the NYSE. These eventually will convert to ordinary shares. In the mean time they will pay out 6 percent per annum. But the most important takeaway that I have from this particular capital raising is that the South African shareholders that do not have money outside of borders and usable, you are going to struggle to participate. Call this whatever you want, but this sounds distinctly to me like once again companies are prejudicing local shareholders with the convertibles on this share register.

The big shareholders will not have this problem, they are of course thrilled and will no doubt participate. Check it out: “We are steadfast supporters of AngloGold Ashanti’s management team, its growth plans and its strategy of increasing its exposure to the gold price,” John Paulson, President of Paulson & Co. Inc. said.” Paulson (of subprime shorting fame) owns 12.1 percent of the shares.
“We support this move by AngloGold Ashanti in accordance with its strategy to remove the gold hedges” said Allan Gray Portfolio Manager, Sandy McGregor.” Allan Gray owns 9.5 percent and collectively these two are the biggest shareholders.

Wind down the monster hedge and raise money for future projects. All expected to be completed inside of the next year. And I think that an ungeared producer would of course give the stakeholders much more gearing to the company. I guess negative in the short term, but good in the long run. Purity is what you are looking for ultimately. Another release this morning makes it more clear than mud, perhaps the local shareholders would participate.

I was discussing with a client who had time to chat and was driving in his motor vehicle using the N1 south and the N1 north from Pretoria to Sandton every day. He said simply, if I leave at 6:45 from Pretoria, I arrive at 8:30 to 8:45 at my offices in Sandton. And we spoke about the toll system. As he understands it, there will be a tag in your windscreen and law abiding citizens will purchase on and load funds on for a full month. We worked out that at the mooted rate he would have to put 500 Rands or so into the pre-paid purse to use at THAT rate. Otherwise you are sent a bill if you don’t have a tag. i.e. an out of towner using the Gauteng roads.

And then he suggested that there could be as many as 600 thousand people who use the freeways. At 500 Rands a month each that works out to 300 million Rands a month. 3.6 billion Rands a year. That ought to help. Most importantly though, this would force a lot of people to use public transport. And we came to the conclusion that he would use the Gautrain, because it would be far quicker and ultimately cheaper. And the congestion would ease, and he would be WILDY more efficient. And his family would see him more. Everyone wins no?

I always advocate to clients that they look for the most direct route and get right to the front of the investing coal face. But I am biased, this is what I do all day, this is what I sleep, eat and read. So the next best alternative for someone of course is for them to own an ETF right? Because of the expensive options out there, ETF’s have gained popularity, as the end owner of the units gets a FAR cheaper investment vehicle. Plus there is no active manager behind it making decisions, it is easy, cheap, and you don’t have to apply your mind that much.

I was then most fascinated to come across this simple (but complex to read) explanation of why perhaps ETF’s are not what you think they are. No siree, these are a little more complicated than you think. When you read it, stay with the three authors, it is how brow stuff. Can an ETF collapse?

The conclusion is not what you want to settle your nerves, because as you well know, it aint a problem until you actually encounter it. My suggestion is simple, choose good quality stocks that complex investment strategies can’t break. And if the investment is no good, then the hedge fund types will break it. First things first, choose the quality and make sure that YOUR name appears on the share register. But then again, I am biased. Something to think about.

This is interesting. Chinese advertising spend. Is it true that one could say that advertising spend is more aggressive in a favourable economic climate? If so, then you can’t “fake” this” China ad spend to reach $44.9 bil in 2010 – 16 pct rise in spending fueled by TV demand. Nope, you can utter wildly inflammatory comments like: I don’t believe the data coming out of Beijing, but I guess you can’t really fake this.

And, if that was not enough, check this out: Power use (in China) surges 14.7% in Aug. Big industry actually fell in August by around three percent and that tells you that the breaks are on. But in absolute terms the Chinese are right up there as the biggest power consumers in the world. On a per person basis however, China are even below the global average. We, as South Africans are comfortably ahead of the global per capita usage.

Check out this Wiki List of countries by electricity consumption and you will see what I mean. Order it by the last column: Average power per capita (watts per person), you might have to do it twice, stupidly the order is from smallest to biggest and not the other way around. You will see quickly that the hottest and the coldest countries in the world are energy hogs on a per capita basis, either trying to keep warm or cool themselves down. Down the bottom end there are WAY too many African countries. But I guess that makes those folks on the supply side that much more excited.

The COSATU document was sent to me by Nandipha after a request for it. I also noted that they got the document up, there must have been several requests for them to do so. Well done COSATU on your reply, that is better than I have got from any government department. Who simply don’t reply. I have had that before.

But I want to take a look at the proposals of COSATU to nationalise some key industries, including stocks that we own in our client long portfolios. Check out this one:

“Petrochemicals: This sector has a large monopoly: SASOL, and already, it was identified by COSATU and the SACP as strategic and therefore needs to be nationalized. SASOL produces important inputs for industrial processes, agriculture and construction, particularly cement production. Besides SASOL also produces fuel, has strategic refining, and controls strategic transport infrastructure for fuel and gas. Sasol also depends heavily on Eskom for electricity supply; its processes are highly energy intensive and it also relies on mining, especially coal mining, as a critical input.

Let us see, we just looked at the Sasol results recently and noticed that they paid around 6.985 billion Rands worth of corporate tax. Indirect taxes raised were 16.292 billion Rands. You heard me right, check this graphic out, I have circled with red (or green if you are colour blind):

As a national entity, the National Petroleum company of the Peoples Democratic Republic of South African (a fictitious NPCPDRSA), my ideological assumption (wrong for some of course) is that the company will be run badly. I am basing this on the track record of government entities. Which are nothing short of messy. Give me the ten year track record of PetroSA and compare it to Sasol. That is all.

So Sasol pays all in about 26 billion Rands worth of taxes, employee taxes, company taxes and the big fuel tax. And if I am right in presuming that taxes collected in this country is around 600 billion Rands, what is that as a percentage? I am running quickly here, back of the matchbox stuff. I did find this line from a Business Day article to back up my 600 billion number: “The South African Revenue Service collected R598,5bn in revenue for 2009-10, R8,1bn more than the revised estimate announced in the February budget.”

What? But remember that the fuel levy is as a direct result of the product they produce, but it’s better that it is internal rather than external. Not so? Still, the nationalisation of Sasol will only lead to lower revenue collection, because I feel the company would be wildly less profitable. Whatever any ideologists would think. It makes me MAD!

New York, New York. When people start talking about key technical levels being breached I switch off. Terrible, but all short term trader talk does very little for me when referring to charts. When referring to the gut feel of certain trader types and what they are thinking, that is a different matter entirely. Broader indices started lower and then closed near the best points on the day. Mastercard announced after hours that they were buying back one billion bucks worth of shares. Plus also a very decent update on what they expect earnings to do over the next three years.

Session end the Dow closed 46 points higher to 10572, the nerds of NASDAQ 11 and a half higher to 2301 with the broader index S&P 500 up by nearly 4 to 1125.

Currency and commodity corner The gold price is last at 1272 Dollars per fine ounce, the platinum price has topped 1600 Dollars per fine ounce. The copper price is flat at 343 US cents per pound. The oil price is lower at 75.17 Dollars per barrel. The Rand is much stronger at 7.08 to the US Dollar, 11.07 to the Pound sterling and 9.28 to the Euro.

Up periscope. Expect more flatness. We are seemingly in a vacuum after recent gains, there are the favourite initial jobless claims that could change matters at two thirty this afternoon.

Sasha Naryshkine
sasha@vestact.com
www.twitter.com/sashanaryshkine
011 022 5440