Slasher's coffee beans

Jozi, Jozi. Wow. A chameleon day, we moved from the lush forests to the Pilbara, and our chameleon market changed accordingly from deep green to deep red. At one stage we were up 302 points on the Jozi all share, that is nearly a percent, but closed the day at 30716, down 465 points. That is a 767 points move from top to close, and for the record, the close was the day low. All sectors sold off heavily, resources, banks, financials and industrials, nobody was spared. The only major sector that squeaked into the green were the gold shares, and only just. And all of this in the face of a Dollar that is gaining momentum against the Euro, which now stands at a two month low to the greenback.

Whilst the Irish have found a better funding solution on that side of the Atlantic, at this side of the Atlantic, the fellows from Famous Brands have announced that they will buy the O’Hagan’s Irish Pub and Grill franchise agreements. For the sum of less than half a percent of their market capitalisation, which is less than 21 million ZAR. Nice new strategy, I must admit, no BIG acquisitions, just small bite sized ones. Nice. My first question actually was, how would this impact any Muslim investors who would be Shariah compliant? Really, that was my first and only question. Otherwise, good luck to them, Famous Brands.

Naspers results this morning, for the first half. Before we jump into these numbers, remember through their stake in DST global that they have small indirect investments in Facebook and also in a business called Groupon. Last night Twitter was abuzz (well, the nerds I follow anyhow, it hardly is going to be a trending topic) with news that Google were looking to acquire Groupon. The Business Insider suggested that this was not going to be the case: No, Google Has Not Bought Groupon Yet. And then, DST was about to make a 100 million Dollar investment in Twitter and value the entity at 4 billion Dollars. That has traditionally been DST Global CEO’s Yuri Milner’s style. And Naspers style is let these alpha males run the businesses.

Naspers highlights column includes “consolidated revenues (up) by 18% and core headline earnings (increased) by 33%”. “Major areas of growth were the internet and pay-television businesses. Our print media business has shown some recovery, whilst the technology business improved margins.”

All good, and then the “new”: “The group consolidated its internet interests in Russia, acquiring a 28,7% interest in Digital Sky Technologies (“DST”) by contributing existing assets and cash. DST was subsequently renamed Mail.ru group. On 5 November 2010 Mail.ru group was listed on the London Stock Exchange and presently has a market capitalisation of some US$7,1bn. Our share is therefore worth approximately US$2bn.” So, over 14 billion Rands. Just a little less than ten percent of the current market capitalisation. Astonishing.

This is a great graphic (thanks IR at Naspers) of their internet businesses, across the globe, from TenCent in China through Easter Europe and onto Brazil, check it out:

OK, check their consolidated income statement out, I have hacked this along with the above graphic from their analyst presentation:

The old business (not the print, but rather TV) is still the major contributor:

OK, core earnings per share were 860 ZAR cents for the half, with no dividend. Gearing is low, there is a whole lot of cash here and just recently a Dollar bond has been floated. I think in Ireland of all places. EBITDA margins are increasing, thanks to bigger contributions from the internet businesses. The group is pretty cautious about the next half, saying that the satellite TV business should slow a bit, post world cup. And that there could be greater regulation. But all things considered I must admit we are pretty pleased with these results.

Ye olde world. The Euro is trading at a two month low to the US Dollar, the same old (or is that olde) uglies have reared their heads again. And who is next, well the short term, I mean smart money suggests that Portugal is in the sights of the bond vigilantes. Credit default swaps for both Portugal and neighbouring Spain jumped to records yesterday. Not good and if I were Merkel and Sarkozy, I would acting fast, right now. Because it does not matter what the finance ministers tell you, but rather it matters what the markets tell you. Because finance ministers and those around them are government officials, the markets are full of hyenas. Gosh, comrade Vavi would be so proud of me for making that analogy.

You are still struggling with the credit default swap idea? I found this graphic on the web, that explains it a whole lot better than I could. Courtesy of Phil’s Stock World, where I found and resized it. Hope you don’t mind Phil, thanks.

So the cost of the insurance is one thing and is determined by a market process, which no doubt will become clearer in time. And regulated, because there is nothing wrong with the concept, perhaps the fact that you own fire insurance on your neighbour’s house might make you hope that it burns down. That issue still sticks in my throat. Surely you should only be able to buy insurance on something that you own? That is my point.

This next graph, courtesy of Bloomberg is designed to show you one thing, and one thing only, that the Credit Default Swap market is so very new. Check out the cost of insuring sovereign debt of the peripheral European economies, how it only takes to trading regularly when the Lehman induced crisis of 2008 (there is a better name, if not too long) grips markets.

So in truth, this market for sovereign CDS’s is only a little over two years old. Judging from this graph. But where are we today? Portuguese CDS’s are 100 basis points higher than three weeks ago. And also 100 basis points more than in early May. So basically, with the Portuguese CDS’s trading at 545 basis points, what that means is that the cost of insurance on your ten million Euro investment in Portuguese bonds would be 545,000 Euros every year that you hold them.

And the Portuguese ten year bond yields 7.03 percent. Back in March 2009 when everyone actually WANTED government debt, the yield was 3.7 percent. OUCH!!!! In August 2006, when everything was safe, the 10 yr yielded 3.35 percent. Even in August the 10 yr was yielding a little over five percent. These are problems, not without solutions, but you get the sense that the EU will have to take drastic action. Or, you could just trust the German government and buy the ten year bund which currently yields 2.76 percent. And what is the cost of insuring against a German Default? I don’t know, I couldn’t find out.

This is not particularly insightful, but I like the guy, Mohamed “the moustache” El-Erian Ireland Rescue Is Not a Game Changer. But we were discussing here in the office this morning. The term bailout implies that the country is bankrupt. All that has happened here is that the country is getting a credit line at a cheaper rate than in the open market. 5.8 percent versus 9 percent. And once the faith is back, then the country will be able to raise money in the open market at cheaper rates.

Paul scribbled (in his very neat way) on a piece of paper of all the crises over the last year or so:

Exactly. Keep calm and carry on.

New York, New York. Stocks staged an amazing late rally to close comfortably off their worst point of the day. Which was just after the open at 10 am and again at midday. All this after folks were still digesting the news that the South Koreans and Americans were pressing ahead with this boat showing. Errr… showing boats. Errr… military exercise. And the Irish had the water expunged, you know a bailout from the EU.

I am still struggling with the terms, I must be honest, it seems if you were worse off then you got a better deal. The fellows over at the Business Insider put together a slideshow titled: These Are The 20 Banks Most Exposed To The European Sovereign Debt Crisis. The last one (or worst off), I know I shouldn’t laugh, but I could not help myself – The National Bank of Greece.

Session end and off the worst, the Dow closed at 11052, down 39 points. The nerds of NASDAQ were lower by 9.3 points to 2525, with the broader market S&P 500 down by 1.6 points to 1187.

Commodities corner Dr. Copper is trading at 377 US cents per pound, the gold price is better at 1372 Dollars per fine ounce, as is the platinum price better, last at 1646 Dollars per fine ounce. The oil price is a little lower at 85.58 Dollars per barrel. The Rand is weaker at 7.12 to the US Dollar, but has gained to the Euro, 9.28 currently. 11.07 to the Pound Sterling.

Oh, and if you needed this, keep calm and carry on.

Sasha Naryshkine
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Jozi, Jozi. Phew, it was always going to be tough with the Americans away from the screens, even though Friday was a half day on Wall Street, you got the sense that the main-okes-what-count were not there. Much of the day from an American business TV focus was spent on Black Friday. The day that traditionally retailers were supposed to click over into the black for the year, and December was the big fat icing on the cake. I guess retailers in the Western World can be really grateful that Christmas is at the end of the calendar year.

Industrials were the only winners on Friday, Richemont up *nicely*. Good feel in the sector and some broker upgrades coupled with a sense that the Germans are doing better than most folks expected, the Germans proximity to the Swiss is good for their exports. Except us, we are normally a little more bullish than most on the sector we like. Not everything. Just the sectors and themes we like, I can assure you that we do not like other sectors that others love. Friday the Jozi overall market, the all share, closed at 31181, down 116 points or 0.37 percent for the day. No thanks to Thanksgiving, which saw us with much lower volumes than normal.

OK, finally we have some news on the WalMart partial offer to acquire a majority stake in Massmart. WalMart want 51 percent of Massmart. I get the sense that the release says that, they probably want more, but all the “stakeholders” if not all the shareholders would have had other ideas. Government, labour, those sorts of folks, perhaps this is a middle of the road agreement that everyone is happy with. Check out the official announcement —> Joint announcement of a firm intention by WalMart to make an offer to acquire 51% of Massmart.

The important points:

“The boards of directors of Massmart and Walmart are pleased to announce the terms of a recommended cash offer to be made by Walmart to acquire:
51% of Massmart ordinary shares, equivalent to 51 out of every 100 Massmart ordinary shares held”

“Under the terms of the Offer, Massmart shareholders will receive R148.00 in cash per Massmart ordinary share sold to Walmart”

“Massmart, following the implementation of the Offer, will remain listed on the JSE” and this is quite interesting, the independent financial advisor, Morgan Stanley “has indicated that in its view the Offer is fair from a financial point of view.” Some would argue that it is rich.

So far, institutional shareholders of over 35 percent have given irrevocable to vote in favour or to recommend to their clients and they have non-binding support from 15 percent. Which is different from actually giving up 51 percent of your shares at that price, support of the scheme is one thing, tendering your shares for sale is another thing. Although you would presume that voting in favour or supporting means you will sell.

What I am struggling to come to grips with though is two things specifically, firstly based on this line: “The Offer has the dual benefit of allowing Massmart shareholders the opportunity to realise an attractive premium on part of their investment at R148.00 per Massmart ordinary share in cash while affording them the opportunity to participate in the future value of the Massmart ordinary shares that remain listed on the JSE.” What is the price going to trade at post the scheme?

And if the scheme vote FAILS (they need 75 percent agreement), it seems that WalMart could turn to plan B. And plan B suggests that they would ask the folks who agreed to sell all their shares. But not necessarily get them all away. Check this paragraph out:

“If the Substitute Offer is made, all holders of Massmart ordinary shares will be able to tender all or any lesser number of their Massmart ordinary shares, but Walmart will only be obliged to accept tenders that will cause it to acquire 51% of the issued ordinary share capital of Massmart after the implementation of the Substitute Offer.

It is not clear and early market movements inside of the first half an hour tell you that market participants are a little confused, less than one percent of the normal traded volumes overall. We think that the smart folks who designed the scheme, designed it so that it could not fail, WalMart from a current shareholders point of view, bearing in mind that almost 51 percent of folks have said yes. The “stakeholders” might have other ideas, the competitions authorities still has to give this the thumbs up. Appease minister Patel and the likes with a public hearing, in which I hope somebody makes that Charlie Munger point in which he said low cost retailers do more for society than charity.

Ye olde world. Was it only us here that was left wondering why folks thought that Capital Shopping centres should spike Friday, particularly after the suitor said, if you buy such-and-such an asset, then we will not proceed with a cash offer to all and sundry. I guess it was a way of the board of Capital Shopping Centres saying to Simon Property Group (the suitor) thanks but no thanks. And perhaps the share price of Capital Shopping centres spiking five and a quarter percent tells you two things, one there are hunters in the night for their assets (these hunters pay money) and another, there might have been a little short covering of sorts. Either way, the stock is up another three odd percent today, read this piece from Friday —> Simon Property May Bid for Capital Shopping to Expand in Europe.

The Germans and the French seemed to have met some middle ground on the bond holders of the Irish banks. And this is about the terms of the Irish deal. The number in absolute terms, 85 billion Euros was a baldy kept secret. A loan facility of 85 billion Euros, which attracts interest payments of 5.8 percent. Which is ABOVE the rate of what the Greeks paid for their bailout package. Man, that sounds a little unfair, the Irish hardly cheated, they just went hog wild.

What is going to happen however, is that government’s budget next week will be tested to the last vote. The current chaps in charge, Cowen and Co. have what Bloomberg call a paper thin majority. And noises are growing on the streets to just default, that would be less painful for the people of Ireland. Blame game, something politicians do so well. Without having jumped into this document too deep —> The National Recovery Plan – 2011-2014 one thing is already clear, benefits are to be slashed AND folks are going to pay more for those breaks that they got in the past.

Wow. And this is already three years into the great era of austerity for Ireland. Add on another four. Yech. The only good thing is that the Irish are hardwired for hardship, so the convincing part should be a little easier than some other parts of the world. Or is that just a generalisation?

Bloomberg have a breakdown of how the funds are going to be utilised, only 10 billion (only) to recapitalize the banks (half to the biggest two is my understanding), 50 billion for public finances, you know general run of the mill government expenses. And 25 billion in a backstop fund of sorts, in case the banks need more capital. OK, so what happens if the mood improves, government are able to raise more money at around 6 percent in six months time. They would have used very little of the money. So it would have all been because of the contagion issues with Portugal and Spain in the sights now.

New York, New York. Half day Friday. North Korea strutting their stuff and puffing their chests out spooking some people. Ireland and when are they going to take the money spooking some people. The Portuguese saying that they don’t need a bailout spooking some people, because Ireland said the same, we don’t need a bailout. A credit addiction problem needs more than a denial, not so? And then there was Black Friday, shopping all stars and novices alike seemed to be getting involved from as early as the shops opened. That was the real physical shopping, in the modern era, Cyber Monday has become just as important for retailers. Where you go looking online for special deals and exciting new propositions, better than a shop can offer you.

I just want to know one thing, what device or special is sooooo amazing that you could queue from the early hours of the morning. Or is this just a tradition of sorts? Eat turkey, pumpkin pie and all the trimmings and then stand in line for a few hours to get a good discount.

Silk road, riced and diced. My views on North Korea are simple, the ruler is a despot who was handed power via his father and in turn has handed “power” to his son, whilst the people starve. Any country with an “eternal president” is fooling few. Some of the stories via his (Kim Jung-il) old chef that emerge are nothing short of nuts, the way the country works. If you can call it works. The people starve whilst the great leader dines on sushi, caviar and all sorts of luxuries that masses have probably never heard of. Why the Chinese think that it is in their interests to keep this pesky lot on their side is anyone’s guess. The country ranks second to last on press freedom. The citizens can’t travel abroad. One factory manager who made international calls was killed by firing squad in the world’s biggest capacity stadium, in front of 150 thousand folks. Fear.

That is what my naive side of my brain tells me, why the Chinese support? The other part tells me that it is in the Chinese interest to be the go to people on the “issue”. Now the Chinese are up in arms over the issue of American and South Koreans military drills and are seeking a quick resolution. Pretty ironic as they were a bit slow on the uptake. Imagine living like the South Koreans live? In constant fear over a mad mans actions on that side of the border, not thousands of miles away, but tens of miles. A Google search suggests that Seoul is 31 miles, just less than 50 km’s away from the North Korean border. Wow. And Seoul to Pyongyang is less than 200 km’s. Yech.

The market in South Korea as such trades with as much as a 30 percent discount to their Asian peers on the same metrics. Less than 10 times forward earnings. And earnings growth is set to be stronger than other companies in the region. So the discount I guess you could call an all out war discount, a fear discount. And the FT article —> Equity investors will be a true and fitting tribute to miracle suggests that the people are getting smarter. Skilling up, on a global basis. I guess if you believe that North Korea will be the last communist state to fall, then South Korea should be a “good place” to be invested.

Apparently everyone is getting excited about this article —> In China, Cultivating the Urge to Splurge that was written last week in the New York Times. It is in that category of too big to fail, too long to read, just like that Andrew Ross Sorkin guy, who writes for the same publication. Too long to read, OR, replacing books? Like reading one chapter of a book. So come on folks, give it a wind tonight.

Commodities corner Dr. Copper last stood at 379 US cents per pound, the oil price much better (for the oil producers) at 84.62 Dollars per barrel. The gold price slightly higher at 1366 Dollars per fine ounce, the platinum price also slightly higher at 1654 Dollars per fine ounce. The Rand is steady to slightly weaker at 7.12 to the Us Dollar, 11.11 to the Pound Sterling and 9.45 to the Euro.

Up periscope and something weird. Markets this morning are cheering the Irish plan or the facility that has been put in place overnight, even if it does not seem like a great outcome for Ireland. If US futures can hang onto these gains, expect strength all through the day.

Sasha Naryshkine
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Jozi, Jozi. Yesterday was all about talking turkey as the Americans enjoyed the day off for the Thanksgiving holiday. Is that where the expression comes from? Talking turkey is a serious business, it suggests that you are there to get the problem solved. Ask Yahoo suggests that this is the origin: Way back when, a settler and a Native American went hunting for birds, and caught an equal number of turkeys and buzzards. When the pilgrim “divided the game, he took the two turkeys, leaving the buzzards for his companion.” Justifiably annoyed, the Native American responded, “Stop talking birds, let’s talk turkey.” Sounds about right, a colonialist taking the bulk for himself whilst doing the same amount of work.

There was still the Irish debt problem (albeit not enormous) hanging over the markets like an inland outdoor fish market in the late afternoon. In the tropics. You can smell it now, no doubt. Apart from that smell and the worries over Chinese inflation and a pending rate hike (my favourite currency guy, Ashraf Laidi, reckons we could see it soon, VERY SOON) markets recovered strongly across the globe. Without help from the Americans. That was slightly refreshing, I must admit. After all participants had their time limit exceeded and had transacted the Jozi all share closed 185 points better to 31298. Byron would say to me, that doesn’t “read right”.

By far and away the biggest news (I think) was a government press release, and only the second half really. And it had to do with this Statement on Cabinet meeting of 24 November 2010. So what I hear you say, hold on a second, this piece, which itself would you believe was highlighted and published in bold itself. Here goes:

“Cabinet noted the report by the inter-departmental task team (IDTT) on Iron Ore and Steel. In essence, the IDTT will be entering into negotiations with the relevant stakeholders in the Iron Ore and Steel industry with the objective of providing cost plus 3% access to the 21.4% Sishen Mining rights to Arcelor Mittal South Africa (AMSA) or other steel producers, conditional upon a developmental pricing model – determined by Government – that will result in domestic prices of steel being no higher than the lowest quartile of global prices.

The team will draw upon a suite of policy instruments which have been presented to Cabinet. These include – but are not limited to – relevant sections of the Minerals Petroleum Resource Development Act (MPRDA); strengthening the Competition Act; amending shareholder compacts with State-Owned Enterprises (SOEs); and promoting new steel investments together with the prioritization of electricity availability and connections to such investments.”

A journalist forwarded this to me and asked for comment. So, this was my answer to here, in italics, I had added commentary today with some after thoughts:

“Holy smokes. The margins for Arcelor Mittal were wide when they were (when they owned the mineral prospecting right) paying a lower cost for their iron ore. Currently there is a different arrangement.

I have inserted an iron ore price chart over the last decade to illustrate my point about how iron ore spot prices have gone wild over the last decade:

“Sounds like a good outcome for the consumers of steel. And by extension the construction companies and the mining companies (remember the spat with the gold miners and Arcelor Mittal).
Does not sound like a great outcome for Arcelor Mittal, or Imperial Crown Mining for that matter, because it sounds like that “chip” has reverted to government. But it is a prospecting right. What does that mean for the pending empowerment deal over at Mittal? Is in not valid then? Phew.

In other words the better pricing that they have in place now would revert back to this cost plus three percent iron ore pricing. “And Arcelor Mittal would not see the old benefits. And by extension the biggest shareholder in Kumba, Anglo American.” Anglo American hold a little less than 63 percent in Kumba Iron Ore, which in turn owns 75.1 percent of the Sishen Iron Ore company. Kumba Iron Ore now exports 85 percent of all of their iron ore production (2009)

“And a modest negative to Exxaro.” They (Exxaro) own 20 percent of the Sishen Iron Ore company ”
Confusing, still, this needs to be rubber stamped by government.”

I want to make a couple of points here. When the preferential agreement was in place in the unbundling process at the beginning of last decade, both iron ore spot prices were much lower AND Iscor (Iscor Ispat, Arcelor Mittal, all the same thing) was a much more important customer of Kumba Resources (the predecessor to Exxaro and Kumba Iron Ore). The mix starts to change drastically as Chinese steel consumption ramps up sharply.

I dredged up the pre listing document dated end of September 2001 for Kumba Resources (which split from Iscor) and later split into what we know now as Exxaro and Kumba Iron Ore, and was surprised by the production number on the iron ore side: “The iron ore SBU currently operates two iron ore mines. In the financial year ended 30 June 2001, the Sishen and Thabazimbi mines produced 27,0 million tonnes of iron ore and contributed R3,3 billion to Kumba’s revenue.” Wow. That is more than I thought.

In the initial listing statement there was a supply agreement over the 6.25 million tonnes per annum. But remember that Iscor shareholders also got a great economic benefit: “Kumba shares would be distributed to Iscor shareholders pro rata to their existing holdings”.

Anglo American made an offer to minorities (after having hoovered up 35 percent, which was bought from Benny Steinmetz and Avmin), that opened in November 2003, for wait for it ……… 37 Rands a share. Government apposed this publicly and Anglo were only able to mop up less than two thirds, less than they would have liked, more than government wanted. All the while, a year earlier to that, the Mittal family had been buying Iscor shares as it was then, and had in the bag a little less than 35 percent at the end of 2002. Early 2003 (end of Feb), Mittal upped their stake with a partial offer to minorities, ratcheting their stake up to 47 percent.

The point that I often make with this Sishen Iron Ore agreement is that there were at the time (September 2001) no majority shareholders in either entity. In fact both of the controlling parties had nothing to do with the initial agreement. I honestly don’t blame Kumba Iron Ore for not “spotting” Arcelor Mittal when it came time to renewal.

A little later in the day yesterday, I emailed the Kumba Iron Ore investor relations person, someone who actually works for Brunswick. And her reply to me was the official one from Kumba Iron Ore, and I hate to overload you with details, but here goes:

“Kumba Iron Ore (“Kumba”) has taken note of the Cabinet meeting statement dated 24 November 2010 and remains committed to engage with the IDTT in discussions regarding the iron ore and steel sectors. The discussions held with the DTI to date have been preparatory in nature, and have not yet enabled the company to fully engage with all the members of the IDTT, and other relevant stakeholders.

I guess in the eyes of Kumba this announcement is a sideshow to the real issues. Either way I think it is not a great outcome to be wrestling with government, and that applies to Anglo as the majority shareholder too. And Exxaro. And it is not a good outcome for Arcelor Mittal either. And perhaps the party to come out worst affected would be Imperial Crown Trading. I would think. What DO YOU think of all these complicated events?

Ye olde world. Protests in Greece yesterday, folks marching, carrying banners, not at work. Or perhaps they are unemployed, I shouldn’t be so callous and rude. But stay tuned guys, because I suspect the bond vigilantes have done more than enough for us to be talking about a Portuguese debt aid package in the coming weeks. The truth is not whether they need it, perhaps they do and perhaps they are talking about it (the Portuguese government have denied any such talks), but rather whether the perception is that they need it. Because bond investors in Portuguese debt are asking those questions right now. And my experience is that they would sell first and ask questions later. And once the longer dated bonds are yielding more (double a year ago at 7 percent on the 10 year now), and have been sold off. It is then too late.

I hacked this from Bloomberg TV this morning, quality is not that great, they probably are going to roast me:

I wrote that stupid line, sorry. So, Ireland is the new Greece, Greece says that they are not Ireland and Portugal added in the mix spells PIG. One more I, in the form of Italy and then the plural of the hog (Spain would provide the S) would make the problem more serious. For the time being it was a result of less rich people in Europe (Ireland, Greece, Portugal and the other two) wanting to live at the same standards as the rich people in Europe, France and Germany, Luxembourg and Belgium. The figures of GDP per capita suggest that is NOT TRUE for Ireland, they contribute more to GDP per person than is the case in Germany and France.

AND, the Austrians have suspended their EU contributions to Greece specifically because they are unhappy with the Greek treasury’s efforts. But let us hop back to Ireland. I think that Paul Krugman is both right and wrong in this article titled —> Eating the Irish. I loved this bit, not because of the Ireland/Iceland thing, but because it took 18 months to happen. So we all knew it was going to happen, what is up with that?

What would the outcome have been if the Irish government did not guarantee all the deposits of their banks, and did not shore up the banks capital? Paul says simply, that economy would have been ruined for a generation and Paul likens their rise and fall to that of Icarus. So who is to blame? Actually, who cares, it is the present pickle and not the past that matters.

New York, New York. You have to check this out: Thanksgiving 2010 Myths and Facts. 46 million turkeys were eaten yesterday. That is one for every South African, more or less. 334 million kg’s of turkey meat. More than 1 kg per Americans and nearly 5 kg’s per South African. That is three days worth of Americans annual meat consumption (125 kg’s per person roughly). They don’t eat it all of course. The amount of turkey cooked per person in a South African context as you can see is 5kg’s per person, and that translates to 13 percent of South African’s annual meat consumption (39 kg’s per person). Wow. Big numbers.

Let us skew it even more. The entire population of Malawi is, just short of 14 million people. On average each person eats 5.1 kg’s of meat a year. Not much. That translates to 71.4 million tonnes of meat. One day of American turkey cooking is just over four and two thirds of a year worth of Malawian meat eating. In other words, All the turkeys COOKED (335 million kg’s) in the US yesterday is as much meat ALL Malawians eat in 143 months. Makes you think.

Silk road, riced and diced. We heard on the wires that shots had been fired between the South and the North Koreas. What? It is said to be within North Korea. Hopefully it is a coup and those bozos can go and live in the gulag. Apparently the old one and the young one, Jung-il and Jung-un were right there, a few hours before the attack. Our great and beloved leaders suggested it was a good idea and then sped away again, dining shortly on lobster, sushi (sometimes sliced off a live fish), caviar and drinking Czech beer. No really.

Up periscope and something weird. It is a half day and black Friday in the US, so expect little action. Be sure to buy all your Christmas gifts today. Those Chinese rates could be hiked at any time. And could even happen today………according to some of the twitter. Twits. You know what I mean.

Sasha Naryshkine
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Jozi, Jozi. After a recent drubbing the bulls turned up with their “will do” face, shooing the bears back into the woods. Reasons I guess are the Irish issue seems to be nearing a conclusion of sorts, at least we will have a timeline, and the Korean tension has ratcheted down a notch, even if the Americans have sent an aircraft carrier to the spot. I wonder if there are any turkeys up for the roasting in the Korean peninsula. Happy Thanksgiving, let us hope we have no SCRAMBLE with that. Eggs or any kind of fighter jet either. I noticed that the US and the South Koreans will have a joint military exercise before the end of the month to send a clear signal to the North Koreans. I wonder if the Americans consulted with the Chinese before doing this?

We had inflation tick a little higher than the consensus locally, that is two days of ordinary local data, hardly an encouraging sign. The local media is going with the line, an uptick in inflation suggests that there is no room for a rate cut. What? It was 3.4 percent people. And this number was for the month before the rate cut was made. Anyhow, apart from a couple of days of iffy local data, we saw the Jozi all share index ended the session up .70 percent or 217 points to 31112. Sasol, I mean the oil and gas index had a good day, up a percent and three quarters. The platinum miners engineered a percent gain whilst construction stocks fell 0.6 percent. For the year the construction stocks and the platinum stocks are the ONLY major indices down, less than two percent, but more than one and a half percent. Retail stocks are up fifty percent plus this year.

BHP Billiton announced this morning that they have bought back 380 thousand shares in London, giving a range and basically suggesting that these shares have been retired already. Retiring is good for the existing shareholders, normally retired shares never make a comeback unless you are an exploratory mining company in which case new employees join all the time. I mean new shares. I often use that DRDGold example, where a few hundred thousand shares in issue turned into a few hundred million shares in less than 20 years. Imagine the dilution if you went to sleep for one hundred years, as in the fairy tale books. Never mind spinning wheel, try big fat spin on it.

There were results from one of the major old established South African food companies, Tiger Brands yesterday. These results from Tiger are for the full year to end September. The company that has a 72 percent market share in the tomato sauce market and 69 percent share in the baked beans market. And again we say almost the same thing every time you see this business. It is a milling and baking (30% of total revenue) coupled with grains (42% of total revenue) that make up the bulk of the sales. And then there is a division called “other grains” that is 12 percent of total revenue to give you a total of 84 percent revenue from businesses that are involved in grains, break baking and milling. Groceries, the brands that we know so well, make up only 17 percent of total sales. And the other one percent is made up of the personal health care division.

The “mission statement” tells you that this is the kind of investment you can rely on. The groups seeks to deliver revenue growth of 3 percent greater than local GDP (not so hard as of Tuesday) and blended operating margins of 15 percent. Which is not too easy. So I would not say soft targets, but rather steady and achievable ones. I quite liked this graph in terms of the outlook for the local consumer, with the data provided by the BER, down in Stellenbosch.

So I guess by their own mission statement, we should be seeing sales growth in the region of 7 percent per annum over the next three years. But I quite like the consumer bounceback trajectory, as per the graph and I quite like the fact that rates should remain low as inflation expectations are muted and comfortably inside the range. Tell me, has the BER showed this to minister Patel?

Raw numbers time. Turnover of 19.316 billion ZAR (down 5 percent) with profits after tax 2.176 billion ZAR. HEPS of 1393 cents per share, a decrease of one percent. Total distributions stood at 746 cents per share. And the stock trades at in the mid 180′s ZAR. So a historic earnings multiple of 13 and a half times. And a dividend yield of four percent. Just remind me cash rates, the best you can get on daily call is around four and a half percent? Is that right? And the interest is taxable, whereas for the time being dividends are not.

Forward the company is expected to make around 1525 cents per share next year and make a dividend payment of half of that. So forward by the same metrics the stocks trades on 12 and a quarter times earnings and a yield of about 4.1 percent. I guess not bad is the conclusion. The people of the Western Cape however are instituting a class action suit against the bread making division, Albany. Phew, we shall see what happens there.

No ways. I guess we should not be surprised. If you were looking for the confirmation that you needed about the biggest shareholder of Telkom, then you got it, read this ITWeb article titled: ANC MPs tell Telkom to toe the line. OK, the PIC are supposed to be an independent asset manager, as Paul pointed out, the thinking should not be that those shares sit in the government stable. Wow, seems too strange to be true, but another reason to avoid the company. Just remind me how awesome the parastatal’s are? Stop being a neg one of my varsity friends would say if I brought this up, hey, I am just pointing something out.

Ye olde world. Ok, so a little Irish green document came yesterday detailing all the spending cuts in an effort to reduce the deficit. The 4 year plan includes tax hikes, not for the corporate types, that low rate has remained. Currently 12.5 percent. Where is that little man with the evil chuckle looking to steal your pot of gold? The already down and out citizen will be forced to cough up more as tax rates are raised. And the government reckon that they will grow the economy between two and a half to three percent. How likely is that?

Does this sound familiar to what we were talking about yesterday? “8% (earning €75,000 or more) will pay 60% of all income tax” (taken from Four year plan includes tax hikes, VAT increase and huge spending cuts) Tax the rich I say in America, it happens everywhere else in the world. And to add insult to injury minimum wage has been slashed to 7.65 Euros per hour. That is around 70 Rands a hour minimum wage.

Seems like a great outcome for masses of South Africans even after the 1 Euro an hour cut. Oh, and just by the way, before the cut the minimum wage in Ireland was ABOVE that of Germany. Sigh. Check this out —> List of sovereign states in Europe by minimum wage. Wow. Albania, Bulgaria, all have crazy cheap labour by European standards. And minimum wage in Georgia is 28 Euro cents a hour. Wow, that looks wrong there. Well, they have a surplus, a flat tax rate, increased tourism, crazy neighbours.

I just guess now we have to wait for the Irish public to protest with a big resounding NO. But what is the alternative I guess? I must be honest, again, the consumer is just as much to blame as the banks extending credit. And if you ask me, pointing fingers normally reveals three pointing back at you. I suspect after the budget on December 7 more will be known by the public. Perhaps any Irish person with an O’ in front of their surname should change to I-O’. Example: O’Reilly’s should change their names to I-O’Reilly’s.

If you are not tired of the subject and want a little more detail, then check out What Investors in European Bonds Need to Know About the Irish Bailout.

New York, New York. Whoa. This is like watching test cricket. Not the UAE style where featherbeds produce a feast of runs and dejected looking bowlers, but rather the Ashes type. And I am embarrassed to say that, but hey, like that red nosed Jackers says in the promo, the biggest little trophy in the world. New York and Wall Street are a million miles away from any cricket in any shape and form. Markets recovered almost everything they had lost in the prior session. What a twist. Initial jobless claims were better than expected, i.e. lower than the market anticipated. When low is good. Durable orders on the other hand painted a less rosy picture. Personal income exceeded expectations, but spend did not. And income was ahead of spend. Which is good.

So, folks might not be buying durables, but certainly luxury was having a decent time, both Guess and Tiffany’s with earnings surprises. Jeans and diamond rings. What bad times? So it was all about consumer discretionary folks, that sector rocketed ahead two percent, led by these two, Guess up ten and a half percent, Tiffany up five and a quarter percent.

I am very surprised with the current moves in the indices that the VIX (volatility index) has not ticked up more. The definition of the VIX index is the “weighted blend of prices for a range of options on the S&P 500 index” as per Wiki. Want to know more? Well, Wiki continues with their explanation: “The VIX is the square root of the par variance swap rate for a 30 day term initiated today. Note that the VIX is the volatility of a variance swap and not that of a volatility swap (volatility being the square root of variance). A variance swap can be perfectly statistically replicated through vanilla puts and calls whereas a volatility swap requires dynamic hedging. The VIX is square-root of the risk neutral expectation of S&P 500 variance over the next 30 calendar days. The VIX is quoted as an annualized variance.”

OK, I might as well have pasted anything there. All you have to know is that it is the fear gauge. The more folks views on the next thirty days differ, the higher the index will be. I guess it is a better measure of fear for most. The more uncertain traders are about the future, the further their calls and puts are likely to be away from spot. To make my point, I have inserted the VIX vs. the S&P 500 over the last three months. Thanks to the dudes over at the CBOE for the graph.

Perhaps one of the most terrifying rides of ’07 through to the middle of ’09 is the same comparison, but because the S&P 500 move is tame in comparison, it does not even register a blip. As trader types were stuck like a bunny in the headlights and wildly moved their bets this way and that. A five year graph to illustrate the moves, again courtesy the dudes at the CBOE.

Breathe in and out and into a brown paper bag after seeing that graph.

Silk road, riced and diced. I must admit, I look forward to the doodles of Michael Pettis, like say, some fellas look forward to the “big match” on the weekend. It sounds completely nerdy, but he offers some rare insight as a Westerner of the inside of China and tries to express his views like that. Would I buy his book titled “The Volatility Machine”? Methinks not, I will continue to be a cheapskate and read his free blog posts. His newest instalment is titled Chinese inflation and European defaults. And I THINK that the purpose of the post is to show that the European problem is huge and inflation is not such a problem for Chinese households, because they are net savers. In other words if interest rates go up, that would be good for the Chinese households because they are net savers. More interest earned.

But Pettis paints a much gloomier picture of Europe, a sovereign default by Greece is inevitable. I was chatting to mumsy yesterday about European entitlements and she scoffed at their easy working hours and higher pay. I am sure that the Chinese would agree with her. And I guess she (mumsy) might be entitled to her views, her whole family lives in Paris. That place with all that history and the Gauls. No back to being barbarians, but again, the Europeans could learn a whole lot from the Chinese.

Read this —> China buys up the world. Because you will be gobsmacked by this article from the Economist. Let me do the gob smacking for you, with this excerpt: “Chinese firms own just 6% of global investment in international business. Historically, top dogs have had a far bigger share than that. Both Britain and America peaked with a share of about 50%, in 1914 and 1967 respectively. China’s natural rise could be turbocharged by its vast pool of savings.” Hopefully. But interesting.

Commodities corner The copper (errr… Dr.Copper) is trading at slightly lower at 373 US cents per pound. The gold price is last at 1372 Dollars per fine ounce (flat), the platinum price is last at 1654 Dollars per fine ounce. A barrel of oil on NYMEX costs you 83.69 Dollars. The Rand is slightly firmer this morning, 7.04 to the US Dollar, 11.11 to the Pound Sterling and 9.40 to the Euro.

Up periscope and something weird. The Americans are eating a whole lot of Turkey today. Joe Kernan, the American CNBC anchor was mortified yesterday and had to inform viewers that male turkeys (99 percent of them) are unable to reproduce. Their breasts had become so big because they had been bred that way. So no doubt the females are artificially fertilized. Now, next question, how would a far right republican feel about eating a “modified” bird?

Sasha Naryshkine
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Jozi, Jozi. Wow. What a day yesterday. Worries over the Korean tensions grabbed the headlines here and there and everywhere, leading to a sell off across the globe. And then we had a lower GDP read. Why? The stronger Rand? Well, turns out that industrial action had a lot to do with it. The very economy that the unions are so desperate to improve was hampered, by themselves. Don’t get me wrong, everyone must have an equal right to do whatever they want, this is what makes a free democracy. I sometimes just wish that our economy was as free as our democracy. And talking free economies, the government decided that it was a good idea to place all sorts of sweeping changes mooted.

And then the US GDP read which was slightly ahead of consensus. And existing home sales that were slightly ahead of consensus. And a manufacturing read which was comfortably above consensus. But all of that was ignored, we had to deal with the geopolitical issues in the form of the Koreas and the conflict. The US said naughty, naughty and we stand by the South Koreans. The Chinese called for constraint and did not condemn the attacks, we figured in the office here that they like to have the role of the go to country on the “issue” of North Korea on the global stage.

Session end here we were beat up, the Jozi all share index was down below 31 thousand, at 30895, down 509 points or nearly one and two thirds of a percent. Yowsers. Most beat up were industrial stocks, down over two percent. Oil and Gas (read Sasol) was down over three percent. Gold stocks were the only gainers, I saw David McKay editor of F24.com editor tweet: “How to make gold bulls moo. Take one Irish crisis, mix well with Korean arms flare up. Serve on a hot bed of US stimulus.” Exactly David. And of course lending a hand was the weakening currency, as the risk off trade played its part, forget GDP for a moment.

Local GDP yesterday. I guess everyone is disappointed because the number came in lower than the expectations. And just as importantly, the previous read, the final take at Q2 was revised downwards. I don’t even know what to say about the absolute number, because truth is we are performing comfortably below the plans we had half a decade back.

First the good:

“The largest contributions to the quarter-on-quarter growth of 2,6 per cent were as follows:
The mining and quarrying industry contributed 1,5 percentage points based on growth of 28,1 per cent;
The wholesale, retail, motor trade and accommodation industry and the agriculture, forestry and fishing industry each contributed 0,4 of a percentage point based on growth of 3,3 per cent and 16,3 per cent respectively;
Finance, real estate and business services and the transport, storage and communication industry each contributed 0,3 of a percentage point based on growth of 1,5 per cent and 3,0 per cent respectively; and
Personal services contributed 0,2 of a percentage point based on growth of 3,1 per cent.”

Check out this table from the Tables in the release. Government quarterly compensation accounts for more than a quarter of the overall wage bill.

But then you see that the government overall contribution to GDP is 15.7 percent. But they are not really supposed to be a big contributor, but you get the point I am trying to make. The government sector is better paid than the private sector, but yet the unions always attack big business for over compensating their executives. What about attacking local government non delivery versus compensation? Or. What about seeing what government employees ear relative to GDP here versus the developed world. Or more importantly, versus the developing world. For instance if we like the Chinese model so much, what happens there if someone does not deliver at a local government level? Or worse, caught with their mitts in the cookie jar? Or just for the purposes of comparison, what do local government employees get paid on mainland China?

I was having this debate with Paul this morning and said, what if we just outsourced all important government activities? Like Education and health. Would it be more efficient or less efficient? I think you know the answer to that. This is your budget, this is the service we expect, these are the existing facilities and here is your budget. These are your goals. And we will provide the inspectors to make sure that you comply and that the standards improve. Unlikely to happen though.

Are we overreacting to the new moves mooted by the Economic Development minister? I quite liked the analysis by Tim Cohen, with his piece in the BusinessDay today titled New Growth Path. Great points that Tim makes, and in particular the piece that strikes me is how Tim thinks that neither the left nor the right would agree with this plan. And Tim suggests that business is not really mentioned. And the same outcomes as this plan could be achieved if you cut corporate tax rates and increase VAT.

Check out the full document on the TimesLive via an uploaded Scribd —> South Africa’s new growth path released and check out some of the key points here from the document, first things first, why:

“1. Identifying areas where employment creation is possible on a large scale as a result of substantial changes in conditions in South Africa and globally.

There are many points made in the document, but the one that has captured all the headlines in the salary cap. It would because that issue impact on the upper middle classes. In fact I would go a step further and say elite. And you will see why I say. I dredged up a recent piece I wrote about tax collection in South Africa because I think that it is important that we understand who contributes the most taxes to the coffers. Why not? Because if the new plans propose a remuneration cap of 550 thousand ZAR per annum, who are these people that we speak of?

So, here goes, some selected pieces from a piece that I wrote back on the 4th of October this year, what it was is an attempt to show how mine nationalisation is a stupid idea. Simply because if you fiddle too much, you will chase away skills. And let us be honest we don’t have these skills in abundance and don’t look like we are engineering new ones anytime soon.

I got to the SARS publication talked about, titled SARS Annual Report 2009/2010, first things first, here are all the registered tax payers:



And next, here is the breakdown of who pays all the taxes.



PIT is personal income tax, CIT is Companies tax, you know what VAT is, as well as the fuel levy. As the SARS document points out: “It should be noted that these numbers and percentages include inflation. Much of the increase in nominal tax revenue has been due to higher economic growth, higher commodity prices, improved tax administration and tax compliance.”

…. But back to who pays the most taxes around here, here is the distribution table for individuals tax payers:



The first thing that stands out for me is that the lower income bracket has not swelled over time, but rather shrunk in the last four years of the table. Does that have a lot to do with aggressive wage negotiations and settlements? And the fact that there are not enough tax paying jobs being created. That IS a big problem. So even whilst the net has widened over the last seven years, sadly it is not enough.

….Rich people pay a much higher rate, but then again I am sure that many middle class people would love to have that problem. This next table is often what economists refer to, the people who make a lot of money per year down the bottom of the table:



I did a quick matchbox tally and worked out that those folks that earn over 300 K per year number only 360 thousand. And those folks contributed 220 billion Rands worth of tax out of a total of 485 billion. That is the point that many make. What these high earners think and do is very important for the overall tax collection, what we should be looking to do is to create a much broader base, bottom to top.

So, back to today, 45 percent of all individual taxes are paid by less than ten percent of the tax base. So first things first, you would erode the tax base. And secondly you would not attract enough skills. People have options. They can go wherever they want, this is not North Korea. Highly paid individuals can go anywhere, because they have the resources. So I think a bad move.

Also, there is something I don’t understand, if we want a loose monetary policy, that means we are not worried about inflation, so 10 to 12 percent should not be a problem in this plan. But salaries are supposed to be capped at all levels. So your salary reaches a ceiling but the goods you pay for do not, they continue to increase? Does not make sense. I think that the important thing to appreciate is that the thinking here is way left of what I would consider market friendly. And one must appreciate that the vast number of South Africans are still struggling with their lot in life. And feeling aggrieved that those employed are getting more, and fewer are being employed sadly in the private sector. This story is by no means done and dusted and expect a whole lot of discourse in the coming days from all sectors of the economy.

If you think that we are the only people dealing with this issue, compensation and the haves and the have nots. No, no, no. Check out this rebuff written in the Economist —> This ain’t no banana republic. Pay particular attention to the parts on why there is inequality, bearing in mind this is a developed world example, but worth reading, courtesy of the Economist:

“The main explanation for widening income gaps in wealthy, advanced liberal democracies is a complicated combination of (1) increasing economic returns to the acquisition of high levels of skill; (2) low supply of highly-skilled workers relative to demand; (3) changes in the way executives are paid, and in the norms governing executive pay; (4) technology-driven magnification of top rewards in “winner-take-all” or “superstar” markets; and (5) relatively low political demand for higher levels of progressive redistribution.”

He goes on to say that the author of the article (Nicholas D. Kristof), who is not a professional in the industry and is writing from his perspective, is lazy. Well, he (Will Wilkinson) agrees with Kristof that the gap in income equality has been markedly reduced in Latin America by improved education levels. Sadly our pass rate in high school has been lower over a decade. Anyone with anything constructive to add on economic policy out there? Wild and or otherwise?

Commodities corner The gold price is lower, just a little bit at 1375 Dollars per fine ounce. The platinum price is slightly better at 1661 Dollars per fine ounce, whilst Dr. Copper has also ticked higher to 372 US cents per pound. On the energy side you have the oil price trading higher at 81.56 Dollars per barrel. The Rand is weaker, 7.11 to the US Dollar, 11.23 to the Pound Sterling and 9.49 to the Euro.

Thanksgiving is going to do very little to help folks get the faith. Bearing in mind that the Irish debt problems are not resolved and the “bond vigilantes” are starting to hone their attention in on Portugal. All the while the Spanish continue to keep those same types at bay. And the Korean crisis has settled down, at least at a global level.

Sasha Naryshkine
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Jozi, Jozi. We managed to squeak into the green. Stocks started the day well, but drifted lower through the session making a late anaemic rally to close in the green. Resource stocks which had been as much as a percent in the green earlier in the session closed the day slightly lower, it was industrials who managed to keep us afloat. Session end the Jozi all share index was at 31403, a whole 4.99 points better than the start of the day. There was that same old story of Irish debt problems (their banking sector) hanging over our heads, the Chinese bank reserves having to be shored up too was hardly encouraging and then some news early in New York that the FBI were searching the premises of some hedge funds. Which can only of course mean one thing.

We had results from African Bank, Telkom and Nampak yesterday amongst the majors, and then a whole host of smaller companies, including the punters favourite Simmer and Jack mines. Don’t ask me why, I just do not have the answer. OK, if you don’t like reading anymore and you want to watch, go no further than watching the markets wrap of the day, with our very own Paul Theron and CNBC Africa’s Bronwyn Nielsen who discuss the days market – 22 November – JSE Markets Wrap – Paul Theron – Vestact. This is a daily show, after the markets have closed on CNBC Africa, between 5:15 and 5:30. Watch it for your daily wrap.

What can get you excited about the Nampak results from yesterday? I am serious, there must be something inside of the packaging giant that one can say “ahhhhhh….. that is cool”. We chatted at length yesterday in the office of the forces that would impact them, cheaper imports. Let me give you an example. Biscuit boxes. That is something that you would have to produce locally in times gone by. So a decade ago, Nampak was always a good proxy for the economy, if consumers were letting their hair down (just not like the Irish Rapunzel please) and opening their wallets more to buy food luxuries, then the packaging giant would benefit. More packaged goods bought = more produced.

But now you can get the same boxes printed in places like China at a cheaper cost, even when delivered to your front door. So, say you are AVI, National Brands and in your Bakers biscuits division you get the boxes from elsewhere. Plus the Rand is “strong” making your imported product much cheaper than the locally manufactured one. Sad but true. You make an economic decision on behalf of shareholders and buy the cheaper packaging. That is just one of the examples that I am making. Nampak of course are no longer just a South African company, they have sizeable operations in Europe.

And, I guess more importantly for existing shareholders, 6 underperforming businesses have been disposed of, gearing has been reduced significantly and the group seems back on track. In fact there were two separate SENS releases yesterday, the first had the usual commentary and numbers and the other one was a PR spin of sorts. But good for them, Andrew Marshall seems to have “done a good job”.

Numbers nook now, they look much better than the previous year. Top line shrunk by five percent to 18.5 billion ZAR. Profits for the year increased to 825.9 million ZAR. So net profit margins of 4.4 percent. And that my friends is one of the reasons why we don’t really like this company. So, no thanks. End of story.

Holy smokes this company is old. We are talking about Adcock Ingram here, over 120 years old. Which means that they are about as old as Jozi itself. As old as the Currie Cup. The company released numbers for the full year to September this morning. What always astonishes me about these pharma companies is how “small” the top line number is, 4.4 billion ZAR in sales. But there are fantastic margins in their business, headline earnings up 15.5 percent to 900 million ZAR, which translates to 518 cents per share. And a dividend (the international developed market norm is for higher yields than here) of 102 cents per share, up 27 and a half percent versus this time last year.

Why does one have a stock like this in the portfolio? When you are sick you are unlikely to skimp on your health, that is just the way it goes. Check out what Jonathan Louw, the CEO had to say in their results release —> “2010 has been a challenging yet satisfying year for Adcock Ingram. Despite a tough economic environment, the group – which celebrated its 120th birthday this year – has achieved pleasing results, reporting double-digit revenue growth, improved normalised headline earnings per share and strong cash generation” Nice.

What is there to like about this business? They have a *nice* spread of three revenue streams, their OTC (over the counter) business, their prescription business and their Hospital products division. Their most profitable division is their prescription business, which contributes 45 percent to operating profits, but it is a 37.5 percent revenue contributor, translating to operating profit margins of nearly 32 and a half percent. Their worst division, from an operating profit contribution is their hospital products division, operating profit margins of 18.7 percent on revenue contributions of 30.33 percent and operating profit contributions of only 21 percent. The OTC business makes up the balance, contributing 32 percent to revenues and 33.9 percent to operating profits. With 28.5 percent operating profit margins.

We still prefer Aspen. Who (Aspen) have a management team that have grown the business sharply over the years, more risk oriented and have some sort of Midas touch. That Sigma acquisition seems to be progressing well. And that is the main reason I guess why Aspen commands a premium to their peer group, their growth prospects are simply better. The end of that story.

Ye olde world. I think the major issues that the broader market participants are having is not knowing the amount that the Irish are going to be strong armed into taking. This bailout. I guess with so much public and private debt they must act now. I saw the Irish PM, Brian Cowen basically saying, lets pass this bill and then have fresh elections, let the people decide who is going to make the difficult decisions in Ireland. Gosh, it almost sounded like defeat. The party faithful close to the PM (or Taoiseach, not sure of the pronunciation) looked tired and did little to make eye contact with the reporters, choosing rather to stare blankly at the podium where the papers Cowen was reading off were scattered. Political implosion and now, as I suspected, this has become a political issue and not so much an economic one. Waiting will not serve the other Euro members well.

New York, New York. Financial stocks traded lower as it became apparent that the FBI was raiding the offices of three hedge funds, with, would you believe ties to SAC capital (2 of them). SAC of course is run and owned by one of the most famous traders of them all, the fellow who reads the tape better than almost anyone else, Steven A. Cohen. The SAC in SAC capital. And we are not talking about sharks in formaldehyde either. Check it out —> FBI Raids Three Hedge Funds Amid Insider-Trading Case.

So what after having read the article. SAC Capital trained them, they learnt everything they knew there and went off on their own merry way. Don’t care. It might turn out badly for a few folks. Financials sold off over a percent. Meanwhile the Irish debt contagion saw markets sell energy stocks in particular as oil prices dropped. Session end the Dow closed off nearly 25 points to 11178, the nerds of NASDAQ managed a gain of 13.9 to 2532 and lastly the broader market down 1.89 points to 1197.8.

I can’t wait for the Sarah Palin book. Sorry, that should read, I can’t wait to avoid the Sarah Palin book. Along with tens of politicians and economists we have all turned into arm chair Fed reserve governors. As such it was really refreshing to see that legendary hedge fund (old school) manager Barton Biggs said that he thought that Bernanke had done a great job. As simple as that, he was being interviewed on Bloomberg over the phone and in his usual style dismissed the anchor, in the case it was Carol Massar.

Before, when I saw him on, he was talking about a similar thing with her colleague, Matt Miller and he was equally dismissive. Not sure how he gets invited back, but hey, it makes for good viewing. He said, stocks will move up a lot. Massar asked, how much is a lot? Check out the video —> Biggs Says Next Move in Stocks May Be ‘Up a Lot’. Love the way that in the Irish piece Bloomberg shows tipple. I think I just liked the interview because he thought stocks were going up a lot. But he doesn’t mince his words. He used the word Baloney.

Silk road, riced and diced Oh dear. Not again, there has been a shelling by North Korean forces on the South Koreans with one South Korean marine casualty. Oh dear. As such we are seeing markets “in the region” sell off. The wires were talking about the Thailand markets having sold off two percent on the Korean tensions. I remember being in KL (close enough to Bangkok – 2 hours or so) and the flight to Seoul was 9 hours long. Just to give you an idea of how big Asia is. A transatlantic flight from Paris to New York is 7 to 8 hours. So, if there is trouble again in Georgia (with those crazy Russians), then Canadian markets should sell off. Just saying. Keeping eyes on these developments.

I read this recently —> No paradise, but better than hell – The accelerating pace of North Koreans heading for the South. The “young one” Kim Jung-il has an opportunity of a lifetime to change the course of history. To open the border and cease all warring. To seek integration with his neighbours. Sadly like most dictators this never happens, because eating lobster is better than being ordinary, even if that is at the expense of the collective. Sounds distinctly like animal farm. Darn commies.

Commodities corner The gold price is trading a little lower at 1364 Dollars per fine ounce, the platinum price is also trading lower at 1658 Dollars per fine ounce. Dr. Copper last at 370 US cents per pound. The oil price is last at 81.49 Dollars per barrel, lower. The Rand is weaker, 7.04 to the US Dollar, 11.20 to the Pound Sterling and 9.56 to the Euro.

Up periscope. Ireland. South Korea. North Korea. These are problems that are capturing the imagination this morning, not the better PMI numbers across the Euro zone. Shells being fired backwards and forwards, clearly a provocation on the part of the North Koreans. But then again, the South Koreans were engaging in military manoeuvres. I hate war.

Sasha Naryshkine
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Jozi, Jozi. Top left to bottom right is OK if you are looking at a route map of your next race, that means a downhill, but not so cool when you are talking about the market action for a day. On Friday we closed at the bottom end of the range for the day, the Jozi all share index giving up 175 points to 31398. That is down over half a percent for you and me. There was a fascinating Q&A type chat with Ben Bernanke and Jean-Claude Trichet, as well as Dominique Strauss-Kahn, amongst many other smart economists, who were all in Frankfurt. Check out this WSJ blog —> In Frankfurt, Bernanke Says Forex Not Only Way to Rebalance.

Bernanke mentioned us, South Africa specifically along with some other emerging markets with FREE FLOATING CURRENCIES. Along with Turkey and Brazil, a pat on the back for not manipulating their currency, and I guess that was a direct swipe at the Chinese. I guess in time the Chinese will float their currency, but the time in their opinion is just not right. I must admit, I am feeling that in theory everyone should have a free floating currency, but in practice what it means is that the Chinese would see a much higher unemployment rate, and social and civil unrest is something Beijing central have been at pains to avoid over the last two decades.

Who was that guy standing in front of the tank in Tiananmen back in 1989? Some publications suggest a fellow by the name of Wang Weilan or it could have been Wang Ai-min. But I guess that he could be credited with bigger economic reforms than most folks think. Because THAT picture captured the imagination of the west and forced Beijing central into a corner. And no doubt they learned from it.

African Bank out with their full year results this morning. There was a slide that captured my attention in the presentation, check this out, because it sums up the operating environment as well as their experience

The group makes a point, like quite a few out there, that the second half was much better than the first half. Which is out of the ordinary, because traditionally the first half is better than the second half. But as ABIL point out in their presentation, headline earnings for the second half was 11 percent better than the first half. “Economic profit” was 20 percent better on the same measure.

Diving straight into the numbers, the dividend for the full year is a dead ringer of that of last year, including the final of 100 cents, taking the full year payout to 185 cents. Around an 80 percent payout ratio, so you can work forward to 235 cents per share worth of earnings, or 1.890 billion Rands worth of earnings for the full year. Which is a four percent increase on last year’s numbers. Bad debts to advances decreased for the first time in three years, to 9.9 percent of total advances. More impressively, costs-to-advances has plunged over the last five years to 6.4 percent. Versus 15.4 percent in 2005, that shows you how serious the group are about costs. They always have been, you know, something they stress at each and every results presentation.

In the African Bank business unit, gross advances increased by 20 percent to 24.2 billion Rands. The credit card book is growing handsomely too, the credit card portfolio now stands at 2.9 billion Rands (up 56 percent) with a total of 500 thousand card holders. Awesome, that is the long term thinking is my sense here, it seems a lot more mature way of doing their type of business. Well, that is the way that I see it.

The Ellerines side of the business saw sales up 7 percent (4.487 bn ZAR) but headline earnings up a whopping 35 percent. There was quite a big turnaround in their retail business as a result of a marked improvement in credit sales, which were up 15 percent whilst cash sales fell 3 percent. Wetherlys sales fell a whopping 18 percent, whilst Geen & Richards increased 17 percent and Beares (who really cares) saw sales increase 16 percent. Margins are ticking up and costs are going down. Plus the new loans being extended are cheaper, longer in term and larger in size. And better quality.

Now there is a line item on their income statement that shareholders will be pleased with, operating costs, that is lower by two percent when compared to last year. Although next year we can see a “modest” rise in operating costs, not too bad though. Wow, bond issuance and long-term funding has increased 42 percent to nearly 21 billion Rands. And the cost of funding more importantly has improved by 100 basis points. Excellent, sounds like a good outcome to me.

There is a lot of anecdotal evidence that “things” are improving. There is even visual evidence, I have circled the September numbers on the strong lift in sales slide to make the point:

And in fact the outlook is a little better, even if not too exiting: “Whilst economic conditions are expected to remain challenging, we do expect some improvement during the next financial year as lower inflation and interest rates start to stimulate consumer spending. For African Bank, the recent lift in sales bodes well for the 2011 financial year.” The stock has turned lower by 1 and three quarters of a percent, telling you that participants are slightly disappointed.

Telkom results for the six months were released this morning. There were 35 references to Multi-Links in their results. Hurrah, they are only making an operating loss of 262 million Rands. Perhaps there will be touching of tomorrow there sometime, included in these results was an impairment of Multi-links goodwill of 2.148 billion ZAR. Is there anything left there, seems not? Plus another 201 million ZAR impairment of Multi-Links assets. Plus Multi-Links revenue for the period was 9 percent lower than this time last year, oh dear.

And worst of all, Multi-Links is for sale, the CDMA business. Exit costs (excluding proceeds of the transaction) are expected to be between 100 to 180 million US Dollars, perhaps licensing obligations. 700 million to 1.25 billion ZAR. They bought 75 percent of Multi-links in 2007 for 280 million US Dollars. And the other 25 percent was bought at the bottom of the market in 2009 for 130 million US Dollars. Total cost 410 million US dollars. Nothing short of a disastrous outcome, what is left in Nigeria, really?

Voice traffic down 15 percent……this as line rentals fall a percent!!!! That was offset by data revenue rising by the same percentage, the two are nearly equal revenue contributors, 6 bn voice versus 5.6 bn data. Should one be impressed that there are 700 thousand ADSL subscribers, that is an increase of 16 percent. Interconnect revenue fell 37 percent. Within a month 8ta had signed up 186 thousand consumers, now that is impressive and better than I thought they would be. Who is being eaten up there? This is about the only good piece that I can find. Telkom are going to spend 6 billion Rands over the next five years in rolling out the mobile infrastructure.

Numbers, what are they? Headline earnings per share (normalised) was 5 percent lower to 285.7 cents. The stock trades up 2.6 percent this morning to 3685 cents. Annualise that HEPS number and the stock looks so cheap at current levels. But I guess that there is a Telkom discount attached to this company. The recent track record with new ventures have been nothing sort of disastrous. Telkom Media and now Multi-links. Why must we believe that 8ta is going to be a resounding success? I want to see the raw numbers, the ARPU’s, who these new subscribers are. Not hot is our guess. The jury is still out and we will still stay away from this stock, fixed line and traditional business revenues are decreasing and data is not growing “fast enough”. And I don’t know about 8ta……… And, what does the biggest shareholder, namely the government think of all of this.

Ye olde world. Let us not talk about it. But rather, let us talk about the Irish acceptance of the help extended by the rest of the Union. The EU, the union that I guess strong armed the Irish into accepting the bailout even if only from a confidence point of view. The Irish prime minister said that the amount would be less than 100 billion Euros. OK, 99 or 30? That makes quite a big difference. In the meantime you have the announcement from Dublin central that they would look to reduce government spend by over 15 billion Euros over the next four years. And reason being is that this financial year the deficit will reach nearly 33 percent of GDP. Mainly because of the banking bailout, prior to this new bailout of sorts, that was 45 billion Euros, holy smokes.

New York, New York. Things turned out better than most people thought, at least in the case of Dell, which posted and earnings surprise. And, more importantly markets managed to close in the green notwithstanding the Chinese raising reserve requirements again. Nike raised their dividend, I have always like the brand and the company, but have never quite got around to exploring their numbers in full, I promise that the next time that comes around I will try harder.

Session end the Dow closed 22 points better to 11203, the nerds of NASDAQ better by 3.7 to 2518 whilst the broader market S&P 500 managed to gain 3 to 1199. A short week in the US, Thanksgiving is on Thursday this week, a proper public holiday. What is exciting however is that Friday is a black Friday, the day that traditionally the retailers start making a profit.

Silk road, riced and diced The Chinese authorities have decided that it is a good idea to raise reserve requirements again, and this of course is hot on the heels of the Hong Kong raising of the stamp duty tax, also announced last week.

Have you ever seen this piece? It is a video of a place called Huaxi in China, Secrets of China’s richest village. A place that seemingly has cracked the socialism code, you know for the good of the broader community. Their secret is hard work, seemingly. 7 days a week hard work that is. But there are perks as you can see from the video.

The very first question I ask, but what about the costs of all of this? How do they afford all of it? Bearing in mind that the place (the only listed village I know) is about to buy 20 aircraft, check it out —> China’s wealthiest village to purchase 20 aircraft in five years.

According to an old Telegraph piece that I dredged up, the secret is not to ask too many questions, there had been one journalist that had been arrested for doing exactly that. But because the business is listed and the profits shared with all the people, shouldn’t I stop being a sceptic and rather try and find out what makes the place tick? How can every adult have a car? Well, there are not too many of them for starters. And a house like that, complete with flat screen TV’s?

Well, the company is doing well, there are several of them, all the town’s businesses number over fifty collectively. Do you think that when the ANC sends a delegation to China at the end of the year, see TimesLive article —> ANC to learn from Red China, that they should swing by here?

And so I searched, how lazy do you think the Chinese think that we are? Our Western ways really, when it comes to the work week? Check this out, a piece I found from a Chinese worker, titled The Chinese Productivity Revolution, And How It Affects Your Sourcing Plans —>

“In my short time in this wonderful city of Shenzhen, China, I have discovered that productivity isn’t a hack or a social bookmark, it isn’t even a frame of mind.
Productivity is a cultural attitude.
I work for Chinavasion, a hardworking Chinese company with higher quality standards than most. Monday to Friday I start work AT 9AM. That’s 9AM, not 9:15AM but 9AM on the dot. I don’t make coffee or chat with my co-workers for 20 minutes before settling down to work at 9:23AM. I begin right on time.
Chinese workers, like Koreans tend to have a nap at lunchtime so that they’re fresh and ready for work in the afternoon. Next, my day ends around 7PM. Officially, the work hours are from 9-6, but no one leaves on time. The high unemployment rate helps us appreciate our jobs very highly. According to the CIA World Factbook, unemployment in China was between 4% and 9% in 2008. When Chinese office workers consider this they are usually very thankful that the company is doing well and that they have a job. If the company does well, the country does well. And if the country does well, we prosper.”

Now I don’t know if this is plain propaganda, but there you go. Make of it whatever you want, six days work a week and long hours see productivity so much better than Europe. As you can see by the measure, nearly 50 percent more. So, you can pay your labour less and they will work more efficiently and longer hours. What is not to like?

Commodities corner Commodities prices have come off the boil, the gold price is lower at 1357 Dollars per fine ounce, the platinum price is lower at 1660 Dollars per fine ounce. Dr. Copper is also marginally lower at 382 US cents per pound. The oil price is trading higher at 82.76 Dollars per barrel. The Rand is steady at 11.18 to the Pound Sterling, 6.98 to the US Dollar and 9.57 to the Euro. You get the sense that even in the face of iffy news markets should trade higher to the end of the year. Bar for any serious catastrophe.

Sasha Naryshkine
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Jozi, Jozi. So yesterday was all about the General Motors IPO. Oh no, sorry, it was all about the MPC statement later in the day. Nope, that wasn’t it, it was about the pending Irish bailout out of sorts. Bailout is such a horrible word. It implies that the ship is sinking and the bailout is a big bucket and plug to block the hole. And the reason that Ireland are pushing back on money, because of the stigma that would then be attached to their banking system. Well, if Ronan O’Gara can be an international flyhalf for that long, then surely a bailout for their banks is not THAT embarrassing. No, but really, the main event of the day was the local MPC meeting.

Session end we closed off the highs, but still managed a good gain for the bulls, up 228 points to 31574. There were strong moves in both Naspers (volatile in the extreme) and SABMiller, which posted above consensus results that helped pull this market forward. The banks actually got bashed, perhaps a stronger arm from the central bank could see (or force) the banks to have to lower their chunky lumpy (at a low repo rate) 350 basis points above the repo rate. And perhaps be more in line with the bank, banks would lower their prime according to the reduction in repo and not just in lock step. Except, how would the central bank act if the reverse was true? Banks were down nearly one and a half percent at the close.

It all comes from this line in the MPC release, more on it later: “There is however some evidence that the banks are still charging higher spreads above the repurchase rate than was the case before the crisis, which indicates that the recent monetary policy easing has not been fully passed through to new borrowers.” At 550 basis points on repo, prime 350 basis points above that at 9 percent seems a little “high”. But at 1150 basis points on repo, another 350 basis points on that is not. So I guess some sort of better balance for all parties should be reached, that would protect the margin for the banks. Perhaps that is the answer and the best outcome for the consumer, does anyone else have any thoughts on this matter? Bankers and consumers alike, I am sure that there would be differing views.

The monetary policy committee decided to cut rates by 50 basis points yesterday. And now we are looking at the repurchase rate at 5.5 percent, add the 350 basis points on top and you are out at a prime rate of 9 percent. Which is a far cry from the 24.5 percent in 1998. Remember those ABSA home loan adverts where the family had their house floating in the air and they were trying to reign it in with ropes. Remember that? At the beginning of 1985 the prime lending rate was at 25 percent!!!! At the beginning of 1974 rates were last at these levels, 9 percent, all the way through to the middle of 1974. So rates are at a 36 year low then. The lowest EVER prime lending rate in South Africa, as per published on the Reserve Bank website was 4.5 percent, way back in 1948. In fact that rate was published on the last day of the year. Happy new year!!!!

So for Marcus and her team, inflation is not really a problem. Check it out —> “The more favourable forecast is a result of an expected moderation in administered price inflation, a more appreciated nominal effective exchange rate of the rand, as well as lower-than-expected actual inflation outcomes which lowered the starting point of the forecast.” But growth is a bit of a problem —> “The domestic growth outlook remains subdued and below-trend growth is expected to persist. The forecast of the Bank is relatively unchanged since the previous meeting of the MPC, with GDP growth remaining at 2,8 per cent for 2010 and expected to average 3,3 per cent and 3,6 per cent in 2011 and 2012 respectively”

It is not all bad news, the consumer is making a comeback of sorts, consumer confidence is growing, vehicle sales are improving, credit extension although ropey is getting better, bit by bit and households are starting to feel a bit better. I loved the Q&A session afterwards, there was some good banter between Mariam Isa and the Reserve Bank governor, where Isa asked Marcus if they were embarrassed by their one-and-done type statement two meetings ago. Ha-ha, Marcus reminded everyone that we are all watching data and making assumptions on that. Check out the Isa piece on the BusinessDay website —> Strong rand allows rate cut to lowest in 30 years.

And can I tell you what I liked the most? Well, I am going to tell you anyhow, the bank reiterated their independence, read this —> “While it is important to listen to and hear what is being said, it is the responsibility of the Monetary Policy Committee to determine the path of interest rates without fear or favour. And this is what we will continue to do.” In other words, political entities, BACK OFF. Predictably however, the unions were not pleased and called for more, a percent. I said to Paul this morning that they (COSATU), should setup a bank with low lending rates and see how that turns out for them. Forget government bank, try a unions banks, seeing as they are now fighting with the old Teba bank. Can’t win.

And the fixation on the currency? Particularly with the US Dollar? How does the central bank see that, for whatever it is worth, there are very few people who could give us a forecast on currencies with any conviction. In the same way that equity markets are difficult to call in the short term, the same could be said for currencies. Check this out: “The search for yield resulting from this increase in liquidity has implications for the exchange rates of the recipient countries. South Africa has been no exception in this respect and appreciation pressures are expected to persist for some time, in the absence of renewed bouts of global risk aversion. The exchange rate therefore remains a downside risk to the inflation outlook.”

Good for inflation and expect it for some time to come is what the banks says. If we don’t see the consumer come back strongly in the coming months, and inflation and expectations thereof remain muted, then I would say that we could see another cut in February. No really. But the bank basically said this cycle was done, that is the way I read it, FOR NOW. A good decision.

SABMiller results yesterday, sorry folks we just ran into some time constraints here. And these are for the six months to end September 2010. Larger volumes up 1 percent. Revenue up 7 percent to 14.236 billion US Dollars. EBIDTA margins increased to 17.3 percent, awesome these are all being read off the highlights reel. This is a big company by local standards, a very big company. On a global scale as far as brewers go, it is big too. Check out the table of EBIDTA region contributors when compared to the last reporting period.

And then check out the EBITA pie chart contributions, you have to love all of these presentation material, it makes it SO much easier for all of us:

I have ticked in the prior graph, where there were good and crossed where there were bad performances. Zimbabwe (which is by no means big) seems to be bouncing back hard for them in the African region, which in volumes was generally quite good. Larger volumes up 11 percent across the continent. Whilst soft drink volumes grew only 5 percent, I would have thought that it might have been a bit better than that. China seems to be a good market, larger volumes grew at 9 percent for their associate CR Snow, I still think that Black Label conjures up the image of a manly beer, Snow, well, does not quite have the same image for me.

And what now is their most important region, Latin America, Peru outpaced Colombia in terms of volumes, in part Colombia has some strange circumstances includes extraordinary taxes and dry periods around presidential elections. But why spell all of this out for you when I can hack a slide from their presentation yesterday:

Volumes are picking up nicely across all of their geographies and even though Europe and North America still look a touch iffy, good performances from their developing market geographies. I guess that is what you get when you buy this company, fact growing emerging markets which is pitted against their slower developed markets that are hanging in there. I wonder, if I had a whole lot more time I guess I could take BAT and SABMiller and their volumes in the regions.

Two of the major publications had less than glowing articles on SABMiller, although that is the way that we read it. Check out the FT piece first, pay particular attention to the passing shot: SABMiller. And then have a look at the WSJ take on it. SABMiller’s Emerging-Market Challenge. Again, the passing shot is cautious.

We reckon that perhaps the stock should trade at the same sort of forward levels as maybe a P&G or Coca-Cola. It is a consumer good of sorts, with strong operating presences in the countries they operate, that is what sets them apart from P&G and those types, perhaps Coke is the better example. Again, I still worry about rising input costs and water worries, plus also the taxation matters in the coming years. Because quite simply, as you have seen taxes rises, you have seen volumes fall.

Naspers released a trading update yesterday and it was well received. Check this out: “We expect core headline earnings per share to be between 25% and 35% higher than the comparable period’s 648 cents. Shareholders are reminded that the board considers core headline earnings an appropriate indicator of the sustainable operating performance of the group, as it adjusts for non-recurring and non-operational items.” This is for the half year. Remember that this is a strange old thing, that second line, because there is so much deal related activity the auditors must be pulling their hair out. And shareholders are doing what we are, take this and that, add it together, discount this and that, and your sum of the parts is tada …… the current share price not so? We still think that this stock has legs based on the assumption that the internet businesses will continue to deliver stronger earnings contributions in the coming years.

Ye olde world Once you are in, you are in. This is a team where no exit mechanism was ever thought out, because it was such a good idea to be in the European Union that you would never ever want to leave. I mean, what for, right? But, the same old folks talking about this matter knocking around, wanting or needing to exit the system, this just can’t happen. But it seems that we thought we were closer to a solution this might not be the case, according to the wires. Check out this WSJ piece —> Irish Grasp at EU, IMF Lifeline.

New York, New York. Out of all the “things” that the US government did during the height of the crisis, I always thought that the bailing out of the auto makers was throwing good money after bad. It turns out that helping the troubled automaker out wasn’t all together the worst thing in the world. Because you could argue that the IPO (used car version) yesterday was a resounding success. And the government as a 25 percent shareholder in the existing entity would have been pleased with the outcome. As Paul pointed out though, good old capitalism at work here, 400 million shares placed at 33 Dollars, 452 million shares traded on the day. Forget the biggest IPO in a long while, the stock traded 50 million more shares than were placed!!!!! I wonder if the government was a seller into strength on day one? Perhaps.

Barron’s take on it was what most people thought —> Oh, Did We Ever Get Stuck-o. The solution is that people must muddle through their mortgage payments for the next few years and restrain themselves from their normal flip flop on housing. Barron’s suggest something a little more unique, the buying of mortgage debt and retiring it. Now that sounds like flushing money away.

How many times have you heard, arrrr things are so bad. Even old “the Nouriel” says that things are gonna feel so bad. But this graph and reference to the railroad traffic —> Weekly Rail Traffic Continues Steady Gains vs. 2009. Check out all the other “stuff” Mark Perry. Sounds like an actor but he is an economics professor.

Silk road, riced and diced The Hong Kong authorities are implementing tougher property taxes to help cool the hot Hong Kong property market. Stamp duty has been increased to 15 PERCENT on houses flipped inside of six months. These are all good measures not so, I don’t remember the EU or the US government implementing new taxes to slow their property market. What is good for the goose…… The PBOC could act as soon as today is what some folks think. What would all of this do for China though, the anxiety sent commodity prices tumbling at the end of last week into early this week. Houses price in Hong Kong have passed the 1997 peak in prices. Why is the IMF so worried here?

Well, my favourite inside guy in China, Michael Pettis makes some points that slowing the economy is not altogether bad, check it out —> What happens if Chinese growth slows? He makes all sorts of comparisons with Japan. And remember that Japan have an ageing population and the economy has “gone nowhere” for twenty years even if the GDP per capita has risen. Declining population. Which I guess is what is going to happen in China.

Commodities corner The gold price is trading higher at 1358 Dollars per fine ounce, the platinum price is also higher at 1659 Dollars per fine ounce. Dr. Copper has also ticked up at 386 US cents per pound. The oil price is slightly better at 83.02 Dollars per barrel. The Rand is slightly firmer (perhaps something to do with the South Korean taxes on bond inflows….) at 6.95 to the US Dollar, 9.52 to the Euro and 11.17 to the Pound Sterling.

Up periscope. Ben the measured and bearded Bernanke gives a speech of sorts today. I have not seen any reference to it yet, but he is expected to defend the recent asset purchase announcement. Sounds better than QE2.

Sasha Naryshkine
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Jozi, Jozi. I guess it could have been worse. There had been some dog days on Wall Street, but somehow we have managed to escape the worst of it and our markets have only given back about three percent since the selling globally started. Spare a thought for Chinese equity investors, down over ten percent in fewer days than that, yech, again the fears that government and the PBOC are going to raise rates and put a cap on the property sector. Raise property taxes, stamp duty, raise banks reserves, Beijing central in fact have been doing all of those things already.

Session end we closed 75 points adrift to 31345 on the Jozi all share index, banks led the charge, up nearly two percent. And would you believe (yes you would) that the main reason was because Standard Bank said that the cost savings of the less than 2000 folks or so let go would number half a billion Rands a year. At the time I quickly stuck the number into a spreadsheet, crunched it around and came up with a saving of around 21 thousand ZAR a month per person let go. I am sure that the number I used was 2000, I think that the number could be less than that, 10 percent or so.

Impala Platinum released their first quarter production report yesterday afternoon. And I must admit, I was quite impressed. But then again I would be, because they are one of our recommended stocks and real clients have real money invested in Impala Platinum. Overall Platinum and Palladium production was ahead of the first quarter last year.

Rather than spelling it out to you, let us just do a hack from the SENS release. Hack is such a dirty word. Remodelling. I have taken production and price and then added implied revenue. It looks a little high. What is does also do though, is remind you that Rhodium production (because of the “high” Rhodium price) is just as important as Palladium production, even if the company only produced 57 thousand ounces for the quarter.

Check it out, Q1 Impala production report

What is not to like here? A firmer Rand, where it is much firmer now that it was in this quarter. But then again, the platinum price is also much better than in this quarter. If I annualise these revenue numbers that I have stuck in (phew it really is back of the matchbox stuff) you get to 30 billion Rands worth of “working revenue”.

Which is still around 7 billion ZAR less revenue than in 2008, the year that there were record PGM prices. Even the 2007 revenue was higher than this (current year) annualised revenue number. Volumes, volumes, volumes, it is all about volumes. Remember that Lonmin presentation graphic the other day? The one that suggested that off road diesel vehicles are going to have tougher emissions controls. As such, over here at Vestact we are confident that the producers will struggle to keep up with increasing demand.

I was once told to never make an investment in anything that you have to feed, or anything that relies on the weather. The second one is a lot trickier, but I guess what the person was trying to tell me is that agricultural stocks are tricky, because they rely on steady rainfall patterns. I remember learning that the two most easy things to talk about are public transport and the weather. Neither is intrusive and both subjects have strong opinions attached to them.

And in this case we are talking about Illovo. And their interim report to September 2010, results of which were released this morning. The first line is hardly appealing and tees you up for something worse lower down: “Earnings impacted by strong rand and severe drought in South Africa” And because of the continuing adverse weather conditions and continued strength of the Rand to the US Dollar (their product is priced in Dollars of course, but sold heavily into the Euro zone) means that the short term is hardly pleasing either:

“…. earnings per share and headline earnings per share, which are also affected by the full year dilution impact of the rights issue completed in September 2009, are currently expected to be between 30% and 40%, and 35% and 45% lower respectively than achieved in the financial year ended 31 March 2010.”

Raw numbers, revenue lower by two percent to 3.968 billion ZAR. But notwithstanding all of these aforementioned problems, the group is still making good money, albeit a lot less than this time last year. It translates to 125 cents worth of earnings per share. And you have seen that the second half will be no better. As such the market participants have sold the stock down this morning. Down to just below 26 ZAR a share, I guess folks are being really cautious. Or tired, because this is trading below the capital raising price last year.

When the old man talks it is like a father reading a story to his kids. OK, my kids keep jumping in and don’t keep completely quiet, so perhaps it is other peoples kids that keep quiet. I am referring to the greatest investor that has ever lived. Cornelius Vanderbilt, I mean Warren Buffett. Even though Vanderbilt was a man alone in his era, I guess the same can be said for Buffett. And in-between them of course was Rockefeller and Carnegie.

I have seen various measures suggest that Vanderbilt’s wealth in 2007 would have been over 140 billion Dollars. But it isn’t. Where does this paragraph going nowhere come from? Well, Warren Buffett wrote a piece in the New York Times yesterday which thanks all of those people that took action in the face of the biggest financial crisis of a few generations. And he feels that those folks need some credit, so he thanks them and explores what would have happened if there had been no intervention.

If you read only one thing today, make sure that you read the New York Times op-ed piece: Pretty Good for Government Work. He spells it out pretty well, these were the moments: “300 million Americans were in the domino line as well. Just days before, the jobs, income, 401(k)’s and money-market funds of these citizens had seemed secure. Then, virtually overnight, everything began to turn into pumpkins and mice. There was no hiding place. A destructive economic force unlike any seen for generations had been unleashed.”

I remember that week well, it was when money market funds traded for the FIRST TIME ever below a dollar. In other words people were willing to get back 99 and a half cents in their investments, just to get it back. A fund had to be set up just to guarantee cash. We will guarantee cash? What? I remember fumbling through the haze like everyone else, this is a piece from my note dated 19 September 2008, at the end of the most crazy week I have ever seen. The one where Lehman went bankrupt over the previous weekend, AIG was bailed out, Merrill married BoFA and Morgan Stanley and Goldman Sachs lost their status as pure investment banks. Here goes, even at the time we agreed that these guys were doing a heroic job:

The SEC may ban short selling in brokerage stocks. Too late for some, too late for Merrill Lynch, too late for Bear Stearns and Lehman brothers folks must be fuming. But hey, the short selling folk were just making money and it was capitalism at work here. More regulation and interference in an attempt to ward off the hyenas and jackals. I have heard talk from Washington officials in which they point fingers and blame hedge funds outright, I thought that it was a little unfair. Hedge funds are also held sway by market conditions and experience the same problems when it comes to funding.

But the big plan has been unravelled, “Big Ben” Bernanke and “The Incredible Hank” Paulson has unveiled a plan that will allow banks to operate with more than just a wiggle of the small toe, as is the case at the moment. The plan will have to go to Washington and will need the stamp of approval from the politicians. A fund will be set up, and around 800 billion Dollars of the toxic assets will be bought from financial institutions. Another 400 billion Dollar fund will be set up and used to insure money markets.

Buffett ends off with thanks again: “So, again, Uncle Sam, thanks to you and your aides. Often you are wasteful, and sometimes you are bullying. On occasion, you are downright maddening. But in this extraordinary emergency, you came through – and the world would look far different now if you had not.” Agreed. Instead of talking about excesses of sorts we would be talking about the long lines at soup kitchens, millions more unemployed.

And then if you only watch one video today, then watch this ten minute piece on his call into the program, after they were talking about his piece. Buffett Prefers Stocks. It is 11 minutes and there are some great points.

Like he said in the interview, people thought that in 1981 Japan and Germany were going to take all American jobs, but they didn’t, as is evident today, America actually added tens of millions of jobs. As Buffett said “we were only going to flip burgers and give each other (Americans) haircuts”. He also talks about Microsoft, gives his old mate Bill Gates a punt, and the value, ingenuity of the company over less than 40 years. Good points, Buffett has a massive American heart and he dumbs down all these matters for everyone. I love his opinion on bonds versus stocks, but then he is talking his own book. And wealthy people must pay more taxes is what he thinks, because he earns a whole lot less money than say, Larry Ellison.

Ye olde world The poms are keen to help the Irish and they have laid it all out on the table, we need to help you because the problem that you have could impact our banks too. And that is how should we say, “a bad thing”? I suspect that this is a good thing. The EU and the IMF are drawing to a conclusion of sorts which could see the Irish banks being helped out and as such Irish sovereign debt should be easier to issue, but will be nowhere near the same as a year ago, when Ireland could raise money at the same rates as Germany. I suspect that is a number of years away. So, in the mean time make sure that like the Greeks you think less than a year ahead. According to the publication European Voice Rescue plan for Irish banks takes shape as we speak.

The difference this time is that the 110 billion granted to the Greeks back then went mostly to the government, this time the 80 billion Euros could be more positioned towards the banks. Bloomberg had an interesting graphic, people who hold Irish government debt, who are these people? Check it out:

I just want to know, who are non Irish investors? Chinese? Japanese? American? Either way, a year ago the angst levels were so low that the Irish 10 yr yield was the same as the German 10 yr Bund. Now the gap is 579 bips, which let me remind you, the last dollar bond of size that we got away costs us 5.5 percent. We are EXPECTING a resolution of sorts today.

New York, New York. Markets fell away at the end, in the last hour, that same old story where the last hour, or half, has a big impact on where Wall Street ends up. Ireland and China, same old anxieties, even if they (those anxieties) are not even new. A CPI read was about neutral, I guess that is good, a housing read was pretty shoddy, and that is directly related to longer term rates ticking higher. That would chase folks away and not attract them.

I came across this last night and did not quite believe it. I mean, how would it be possible that Facebook could be a passing fad. I have some family members who would be devastated. Perhaps, but a reminder to pay attention, from Minyanville: Facebook’s Got Five Years Left, Says Web Analyst.

Commodities corner The copper price has recovered and is trading a higher at 380 US cents per pound. The gold price is also trading higher, 1357 Dollars per fine ounce, the platinum price is also up at 1653 Dollars per fine ounce. And it comes as no surprise that the oil price is also trading stronger at 82.52 Dollars per barrel. The Rand is trading stronger (that should be no surprise either), last cross 6.97 to the US Dollar, 11.13 to the Pound Sterling and 9.51 to the Euro.

Up periscope. We are going to start a whole lot better here today.

Sasha Naryshkine
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Jozi, Jozi. Whoa…stocks globally started to sell off, I guess you could point the fattest finger at the Chinese and their hot economy and now a bit of an inflation pickle and you would probably have the answer that you are looking for. Although what few people are talking about is the root of the inflation problem, the fact that adverse weather conditions have seen food prices run unnaturally ahead. Part droughts, part floods, but natural disasters are more common in China than in many other places around the world. In fact the worst three natural disasters recorded from a loss of human life are all Chinese events. And then the Chinese have recorded two other top ten spots, so you know what I am talking about here.

And, to add in an Irish problem that is gripping the media, and “a will they or won’t they” accept EU help is starting to weigh on markets. Sure it is a big problem, but is it a new problem? No. Resource prices weighed on the majors in our index, that sector down over two and a quarter percent, the diversified stocks taking most tap. The overall market, the Jozi all share index closed down at 31419, down 396 points or 1.25 percent, a drubbing for the bulls.

Spar good for you. Results for the full year this morning. I must admit, I quite like the model. I quite like the brand. I used to like the share price. Turnover of 34.8 billion ZAR, which is a 9 percent increase on last year. Whilst operating expenses seem to have been kept in check, a rise of only 6.7 percent (I say only), operating profits are better by 14.2 percent. Net income of (perhaps insert only) 915 million ZAR. Phew, you work so hard, nearly 35 billion ZAR turnover for less than a billion ZAR of profits.

That translates to EPS of 536 ZA cents. With an annual dividend of 362 cents per share, hey, that is good. The stock trades at 99 ZAR a share. So take the yield part, 3.6 percent is not bad, that is pretty decent bearing in mind that cash rates are going to fall further, perhaps as early as tomorrow afternoon again. The analyst community has the company making nearly 7 ZAR a share worth of earnings in 24 months time, and paying a dividend of over 450 cents a share. So on that basis, the stock trades two years forward on 14 times earnings and has a yield of four and a half percent. Is that good value? And I guess you should be paying a little more if the company has managed to grow that fast.

I guess this is the tricky part that everyone is struggling with, how do you value these companies? Revenue has doubled in five years. HEPS has grown at 23 percent per annum over the same time. Dividend payments have grown from 123 cps back in 2006 to 362 cps now. Margins have actually been maintained, although they look a little “light” for my liking, with net margins below 3 percent. But, they have crept up over the last five years. Operational cash flows are strong. Gearing is low. Did I mention that net margins are low? But then again it is a franchise business.

I get the sense that companies are starting the thaw to the idea that consumers are starting to feel more comfortable, check out the prospects column: “We anticipate that consumer spending will remain under some pressure, however the impact of lower interest rates, improving economic activity and a gradual increase in food inflation are positive signs for an improvement in trading.” Ahhh, light at the end of the tunnel for the battered (embattled?) consumer.

A rental car business? The Sub-Saharan, Siberian and Iberian (Spain and Portugal) Caterpillar franchise? Bulk Handling? Logistics? Second hand cars? This of course is a business called Barloworld, who reported full year numbers this morning. A shadow of their former self, the business used to be a South African icon a mere thirty years or so ago, and were one of the biggest back then. Nampak, Tiger Brands (and all the subsequent unbundlings including Spar, Astral foods and Adcock), Reunert, any mine with a Rand name back then, that included JCI (with the significant current Anglo Platinum assets). Phew, add those all up and this would be a giant conglomerate, if it still existed. One that Punch Barlow envisaged.

But now they are a business that turned over 40.8 billion ZAR last year. Discontinued operations made a wider loss per share than last year, whilst continuing operations per share were much lower too. I don’t know, they seem pretty upbeat about the outlook, their heavy duty franchise business will benefit from growing markets in mining here in Africa, they make specific reference to growing copper output from Zambia, and increased excitement in Siberia, both markets took a whack as commodity prices imploded. Spain is still set to struggle as government expenditure in the great age of austerity (or call it a return to what your grandparents would refer to as the norm) is toned down on infrastructural projects.

And in fact this is the division that they will look mostly to in the coming year: “Equipment southern Africa is entering the new year with a strong order book particularly from mining customers.” But….. “The anticipated recovery of the construction market in South Africa and Angola driven by governmental infrastructure spending is not expected before mid 2011 calendar year.”

And the same, as mentioned previously is the outlook in Spain and Portugal: “The austerity measures introduced by the Spanish government mean that the public works sector will remain subdued for most of 2011.” But it is a completely different story in Siberia (note, not Russia), a good story: “In Russia, order books have increased significantly on the back of a recovery in mining activity and we expect a strong first half of next year” Excellent.

Fleet services business looks fine and the year ahead is all good. The automotive business is set to recover here locally, led by better consumer access to credit and rising consumer confidence. You know, it is time to buy a car. A new one. You will probably find that this time next year we are talking about a much improved performance, but I am not too sure that a geared investment to the credit cycle is predictable enough to make me comfortable.

Reunert full year numbers this morning too. It has been a busy morning here. A four percent change in revenue to 10.6 billion ZAR with a bottom line of 911 million ZAR. So, you would have to say, decent net margins, although in the world of Warren Buffett I think anything below ten percent is a no-no, that is quite hard to achieve. Nashua is two thirds of overall revenue and 52 percent of operating profits. What is quite (or very interesting) is CBI-Electric is a 45 percent operating profit contributor but only contributes 28 percent to total group revenue. So clearly the operating margins in the CBI-Electric businesses are double that of the more talked about Nashua business.

I guess cables and low voltage equipment are much more exciting to engineers than the mobile business, with around three quarters of a million customers. Although the same could be said for office equipment, they try their best with those adverts, but darnit, a printing solution is boring, whichever way you look at it, regardless of your geniuses at Nashua. And then of course there is a separate third division which is related with defence systems, perhaps the SANDF used to be a bigger customer in years gone by.

And how do the geniuses at Reunert see the outlook? “The economy is in a delicate state with lower interest rates encouraging growth. However, the strength of the rand is of serious concern with increased imports and reduced export opportunities hampering growth. Subject to the prevailing economic conditions remaining unchanged, the group predicts an increase in earnings for the year ahead.” I would venture to say that again, this time next year as is the same for Barloworld, “things” will be better. Disclosure: I am an optimist and no, we don’t own any of these shares in our client longs.

Ye olde world Ireland was actually running a surplus a mere four years ago. Public debt now tops 35 thousand Euros per man, woman and child, according to Bloomberg. WHAT!!?? How did this happen? Well, most folks think that the root of the problem was the root of most of the problems, easy money (easy lending criteria) led to massive speculation in the Irish property market. Fuel was added to the hot property flames in the form of lax laws surrounding the flipping of primary properties. And of course, access to easy money, did I say that already? I heard an American property commentator say something along the lines, “well this time around if you want to obtain a mortgage you actually have to HAVE A JOB!” You get the point he is trying to make.

“Ireland built half as many homes as the UK in 2007 despite having one thirteenth the population” is what I read on Candid Money. In fact, you should read the whole article —> The Irish problem. I don’t agree with his conclusion and do believe that he is way too bearish. And that is probably because in 18 months time problems like these will be less problematic for the EU and for the global economy.

Again, the same questions are starting to be asked, will we see a breakup in the European Union. The biggest problem for the Irish is that they cannot weaken their currency, they share one with a whole lot of bigger economies and they can’t tap lines of credit from the IMF, they have to ask the other union members first. They apparently need around 20 percent of their GDP just to bail out the local banks. To put that into local terms OK, would mean that we would need 60 billion US Dollars, or 420 billion Rands to help our banks out, if we got into the same pickle. To answer that question, will they exit the EU, well first things first, there is no mechanism to implement such a mechanism and politically it would lead to civil unrest, as I no doubt think the masses would view this as a step backwards.

Christine Lagarde, the French Economic minister said in an interview last night that if Ireland needs help, they will help. But, she said, they have not asked for help. So everyone seems to think that Ireland needs help, except the pride of the Irish. Politicians I tell you. And did you know that the 1 in 5 people in the Irish workforce is a civil servant. A bloated civil service no doubt. This seems to have been a global trend over the last decade, to add more people to the government payrolls and not fewer.

It is not all doom and gloom though. Remember Latvia? Remember the nearly one fifth contraction of their economy overnight because of the over extension, housing and consumer led economy? Well, not that things are fixed, but they took their medicine and now the economy is growing slowly again. Perhaps there are some hard knock lessons in there for Ireland and Greece. Take all the pain now. But I don’t think that they will.

New York, New York. Trounced. Thrashed. Irish debt problems in their banking system and the Chinese inflation problem were blamed. Oh, and if you want, Austria and their school of economics and attitude towards Greece. Because, if the Austrians want to withhold a payment to Greece is that any different from the Greeks having broken the rules in the first place? Methinks not.

But that has nothing to do with what is happening or happened in New York last evening. There is of course a small matter of a General Motors IPO. And everyone is going gaga for that. Not like meat dress gaga, but rather a forward multiple at the thought current pricing is less than seven times. Cheap. And the US government in order to get back their bail out of the motor vehicle manufacturer, their remaining or residual stake will have to increase 50 percent. Hey, remember when they were not going to get anything back at all? Morons, yes, turns out that the government might get all of it back.

Silk road, riced and diced What do you make of the Chinese setting out on price controls again? Is this a step backwards? Or is this a step in to control what could lead to violent protests, elevated food prices? Because food prices impact more on poor people and poor people have to turn to violence (as history shows us) when they are desperate. So this is not an economics move from Beijing central, but rather a political move. Although, this Marketwatch piece suggests that the price controls could have the opposite effect: China controls may do little to curb prices.

This line I guess will spook almost everyone, except the growers: “Data released this week by the Ministry of Commerce showed that average wholesale prices for 18 key vegetables in 36 Chinese cities soared 62.4% year-on-year in the first 10 days of November.” I guess that is the other issue, what might not be good for urban consumers is good for rural farmers. Who, just remind everyone, feel marginalised anyhow. I do not know enough about Chinese politics to know what Beijing central is up to. All I know is that their approach to many matters economic and political is seemingly VERY WELL thought out.

Chinese stocks continued to take a thrashing, down nearly two percent, Hong Kong down 2 percent too. Japan bucked the trend though, a weaker Yen is good for exports, excellent. And of course this is having a negative impact on all of the commodity prices.

Commodities corner Which are: the gold price last at 1338 Dollars per fine ounce. I thought a crisis was good for the gold price? There were CME margin requirements raised yesterday too, some folks thought that might have led to some selling in commodities too. My favourite currency guy, Ashraf Laidi said he thought that the gold price would retrace to 1320 Dollars per fine ounce. I think based on currencies of course. The platinum price is lower at 1640 Dollars per fine ounce. Jeepers the copper price has been bashed, down to 368 US cents per pound. The oil price is lower at 82.05 Dollars per barrel. The Rand is about steady at this time, 7.03 to the US Dollar, 11.20 to the Pound Sterling and lastly 9.50 to the Euro.

Up periscope. We started off on a poor note, but have improved through much of the day. There are of course housing numbers a little later.

Sasha Naryshkine
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