Slasher's coffee beans

Jozi, Jozi. We closed at the highs of the day, as on Friday it started to become apparent that the crazy fellow in Libya could not last forever. Because the banking fraternity have decided to freeze his assets, and he is not liquid enough to pay his private army. So much for paying for banking secrecy, it depends who you are it seems. Don’t get me wrong, I am all in agreement with the authorities freezing the demented Top Gun wannabe’s (those Tom Cruise glasses are too much) assets, because I am not too sure how he can accumulate 30 billion Dollars in 41 years. Legally that is.

That is suggesting that the fellow somehow “made” 1.5 million Dollars a day over the period he was in power. Just a reminder, from the budget speech last week, our president makes 2.6 million ZAR a year. Qaddafi swindled/stole/accumulated 1.5 million Dollars a day. So roughly 10.5 million ZAR a day. By mid morning tea time each day he has “made” more than our president earns a year. You can quickly see how there are problems and then there are other problems.

So the consensus out there was that the problems we were seeing with Libya were going to be short lived. Turns out this morning this is not the case. But, Friday it was, and markets cheered. There was the small matter of a second look at US GDP and it turned out that even as the headline suggested it was below consensus, as you dug deeper you found signs of future hiring. Hey, that is just the way that it goes, I am reporting what others say, more on that later.

Session end the Jozi all share had closed at the day high, 31966, up 259 points or 0.82 percent. The leaders were many, SA inc. got a head start as you could see the flows were back, the Rand was firm through the day, and comfortably through the 7 mark to the US Dollar. This didn’t help the gold (down 1.4 percent) and platinum sector (marginally in the red), but retail and banks were lifted comfortably over two percent apiece.

Construction stocks even got a lift, notwithstanding that in the morning session Murray & Roberts (MUR) traded at 22.45 ZAR, down as much as 10 percent on Friday at one stage. It is not good I guess when your top brass are out at the end of June, but hey the cycles are deep and long. At the beginning of this year MUR was trading above 40 ZAR. Less than 40 days later and we are at 25 ZAR. Sis. The last time that MUR was at these prices was mid 2006. So, five years ago. But this stock traded as high as 108.25 ZAR on the 29th of October 2007. From 25 to 108 and back to 25, in less than five years. Wild. If you bought them in 2006 early and went away to the Peruvian rain forests and returned Friday, you would wonder what the fuss what about. The cycles are deep and unpredictable, that is all I can say about that.

The results continue to flow here and it is a little tough to keep up, but this is what we do, so we must pay attention. First, Bidvest half year results to December, because that was the chronological order, the timeline. First come, first served, a little like the football seating at FNB stadium (Soccer City) Saturday. For the record, if want to have fun that is off the funometer scales, you must go to a Soweto derby. It was the second time that I was going to such a match, the stadium had over 93 thousand I think. Amazing.

But back to the grind of results, Bidvest reported revenue for the half year of 58.5 billion ZAR, an increase of 4.2 percent. Headline earnings grew to 1.7 billion ZAR, an increase of 11.3 percent, that translates into a headline earnings per share of 539.8 ZAR cents. Distribution of 225 ZAR cents. So annualise these numbers for the face value fundamentals geeks and you are looking at 14 and a half times earnings and a dividend yield of around three percent. Not overly exciting and not at current growth rates.

Tyco is a *nice* comparison at a global level (OK, sort of) and they trade on 16.6 times earnings with a dividend yield of just less than 2 percent. Maybe a GE comparison too, but as was noted in the office here, not as much intellectual property and not as much manufacturing in the Bidvest stable. GE trades on 18 times earnings with a dividend yield of 2.75 percent. 3M trades on 16 times earnings with a yield of just less than 2.5 percent. You get where I am going with all of this, the price is probably about right. Well done market participants.

Bidvest could be really interesting with potentially a whole lot of corporate activity with some potential slicing and dicing down the road. One of the theories (at least in the office) is that we could see a local business unit, a European one and maybe even an Asian one. Or Bidvest South Africa and Bidvest International. Something along those lines.

Divisionally as I scan down the page you can see that there was a big bounce-back from the Automotive segment, sales up 17.7 percent to 9.5 billion ZAR. Foodservice, a monster contributor (around half of all sales) was lower by 3.8 percent to 29.2 billion Rand. European sales in Rand terms were lower by 9.7 percent to 17 billion ZAR, Asia Pacific was higher by 7.3 in Rand terms to 9.5 billion Rand, the fastest growing of the major divisions.

But freight was the star performing business unit, revenue up 19.8 percent to just shy of 9.6 billion ZAR, and this was against a second half last year that was worse than the comparable first half to December 2010. In other words of the last three halves, the middle one was the worst. I guess it is seasonal as well. So, those are the big five divisions.

Listen in here carefully, because you can have all the sales in the world, it is actually all about profits. Margins across the group are not great, I must be honest. The most profitable (trading profit) of all the major divisions is the Foodservice division, 956 million ZAR, but that was lower by 7.4 percent when measured against the comparable period (H1 2010). Check out the commentary, “Revenues … reflect continuing pressure on consumers in both the out-of-home eating and institutional sectors and the impact of the translation of the earnings of foreign businesses into rands. Margin squeeze and downtrading impacted trading profit…”

I did a quick trading profit margin calculation and of the big five divisions by sales and here goes, Bidvest Automotive (2.55%), Bidvest Foodservice (3.27%), Europe (2.18%), Asia Pacific (4.19%) and Bidvest Freight (4.16%), the margins are pretty low.

However, of the other divisions not mentioned here (it is not all about revenue, said that already), Bidvest Services is very profitable, trading profit margins of 14.39%, Bidvest Namibia has legendary trading profit margins, up 23.90%. Bidvest Southern Africa on the same metrics has trading profit margins of 7.09%. So you can see that some of the smaller businesses inside of the group have much better margins. What is that old payoff line of theirs, “through diversity comes strength”, something like that. Bidvest are actually the offices next door to us. My favourite sign is still the one in the Bidvest foyer: “We refuse to participate in the recession”. It makes me chuckle. I should see if it is still there, because that would indicate where Bidvest think we are in the cycle.

And the outlook? Looks better in parts —> “Economic conditions in most of the geographies in which Bidvest operates have improved, resulting in higher activity levels, however, the European landscape is likely to remain weak. The underlying threat of inflation and the potential for rising interest rates present both opportunity and risk for trading operations. Our businesses have adjusted to the new economic reality. Management is acutely aware that innovation and service hold the key to future success.” I will check out the results presentation and add in anything tomorrow.

We are not huge fans of the company, but it falls into the category like. You know, like that “like button” on social websites. Too many moving parts is a negative, but keeping the management in place of business that they (Bidvest central) buy, and centralise everything is hugely helpful. So centralised control of a whole lot of different businesses and bankrolling from one acquisition to the next. Brian Joffe is highly regarded. I guess a few question marks about a successor, but I would not be too worried about that. Yes, no, maybe, ja, no well.

Byron’s beats. This is all about the unknown and unthinkable. Saudi Arabia, Byron’s view of what is happening there, and what might happen there. Perhaps everyone should take a leaf out of the Indian’s book and preach for socially conscience capitalism. You know the kind. Don’t have wild sushi parties, that could be the South African context that Cosatu sometimes refer to. Except, as Byron points out here, it seems a little more egregious.

Yesterday the Saudi market crashed 4.9% (yes the market is open on a Sunday) due to fears of potential unrest. Remember, Saudi Arabia is the biggest country in the Middle East and has the world’s largest oil reserves. Often known as the Kingdom of Saudi Arabia the country is ruled by an Islamic absolute monarchy who have often been subject to scrutiny from human rights groups.

The country has a shrinking middle class with growing disparities between the haves and have nots as a weak education system and growing unemployment only elevates this disparity. The extravagant lives of the royal family and the elite few who have managed to reap the rewards of the black gold cannot bode well with the poor who are growing restless.

The country has a heavily censored media and is not very well understood by the rest of the world. We see stories of Sheiks buying platinum plated Rolls Royce’s but little is known about their 28% unemployed. Last week King Abdullah, the current ruler, ordered an extra $36bn ($2000 per person) in new welfare grants for his people which is a clear indication of how anxious he really is. Other measures such as a huge infrastructure spend injection and bans on hiring foreign domestic workers have also been implemented. There is a huge contingency of foreign workers in the country as the local Saudi’s try and hang onto their middle class livelihoods and refuse to work the “lower end jobs.” So a revolt from the foreign citizens is more likely at this stage.

I think the difference between Saudi Arabia and Egypt and Lybia is that the Saudi people are still fairly pro government and the state has plenty of money to blackmail their citizens into happiness. What sparked the huge fall in the market was the death of two protestors in Oman, a small country to the East of Saudi Arabia. They were shot dead by police.

Much speculation about these anxieties spreading to Saudi is definitely spooking markets globally. Like I said, they have the biggest oil reserves in the world with 260 billion barrels. This comprises one fifth of the worlds proven reserves so you can imagine what kind of affect an uprising would have on the oil price. I still maintain that long term these uprisings will have a positive impact but for the short term a surging oil price is not ideal for an already growing trend of inflation around the world.

New York, New York. US GDP, fourth quarter, take two was Friday, before the market opened. We had lots of stuff going on here, meetings, swings in the oil price as the Saudi’s saying, no worries we will pump more if we need to and then of course the cricket in the background. Poor little Bangladesh, they did manage to come through though against the mighty Ireland. Check out the full release of the Second Estimate of GDP.

I am no economist, so I couldn’t explain the hidden stuff, a look under the hood would reveal the engine, but mean very little to me. But I understand a whole lot more about this content than the combustion engine. Hmmmm, not so cool, don’t tell the guy in the Windhoek Larger advert. So check out the sectors adding and the sectors weighing on the overall GDP read:

“The small fourth-quarter acceleration in real GDP primarily reflected a sharp downturn in imports, an acceleration in PCE, an upturn in residential fixed investment, and an acceleration in exports that were mostly offset by downturns in private inventory investment and in federal government spending, a deceleration in non-residential fixed investment, and a downturn in state and local government spending.”

Someone suggested that without the inventory drag, we were looking at around a 7 percent print. But you can’t slice and dice, it is what it is. But I get why the markets could have been a little more than just a bit excited about this. All you need to know is that “things” are a little rosier.

Silk road, riced and diced. So what does it mean to all of us that the Chinese have lowered their long term growth target from 7.5 percent per annum to 7 percent? I guess the base rose so furiously that you can’t expect that sort of breakneck speed growth into the future. Bearing in mind that your economy is now 5.7 trillion Dollars, so seven percent per annum should see the Chinese economy roughly the size of the US economy now in 2035.

Explained here —> And let us suggest that the US economy could grow 3.5 percent per annum for the next 15 years, that suggests the inflection point could be around 2035 and not 2025. A lot can happen I know, in that time. This is just until 2015 though, not until that time. This WSJ article suggests that in the past the Chinese growth targets have beaten their own expectations —> Beijing to Slow Growth. There are of course all these methods to slow growth, salaries in the urban and rural areas are skewed to the cities.

What Beijing central does not want is for the masses to start getting more and more irritated. But I suspect that “the party” is on top of it. So, any whiff of a Jasmine revolution spilling over into China, anything is likely, but you would think not. Chinese economic reforms are into their fourth decade from the great leaps backwards. At least I hope so.

Commodities corner Dr. Copper is last at 444 US cents per pound. The gold price is steady at 1411 Dollars per fine ounce, the platinum price also unchanged really, at 1805 Dollars per fine ounce. The oil price after having slipped back Friday, is back on an upward trajectory, last at 98.66 for WTI on NYMEX, the Brent crude price is 113.23 Dollars per barrel. DME Oman Crude is trading at 105 Dollars per barrel exactly. Wow. All over the show. The Rand is firmer at 6.98 to the US Dollar, 11.32 to the Pound Sterling and 9.65 to the Euro.

Where to from here? Key stuff to watch out for later are definitely the personal income and spend monthly stuff from the US. Chicago PMI. Pending home sales. The Qaddafi daily madness index. I slipped that one in there to see if you were paying attention.

Sasha Naryshkine and Byron Lotter
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Jozi, Jozi. More falling tumbling down yesterday, the bears and their oil rally had a firm grip over the markets. One thing that still continues to baffle me is the firmness of the currency. This is quite awesome from an inflationary point of view, because if you could imagine the Rand weakening to the US Dollar AND the oil price ballooning out, you are looking at a pretty dire state of affairs for the beaten up consumer. Yech. Econo(missed)mists have suggested that every one Dollar increase in the oil price brings about another 7 cent hike in the local petrol price. The implications for food prices and the cost of transportation is going to test the Reserve Banks mettle for the balance of the year. Unless of course Dear Brother Leader goes quietly into the night to live with his only mate in Venezuela, oil prices should come off then.

Session end the Jozi all share index closed at 31706, down 225 points. In fact we find ourselves in the situation where we are lower for the year again, after having been over three percent to the good a couple of weeks back. Banks were down comfortably over a percent, YTD banks are off 6.4 percent. Pity the construction stocks, down 22 percent Year to date. Wow, that is mind blowing really. Retail is down over ten percent this year. The only sectors in the green so far this year are the broader resource stocks, think Anglo American and BHP Billiton, up three and a third of a percent. The gold stocks are up just a fraction less than that. And then Oil and Gas (aka Sasol) is up over ten percent this year.

One of my least favourite companies reported yesterday. Note, difference between company and stock. Company and share price are related over the long term, value is what is offered in the market today. Quality of company is something that ebbs and flows over time. And that company is (drumroll….you know it already) British American Tobacco. Now why would you say, the conventional line is, the stock is defensive, pays a decent dividend and cash flows are unquestionably very good. And their product is addictive, that is the best part. But also the worst part going into the future.

First the numbers, those are what matter in the short term in determining if the company is priced “right”. Basic earnings per share increased by 6 percent to 145.2 pence a share, that converts at 11.39 to 16.53 ZAR a share. Total dividends per share are 15 percent higher than last year at 114.2 pence a share (81 pence final) or 13 ZAR exactly. I had a look at global valuations yesterday and this is about the same as the rest of the sector. So you could say that they neither trade at a premium, nor at a discount to their global peers.

They grew market share, which stands at 25.3 percent, BUT stick volume was lower (3 percent down) across their geographies, with the only increase coming in Asia Pacific region, up 2 percent. That region however is their biggest by far now, Western Europe and even Eastern Europe have seen stick volumes tumble over the last few years. In part higher taxes on their products, in part smoking bans.

Check out the volumes and revenue from their regions. Notice how more advanced countries and emerging Eastern Europe are smoking less, what I was referring to in the paragraph above:

The thing that worries me about this investment comes out of their results announcement, from the incoming chief executive, Nicandro Durante, who has a matching first name for his business:

“Paul has explained why we are confident we have a sustainable business, but where will the industry be in 10, 20 or even 40 years’ time? Well, one thing we have always said is that it’s not a good time to predict the long-term future when you’re in a recession. Even so, few would disagree that the industry looks very robust for the foreseeable future. Forecasts suggest that the world market is likely to remain fairly stable at between 5 and 6 trillion cigarettes, more than 40 per cent of which are sold in China.”

I thought we were out of the recession? Plus more importantly, their major markets in Asia Pacific never experienced a downturn. And lastly on this paragraph, are the Chinese authorities completely happy with their citizens smoking like gang busters? Is that used in the right context? Perhaps not. Wiki suggests that smoking in China is a cultural norm, with 60 percent of Chinese male doctors who are smokers. Tobacco laws are in their infancy still in China. A Chinese report suggested that second hand smoke impacts on the lives of 540 million citizens. That is roughly every citizen in Europe affected by second hand smoke.

But I would say that if you are looking for cultural associations with smoking, I would think that we should look at Japanese smoking habits and what has happened recently. Because you would think that in time the Chinese story would turn out a little like that of the Japanese story. More on that in a bit, the new chief goes on to say: “Looking at market size in isolation, we’ve done extrapolations that cover the next 20 years and that’s where demographics become important. Trends indicate that individual smokers will consume fewer cigarettes each and smaller percentages of populations will smoke.”

So fewer people will use the product and those who do smoke, will smoke less. But don’t worry, there will be more people in the world. Do I read that correctly? I don’t know about that strategy. We have been accused in the past of excluding our clients from this good investment. By being “moral investors” on this one.

We disagree, it is because government taxation is going to make their product unreachable for the target market. It is not us who are increasing the taxes on sin products far above inflation. It is not us who have formed organisations to ban the product by a certain date. It is not us introducing legislation to curtail the advertising activities of the tobacco companies. It is not us instituting class action suits against the tobacco producers because their product kills people. Nope. And I could go on.

You don’t see the guys selling mobile phones for instance running into these pretty heavy headwinds. So, the outlook is tougher. And it is not going to get easier. And I have not even got into the argument about the use of resources. How do they (BAT) think governments are going to view arable land used for tobacco over food? That is another argument entirely.

Byron’s beats. Byron talks about two things today, one being environmentally friendly investing and the other about Nike. One of the newest additions to our stocks in New York. We just added it. Get it?

Everyone knows that green is good and investing in environmental friendly projects not only makes you feel good but it is also an exciting theme that has loads of room for a lot of exciting innovation. The industry also offers some great cost cutting incentives and potential to make a lot of money. Check out this interview with Martin Creamer, editor of Engineering News and Mining Weekly. —> SAfm’s AM Live’s radio anchor Caesar Molebatsi speaks to Martin Creamer

It talks about a Wits initiative where they have developed the technology to turn garbage into electricity and fuel at a profit. Well I can imagine it would be at a profit, I doubt the input cost of garbage is too costly. There is already a fully operating company in Canada, Montreal called Enerkem that do this exclusively.

Here at Vestact we look to invest in this theme as much as we can and you would be surprised which companies are heavily involved in such initiatives. It’s one of the beauties of investing in equities. If you pick the right companies they will find ways to shift your money into themes that look profitable in the future. Their survival depends on it.

Nike is one of our recommended stocks in New York. We like the company because we are optimistic about the long term purchasing power of developing nations and the aspirations for a better life and more consumption. In a world of choices we prefer the Nike brand to the other options and like their high dividend yield and exposure to developing countries with over 50% of their sales outside the US.

Where do Nike and environmental protection coincide? I read a fascinating story yesterday and I know it’s old news but I hadn’t heard about this before. Last year Nike rescued 13 million used plastic bottles, melted them down into polyester and made high performance football jerseys that were worn by 9 teams during the Soccer World Cup last year.

Again this reiterates my theory that human innovation will solve most of our problems with regards to energy consumption and environmental issues. What a great scenario, you invest in an innovative company and they come up with fantastic ideas like that. Unfortunately there are not many inventions other than the flawed invention of democracy that can solve our ever present political issues but that is another argument all together.

Ran short of time here, so will get straight into Commodity corner. Oil is fall tumbling down. Qaddafi I am betting is nowhere near Tripoli. Why give a telephonic piece on Libyan TV? Moron, not martyr. The NYMEX WTI price last at 97.68 Dollars per barrel. The copper price is improving and last at 433 US cents per pound. The gold price is steady at 1403 Dollars per fine ounce. The platinum price is last at 1789 Dollars per fine ounce. The Rand is power, 6.99 to the US Dollar, 11.24 to the Pound Sterling and 9.64 to the Euro.

Where to from here? A second look at US GDP might be fun. A sentiment reading later could also be fun. Those are all a little later this afternoon. Until then we have tracked a little lower.

Sasha Naryshkine and Byron Lotter
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011 022 5440

Jozi, Jozi. There are some days when you say, what am I going to churn out today, that looks OK’ish, that looks alright but not appealing and that story is downright boring. Well, on days like today there is an enormous amount to write about. Because of course yesterday we had the budget speech. Again, we could watch on any number of channels, thanks all of you for making a big deal of it, it certainly gets a lot of airtime. Thanks everybody. Meanwhile in the background our dear brother leader slash gone mad and needs to be carried away by men in white coats (who always get a bad rap) continues to defy everybody. Seemingly. And the implications are very real. Very real. Let me kid you not, if you think that the petrol price hike next month is going to be tough, I think 40c a litre on the Highveld, the following month will be worse.

There are a lot of countries that are sensitive to oil price shocks, we are somewhat sheltered because of our own production from the likes of Sasol, but it is not nearly enough. Oil Consumption (most recent) by country is an interesting table, if not looking a little tired and old. But the picture does not change that quickly. We are about right for our consumption, in 30th place and use around 505,000 barrels of oil a day. Imports mostly from the Middle East, Iran and Egypt as far as I understand it, please correct me if I am wrong.

Since the beginning of the year, the oil price is up roughly 18 Dollars a barrel. The Rand has also weakened, around 6 percent or so. The number that I have heard on the wireless worked out by economists suggests that every one Dollar increase in the price of oil, we are likely to pay 7 cents extra per litre of petrol. The move for February alone is around 16 Dollars per barrel. Expect around two percent to be chopped off for the firmer Rand. So, by my guesstimate (and I am going to be honest, I have no idea how the petrol price is set each month, but some sort of calculation like this one) is that we will be paying over 80 cents a litre more for petrol in April. Yowsers.

Yesterday Jozi markets were all fall tumbling down. The Jozi all share fell below 32 thousand for the first time since the beginning of the month. We closed up shop at 31832, down 512 points or 1.58 percent. Yech. Banks were down over two percent. Mobile telecommunications (that equals two stocks, MTN and Vodacom) were down two and a half percent. Resources, the broader sector was down one and two thirds of a percent. What I can’t explain is how strong the Rand has been. Because it goes against common sense, equities down, US treasury yields lower, that should mean a sell-off in the local unit. But no, it has been strengthening over the days. WalMart buying Rand aplenty perhaps, could it be that?

Budget yesterday. I spoke to my dad on my way home yesterday and he said, nah, I haven’t checked anything about the budget, I am waiting for your take on it. Oh drat, the pressure of getting through all the gumpf and coming up with anything compelling. So I will try my best. One thing that has been picked up on a little is the government wage bill. Check this out, an email that I sent to a journalist in response to a question about the budget:

“My lower comment is a throwaway one —-> At Goldman, Quarterly Profit Drops 53%

Almost, but you get my points to her. Goldman Sachs get roasted by how much should be for shareholders versus how much is paid in compensation for highly qualified staffers. 40 percent of non-interest government expenditure is for government employees. So, ever 40 cents out of the Rand that you pay to SARS roughly (there are Treasury borrowings) is used to compensate state employees. And lest you need reminding of this magic graph (some must be tired of it) productivity is not exactly soaring, it is falling in a heap relative to compensation:

Here are two graphs that I pulled out of the medium term budget speech, the first one is the increases in the state salary bill:

And then the next one, equally ugly. If not uglier:

And no guessing that the wage negotiations from unions (who get a percent from their members annual take home) will be aimed high again. The first negotiations this year have set the benchmark to more than double the current inflation rate. Although in truth truck drivers for the hours, the risks and amount of skill required still get paid a pittance. Don’t get me wrong at all sports lovers, I am in favour of everyone getting paid more, as long as productivity rises.

But sadly, in a South African context, productivity is not increasing as wages are ballooning:

I think the point that I am trying to make is that government cannot actually afford to suck up any more of the labour force, unless tax collections are boosted dramatically. There are pitifully few individual tax payers around, although that trend has shifted. So it will be up to business to create new jobs. And business and hopefully labour realises that it is time to get together to solve a problem that is all ours. Unemployment. The dignity of a job above a grant. First things first though, in my mind we need to dispel the notion that government employment is more attractive over private sector employment. And perhaps government needs to put a freeze on certain managerial salaries for a little while, to recognise the challenges that face us. How do you think that proposal will go down?

OK, but we digress here. I think with all the awesome stuff around written by those paying more attention than I am. Or having the resources and time. Here goes, a few of your favourite places to find the relevant information:

Moneyweb
Fin24
BusinessDay

As promised yesterday, the piece on construction, as per seen by someone who is involved in low cost housing projects. Thanks so much to RM:

“On the question of the feelings around cement sales.

Awesome. Agreed. Anyone else out there with a similar outlook, or something completely different?

Massmart released their six monthly results, or to be more precise, they released their 26 week results to end 26 December. A sales increase of 13.3 percent to a whopping 27.3 billion ZAR for the half year was recorded. I remember when the group did just a little more than that for the full year, not so long ago. In living memory in this industry, it depends how old you are I guess. Some are old enough to remember 1987, and 1998 as dates that defined them, others 2001 and 2002 and more recently the period of great pity. Like a friend in the industry said to me, it is important for youngsters to come through, they are not skewed by any event anywhere or anytime and are “fresh”. Agreed on that score.

But back to those results of Massmart. Headline EPS of 366 was an average 5 percent increase on the comparative period, the dividend was unchanged at 252 cents per share. So I guess that is good news. Another sign that we are still in the woods with the bears: “Whilst the Massmart Group’s sales growth for most of the six months to December 2010 was strong, the softer sales growth over Christmas, and in the eight weeks since then, suggest that the South African economy may not yet be in a sustainable recovery.” Feeling a little narfy after that?

Food deflation was a problem, trading conditions were “tough”. For the group, not necessarily the consumer. Most of the sales growth came through Massbuild, the Builders brand. Builders Warehouse is a cool spot, I must be honest, I actually enjoy going there. Masscash is the biggest sales grouping inside of Massmart, but the second least profitable. The most profitable segment for the overall group is the Massdiscounters, the Game and Dion Wired brands, nearly 100 stores in total across the continent. That has been the brand chosen across the continent, Game. But there is something new, potentially very good for food inflation, a new brand called Game Foodco alongside the brand bought in KZN called Cambridge.

Check it out: “We expect Walmart, subject to approval by the Competition Tribunal, to greatly reduce the risk inherent in our entry into Food retail, whilst assisting us with the implementation of all other aspects of Vision 2013.” And what is not underscored enough in this transaction is how much cheaper goods are going to be helpful to society. I have often fallen back to the theory that Charlie Munger (Buffett’s oldest friend and right hand man) who said that Costco had done more for society than any philanthropic cause. Agreed, lower prices helps everybody, but more so the poor. So unions, start thinking about poor people. Because methinks there has been a subtle yet easily identifiable shift in COSATU bargaining and earnings power.

But that aside, lets wrap up a look at the Massmart results. Costs are the key feature now. It seems many South African companies are struggling with costs. And therefore less likely to hire, at the moment. I guess also the pending labour legislation could impact the whole hiring question. I would like to see where Massmart trades post the deal before suggesting that twenty times earnings is way too much at current levels. I have said this before, it is time that we started looking at our retailers at a global level. And compared the likes of Massmart to WalMart Mexico. Which trade on multiples comfortably above that of Massmart now.

New York, New York. Another day of selling as the bears cheer that crazy Qaddafi on. Although the steeply rising oil price is a bit of a problem. OK, let me rephrase, the inflation implications are too much to think about for the time being, but really real. Can I make one observation (I will anyhow)? The alternative energy sector desperately needs higher conventional energy prices to be viable. So, this could be another opportunity for them. This might just be the kick start that they need again. Plus also another reason for American consumers to start thinking about smaller vehicles again. Come on guys, buy the hybrids and the smaller cars.

But it was the higher oil price that spooked all and sundry, stocks sold off aggressively, the Dow ended down 107 points to 12105, the nerds of NASDAQ lost 33 to 2722 whilst the broader market lost just over 8 points to close up shop at 1307.

Byron’s beats. Tech head stuff again here, this time Zynga and Amazon.

To continue on with my fascination with social media and tech companies taking over the world and generally making our lives easier, I am going to talk about two companies today that have been able and to some extent pioneer the monetisation of these sectors. Firstly I’m going to talk about Zynga and then have a chat about some innovative moves from Amazon.

If you think you don’t know about Zynga, you do. Ever heard of Farmville or Mafia Wars? I’m sure you have received all sorts of requests on Facebook to join in on the Mafia wars or help build a farm on Farmville. Unfortunately I cannot relay how these games work from experience because I have never played them but I believe they are extremely addictive yet very simple.

What’s even more impressive is that they have managed to convince people to buy virtual products. Yes, use actual real money and buy virtual farmlands and Tommy guns. Hence Zynga have been dubbed the most profitable company in the world by this Business insider article. A profit margin of 47% seems very attractive and it looks like there is room for more games and innovation.

How do I as an investor benefit from such a crazy high margin business?

Naspers who own 35% of Tencent is a Vestact recommended stock and if you own the share you are already reaping the gains. Tencent have over 500 million subscribers in China and are directly involved in social networking and virtual gaming within the most populous country in the world. When you have such a huge subscriber base all you have to do is maintain a constant flow of new, innovative games and concepts to ward off competitors. Something Tencent have managed to do over the years. I suggest you add this stock to your portfolio if you don’t own it already.

Amazon, which is also a Vestact recommended stock, is using its massive subscriber base to enter new markets where huge potential lies. They have just rolled out an instant video streaming business which will allow customers access to over 5000 commercial free movies and TV shows. In developed nations where the bandwidth allows for such streaming this is a fantastic service which just makes our lives easier on a day to day basis.

This is not an Amazon only idea, in fact Netflix have been doing this for a while now and have been hugely successful. To put things into perspective, the Netflix share price is up over 300% in one year. Like I said though, Amazon already has a huge subscriber base and big enough pull to get more TV shows and movies. At a price of $79/ year you can access all of these shows.

Gone are the days of the DVD store I am afraid.

Commodity corner. Dr. Copper last crossed at 424 US cents per pound, the gold price is higher as the oil price surges, last at 1413 Dollars per fine ounce. The platinum price was last at 1774 Dollars per fine ounce. The gap has closed dramatically there, you see? The oil price is going nuts, 102.53 Dollars per barrel for NYMEX WTI. Brent is at 118.03 Dollars per barrel. The Rand is last at 7.11 to the US Dollar, 11.49 to the Pound Sterling. And 9.77 to the Euro.

Where to from here? The markets bloodletting has stopped. In Libya it has not. Hundreds killed as Qaddafi decides it is a good idea that he stays there. I wish he would go in the night.

Sasha Naryshkine and Byron Lotter
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Jozi, Jozi. East to West, North to South, everyone was worried about the implications of the Nero impersonator, Qaddafi, and what actions he was going to take next. Hey Mr. Crazy (he must be) give it up and go and live near Angel falls with your good mate Hugo Chavez offering you asylum of sorts. But it turned out a little later in the day that it was not to be, Qaddafi vowed to fight to the end. Twitter users that I follow were less than complementary, with the mad tag attached to him. The German Chancellor Angela Merkel was somewhat disturbed by his call to fight to the end. At least Hosni Mubarak had a little grace if zero tact. Any apology from that fellow yet?

Here the markets were opened lower and tracked that line all day long through to the close. Industrials were beat up, down over a percent and a half, perhaps sympathy selling on SABMiller, where a competitor was bashed, or perhaps the Russians looking to slow beer sales all over again. Those Russian authorities seem determined to protect their Vodka market, or perhaps the official line given is closer to the long term truth. The Russians have a BAD drinking problem, almost anyone who has been there can attest to it. My best mate (and best man at my wedding) audited in Moscow for three months and whilst walking to work, (in the summer that he spent there) he saw a common sight of people drinking beer at breakfast time. No problem. I will have eggs Benedict, go easy on the sauce, but give me a draught instead. Hah!

Just quickly, here is the rest of that story —> Russia takes first step to curb strong beer sales. One of the local market software developers should get cracking on a JSE All share (or top 40) impact table. Like the iPhone and iPad CNBC application, there is a little tab called the “Dow Impact”. Session end the Jozi all share index closed at 32444, down 362 points. Resources were down two thirds of a percent, Banks were down one and a quarter percent collectively.

OK, the GDP read from yesterday was probably the least looked forward to GDP read that I can remember. In a long time. For me anyhow. I know having been on the box Friday that the Standard Bank view was a 5 percent print, which in itself was very bullish. The consensus view was 4.2 percent. Obviously including the Standard Bank view. The actual number came in at 4.4 percent, for the fourth quarter. It is a little bitter sweet, the whole year view that is, bearing in mind that over the period of great pity we lost over a million jobs. So the bounce back in the economy represents all the efficiencies that were built in over the last two years. Because the employment situation looks worse. But we know that employment lags economic growth, that is just the way it goes.

Into the actual numbers sports lovers (can’t wait for tomorrow). You can read the whole publication here —> Gross domestic product – Fourth quarter 2010. Some telling stuff in there:

“The mining and quarrying industry contributed 0,9 of a percentage point based on growth of 17,1 per cent;
General government services contributed 0,7 of a percentage point based on growth of 5,3 per cent;
The manufacturing industry contributed 0,6 of a percentage point based on growth of 4,1 per cent;
Finance, real estate and business services, the wholesale, retail, motor trade and accommodation industry and the transport, storage and communication industry each contributed 0,4 of a percentage point based on growth of 1,7 per cent, 3,5 per cent and 4,2 per cent respectively; and
The construction industry contributed 0,0 of a percentage point for five consecutive quarters.”

Poor construction. Been completely beaten up. Feast or famine as “they” say. See this, classic V shaped recovery:

A question which is always fun is quite simply: How big is our economy? Well the answer is simple, Q4 2010 the nominal value added to the economy was 698 billion Rand. Annualise that and you get to just short of 2.8 trillion Rand. Convert that to US dollars and you get 388 billion US Dollars. Which is only a little more than the market cap of Apple, which is 311 billion Dollars. But less than the market cap of Exxon Mobil, 425 billion Dollars. And double the WalMart market cap, which is 191 billion Dollars. But less than WalMart’s annual sales, which annualised from yesterday’s quarterly numbers tops 460 billion Dollars. Get that. The annual sales number at WalMart is around 70 billion Dollars MORE than our entire annual economic output. Sniff.

What is interesting looking at all the tables is that the economy has expanded roughly 50 percent in ten years. And even more interesting is that certain sectors have “gone nowhere” for equally as long, whilst others have done marvellously well. Believe it or not (tell me the word Ripley came into your head) the mining and quarrying sector’s contribution to GDP has stood still for ten years. Finance, real estate and business services has grown nearly 80 percent over the same time frame, and is now the biggest contributor to GDP overall, at 24 percent. Back in 2000 that was 19.2 percent of the economy. Government’s value to the economy actually fell over the same period, as 17 percent overall contributors to the economy in 2000 versus 15.6 percent last year. Shocked? I was too.

Construction on balance, over the same time frame has done really well. I had a great response to our question about construction, which I will include in tomorrow’s piece. After the budget speech. Should be fun.

Discovery results yesterday for the six months to end December. We watched the results presentation here in our offices on the television. We did not step away from our desks, we answered the phones and heard the same that those loafing sitting in the presentation hall heard. I really hate to drum on about this point, but why use the old traditional way when you can use the new time efficient one? Like I tweeted, no free lunch was the worst part about not being there. But the magical Mavis made us a marvellous lunchtime sandwich and we were happy. Adrian Gore is nothing short of falling into the same category as Mavis Bande (our office manager, she does EVERYTHING). And that category is excellent.

He handled and went through the presentation with the usual professional approach. OK, so you want to know how the business has evolved over the years, from that humble start to the current form. This is one of the slides from the presentation to show you that it is for the moment all about health and life:

I think what you have to get your head around is the fact that the company is operating in a space that is always close to peoples hearts, health and wealth. It should be closer to your head and not heart. The company really has been at the forefront of innovation and I get the sense that many follow. That is my opinion anyhow. And see how the company has “done” over the last decade, the share price has acted accordingly:

Wow, that is no mean feat. It has always been a stock that we have umm’d and ah’d about, the main reason is that private healthcare, although predictable has been a contentious issue for a long time in this county. We used to own, Netcare but booted them just over seven years ago. That is right, the piece was titled, “Netcare, scalpel please nurse” and we referred to “the venerable Manto Tshabalala Msimang”. Who was then the minister of health. Since then there has been better candidates for the job, but I must say that I was a little disappointed with the same old rhetoric.

This time from the current minister, who I think is tops. Dr Aaron Motsoaledi is quoted as saying something along these lines: “Private Medical care is pricing themselves out of existence”. Source —> NHI to be passed in 2012 says health minister. Now, if that were the case and if the comfortably above inflation increases in the cost of medical insurance was biting the consumer, then the medical insurance companies would be attracting less members and not more. My solution (which would help few businesses) is that as a government employee there should be no benefit of private health insurance. No sir. If you want to improve public medical care then get the public workers to use it. You get my line of thinking here?

Plus, I understand why it is such a contentious issue. Private sector healthcare is world class. Public healthcare is well, not good relatively speaking. I want to know, where does the minister go when he gets sick? Because the principle is one thing, the reality is another. I would suggest that if we are so worried about the costs of private healthcare, then the easy answer is to improve public healthcare. So that the afore mentioned abortions do not take place in back street clinics. End of story, it is so easy for me to say, I can afford the world class healthcare we can talk about. My outdoor domestic executive (a very nice fellow by the name of Senzo) cannot. And neither can his family in rural KZN, near Eshowe, just down the drag from where I lived in Melmoth!! Those are the realities. As such, whilst the sector remains under scrutiny from officials, we will avoid it, obviously at a cost. Great company, not a sector we like sadly.

Byron’s beats. I am sure you wanted to know the difference between all the quoted oil prices, here goes:

Why is there such a big price disparity between Brent and the West Texas Intermediate (WTI)? At current prices WTI is trading around $94 a barrel while Brent is sitting at around $106. Surely oil is oil and global demand should determine the price? Clearly this is not the case.

Brent oil originates from the North Sea and is mostly exported to Europe while WTI oil is delivered in Texas and Southern Oklahoma representing the American demand. If you have a look at the graph below which I got from this Wall Street Pit article



You will see that such a disparity is unprecedented. The influences are coming from both contracts.

The most obvious one is the Middle East/North African uprising which is putting supply pressures on Brent oil. Although not all that significant in terms of global supply, the uprisings in Egypt and Libya have created anxieties over further protests in the likes of Saudi Arabia and Iran, where oil reserves are notably significant. Hence the Brent price has risen.

The WTI has at the same time decreased because of an oversupply from Canadian pipelines into the Midwest as well increases in North Dakota oil production which also sends its oil to the Midwest for refining. This falls on top of oil being sent up from the Gulf. I think it also comes down to more oil being discovered in the Americas. They are starting to realise they have much more reserves than once thought and are less dependent on the Middle East.

So what about arbitrage? If you have another look at the article above you will see they mention financial arbitrage which involves buying WTI futures and selling Brent futures simultaneously. Unfortunately this perfect storm amongst the physical demand and supply has pushed these guys out and trying to keep the prices synchronized has been impossible (losing them loads of money I can imagine). Physical arbitrage would involve sending oil from the Midwest to Europe and selling it there. This would increase the demand of WTI and increase supply of Brent, converging the prices.

Obviously transport and other such costs come into play so the gap has to be big enough to make this economically viable. This has actually happened over the last few days with the WTI-Brent gap narrowing from $20 to just over $10. I don’t think this will be a long term phenomena as financial arbitragers will regain confidence as the physical traders start pushing oil around the world.

What are the implications? WTI is rising rather than Brent decreasing and this is spooking markets globally as high oil prices means high inflation and high input costs. Not good for sustainable growth. I do feel however that markets tend to overreact and this is the case with the oil price. Long term, these revolutions have the potential to create much more stable environments in big oil producing countries. The Americas having more reserves than first thought is also a positive as the biggest economy in the world has enough energy supply to keep their juggernaut rolling.

New York, New York. Volatility spiked as the major indices were given wedgies and ear warmers at the same time. Not the kind of ear warmers designed for the snow but rather the kind designed and perfected at boarding school. For those who didn’t go, ask your mates who did. Session end the Dow closed in the toilet, down 178 points to 12212, the nerds of NASDAQ walked away bloody nosed at 2756, down 77 points, whilst the broader market S&P 500 lost 27 and a half points to 1315.

Granted that US markets had to catch up a day of violence in Libya and other parts of the MENA region, the futures market in the US pre session had seen futures half their losses. Mostly on good earnings would you believe, yes I would, many wouldn’t.

I laughed at a line from one of the US market reports I read, Breifing.com —> “Gaddafi was also defiant in the face of calls for him to step down as dictator.” First things first, you can spell his name almost any way that you want, because the original is written in the Arabic language. And secondly, the very nature of a dictator is to not relinquish power. That is how and why he got there in the first place. I guess the part that spooks people is the openly crazy way in which the guy talks. And the fact that he is not afraid to use military force against his own people. Bearing in mind that as a 27 year old coup engineer, the whole idea was to create a socialist society, all he succeeded in creating was a society with a supreme leader and fearful citizens.

I got another email from perhaps our most well travelled reader, he has actually visited Libya on a business trip and put finger to the keyboard for us to enjoy some insight into the country. His name is Gary Bryant and he works for The Brand Union, a global organisation with a presence here in Jozi. Here are his insights of the country, you will be as surprised as I was:

“Libya has some fantastic potential I must admit!

Thanks Gary for your contributions, and thanks to your employer for sending you to places like this. Perhaps he should start keeping a Gary’s chronicles. Remember that Gary actually wrote the awesome piece on China for us? Remember?

Commodity corner. Copper last traded at 430 US cents per pound. The gold price was last at 1400 Dollars per fine ounce, the platinum price at 1803 Dollars per fine ounce. The oil price (which one to quote) was last at 96.21 Dollars a barrel for light sweet crude WTI, 107.40 for Brent Crude oil.

And to complicate matters even more, the stuff that we “get” from the middle east, is more likely to be closer to this traded contract quoted on the Dubai Mercantile Exchange —> DME Oman Crude (OQD). Which currently trades at 105.11 Dollars per barrel. That is the April contract, so that gives you a GOOD idea that the inflationary pressures should grow as we head into winter. Sniff. The Rand is stronger (would you believe, I would have expected the opposite) at 7.12 to the US Dollar, 11.56 to the Pound Sterling and 9.77 to the Euro.

Where to from here? The most excitement locally will be the budget speech. Paul will be on CNBC Africa from 3 to 4 this afternoon with a review of the speech and then again on the same channel at 7:45 tomorrow morning. Excellent, catch him then.

Sasha and Byron
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Jozi, Jozi. For those of you who don’t or didn’t read Asterix and learn all of your lay(wo)man Latin there, “quo vadis” simply means, where are you going? And the reason why I say that is simple, Qaddafi has seen an unprecedented push back from his military and international affairs, with pilots defecting to Malta and ambassadors resigning. If that does not tell you that the writing is on the wall, then nothing will. Yesterday in Jozi we went completely against the grain, in part we closed before the Europeans had their big leg down. The violence in Libya escalated and markets got crushed. What is very tricky for outsiders (and even trickier for insiders) is that there is little to no news coverage. All we have seen so far are a few grainy YouTube clips.

Obviously the implications of Libya being in a tailspin is that the oil market will become imbalanced. And there will be price spikes. Currently NYMEX WTI (which is still trading on Friday’s close) is up nearly eight percent and at a two year plus high. Session end here in Jozi the all share was driven by resources, that sector up 1.3 percent, the broader market lagging that at 32806, up 292 points after all was said and done. Futures markets over in the US are much lower and markets are expected to open lower across Europe this morning too. So expect a reversal of sorts here at the beginning.

So really, Quo Vadis Qaddafi? Suggestions are that he will go and join Chavez in Venezuela. Ladies and Gentlemen, I think that these are truly historic times where the suppressed people of North Africa and the Middle East are tired of dictatorships and a lack of basic freedoms. I also think that these are the aftershocks of the great pity period of 2008 and 2009. And on that basis nowhere is safe, including Venezuela. If I were any dictator or royal family who still ruled with an iron fist, I would be making plans right now. But lucky none of us are either in the region or faced with such decisions. Although having said that, at Vestact we have clients in both the Emirates and Qatar, far enough away from the violence, but still on their back door.

I made a passing comment to a journalist that the daily oil output of Libya is about the same as the daily oil consumption of Italy, over the Mediterranean. Well, the links are closer than you think, there is actually a pipe that runs from Libya to Italy, the boot of Europe gets one quarter of all their oil and gas from Libya. Take that boot to the kidneys, the equities market in that part of the world sank three percent, ENI which has a production capability of over 225 thousand barrels a day in Libya, got smashed even some more, down five percent.

Libya has a stock market, it turns four years old next month. It seems like they only trade from ten in the morning to midday. I see, good for you guys. In the coming days I suspect that the protestors have renewed energy and will send the 68 year old (yes, I thought he was older too) packing. Ironically when he overthrew the king back in the summer of ’69 (really) his intentions were good. Goodbye, not without a fight I suspect.

Out biggest and one of the most important stocks in client portfolios, BHP Billiton, announced an acquisition last evening/middle of the night. Here it is —> BHP Billiton Announces Acquisition Of Chesapeake Energy Corporation’s Fayetteville USA, Shale Assets.

Awesome. Byron has been into shale gas lately. And no, he does not have a small holding in the Karoo, just before you ask. The reasons: “The acquisition is consistent with BHP Billiton’s strategy of investing in large, long-life, low cost assets with significant volume growth from future development. It also supports our goal of diversification by geography, customer and product. BHP Billiton will become the operator of Chesapeake’s operated interests in the field.” Gas. Everyone is getting excited about gas, including GE. Just to give you an idea of size and scale, the price 4.75 billion USD is 34 billion Rand. That is around the size of Tiger Brands. Phew.

At the same time BHP Billiton fleshed out their buyback program. And this is good for South African shareholders. There are two programs, one, the on market buy back and two the off market buy back. The background is that qualifying Aussie shareholders give up around ten percent because this is a more tax efficient way of doing it.

Read through it: “BHP Billiton Limited will repurchase shares under the Off-Market Buy-Back at a discount of at least 10 per cent to the volume weighted average price of BHP Billiton Limited shares over the five trading days up to and including the closing date of the Off-Market Buy-Back (“Market Price”). Eligible shareholders of BHP Billiton Limited may tender some or all of their shares at discounts of between 10 per cent and 14 per cent inclusive (at 1 per cent intervals) to the Market Price or as a final price tender (which is simply an election to receive the final buy-back price).”

We won’t and can’t participate in these buybacks, as they take place in London and Sydney, so all this is academic. And earnings enhancing. I guess that is all that you need to know. I can appreciate that whilst South African investors would prefer a bigger dividend check, the truth is that dividends are taxed and in some cases heavily, in the other geographies that BHP Billiton are listed.

PPC released an investor presentation this morning —> Investor update – 22 February 2011 A fascinating slide tells you about all you need to know.

Oh dear. And remember when we were brave and younger and the world was wilder, PPC was in the same camp as us, check out this long term demand chart from back in 2007.

So what now? I think that we are at the bottom of the cycle. In fact, in the presentation, PPC suggest that. Or at least that is the way that I read it: “Demand looks like 2005 but the market feels like 2000″ And then they go on to regurgitate some excerpts from the 2000 annual report to highlight the similarities:

“3 years of decline in sales and uncertain about a fourth. Reduced interest rates not having desired affect on residential building. Residential building plans in a trough. GFCF (Gross fixed capital formation) below 20% of GDP again. Government fixed investment slowing.” Yip. We know. Still, cast your eye back to that graph, the cycle seems to be bottoming, it has that “feel”. Anyone in the industry, feel free to comment on whether it is feeling worse, better or if it has flattened out.

Byron’s beats. Sacoil (Who??) and the PIC is where the beats sit today. Byron and I won’t be friends on Friday. He is a Chiefs supporter, a Kaizer one. Me, I am on the other side of the field. And guess what, WE HAVE OUR TICKETS. Soweto derby here we come…..But that is Saturday, this is Tuesday, here are the beats:

The Public Investment Corporation (PIC) is back in the acquisition news, buying a 7.5% stake in oil and gas exploration company, Sacoil holdings. Sacoil was the best performing stock on the JSE last year rising over 700% which obviously drew a lot of attention. One of the main reasons for the huge surge in the share price was a presidential decree granted by the DRC for block 3 on Lake Albert.

Lake Albert is situated on the western arm of the Rift Valley and sits on the border between Uganda and the DRC. It has been subject to large exploration drilling in the last two years, many of these being successful. In fact 12 wells have already been drilled within block 2 and block 3 and all have been successful in encountering hydrocarbons. According to the experts this is a fantastic success rate and bodes well for the potential of the basin as a long term petroleum source.

The granting of these rights has been controversial after British energy firm Tullow was stripped of their rights to block 1 and 2 and given to energy firms Caprikat and Foxwhelp. Both of these companies are registered in the British Virgin Islands and have ties to the Zuma family. I’m not one to immediately jump to conclusions with regards to names and reputations but the fact that Tullow Oil was stripped of their rights after apparently paying a $500 000 signing fee does not sit well with the stability and authenticity of these rights. Tullow still have valid interests on the Ugandan side of the lake and have been involved in numerous court battles concerning their rights in the DRC with little success.

Hence this acquisition has been described as speculative. There has however been no news of Sacoil’s claim to block 3 being under dispute and Tullow have not mentioned them in any of their claims. The company has a market cap of R1.2bn and made a loss of R2.21 for the last 6 months up to August 2010. It seems like all hopes are riding on these block 3 rights. I think for Sacoil having the PIC as a minority shareholder may help when it comes to political connections. That’s a low blow but I can’t help but smell something fishy with all of this and I definitely wouldn’t be risking my hard earned money with this company.

New York, New York. Shut for Presidents day I am sorry to say. All the focus was on Libya. And a surging oil price. And strange pictures of a Johnny Depp wannabe Qaddafi standing with an umbrella addressing a standalone camera. Letting everyone know that hey, he is still in control, and not in Venezuela. Yeah right, half the air force is in Malta. Well, two Mirages anyhow, could be half, who knows. But that is another story for another day in MENA. That is another cute acronym for Middle East North Africa. Who is next? Iran?

Commodity corner. Dr. Copper was last at 438 US cents per pound. Risk off chaps, unless you are long oil, 97.79 on WTI crude, as quoted on NYMEX. It is flying. As is gold, because the “fundamentals” are in their favour, last at 1396 Dollars per fine ounce. There is going to be less in “issue” as Qaddafi takes the Libyan gold reserves with him to Venezuela. The platinum price last at 1821 Dollars per fine ounce. The Rand is taking a knock, sell it all, emerging markets. South Africa, that is somewhere near Libya, right? The Rand is weaker at 7.20 to the US dollar, 11.65 to the Pound Sterling and 9.78 to the Euro.

Where to from here? Slam dunked. Sorry. Some crazy guy in Libya messed it all up. There you go market writers, there is your reason, you can now take a deep breath.

Sasha Naryshkine and Byron Lotter
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Jozi, Jozi. We were higher but ultimately closed lower as tensions in North Africa and the Middle East were seemingly escalating. I am in the camp that thinks longer term this is a great outcome. Let us be honest, the dictators and their cronies are pushing back, some rather violently, that is the main opposition to the “people power” that we have seen. There have been a few stories on the wires that suggested that in China there had been “pro democracy” protests that had been dealt with, as only the Chinese can. I guess that is the biggest fear of Beijing central, because if you are talking about people power, it can’t get any bigger than that. To wrap up this segment, Friday the Jozi all share index closed at 32514, down 209 points or around two thirds of a percent.

I listened into the Anglo American conference call on Friday from the comfort of my desk, I didn’t have to run to wherever for free sausage rolls (filled with soya for me) and then knock off early. I can’t quite understand why people have to go along, but do accept that without them (the attendees) there would be no cameras. But, for someone like me, this is a clean way for analysing the results. Check out these resources and tell me if I am wrong or right —> Investor presentation – PRELIMINARY RESULTS – YEAR ENDED 31 DECEMBER 2010. And the Video interview (transcript) with Chief Executive Cynthia Carroll, and Finance Director Rene Medori.

So, what is there, other than sausage rolls, free Coca-Cola and to hobnob? To “feel” out management? Speak to your industry contacts. Many of whom still have a jaded view of Cynthia Carroll, I am not sure if it is because she is a woman in what is perceived to be a man’s world. I must be honest, I sit in the camp that thinks that she has done “good things” lately.

Here is a more detailed look at the results, first some really *nice* slides. Nice is such a horrible word, but it works for the purposes of what I am trying to achieve. First, the question that everyone always asks, how important is South Africa to Anglo American? Here is the answer, very important:

They are still a “South African” company, despite trying to de-South Africanize over the years.

Anglo did well across all divisions other than thermal coal, I have a mate who moves at the end of the week to go and work for Anglo Coal in Queensland. Taking his gum boots no doubt. And luckily he will be based in Brisbane. So he has a new team, the Reds, who squeaked in by a point on Sunday, the least watched game of the weekend. Perhaps, I don’t know.

And then this table, completely out of their hands. This makes it a whole lot easier for the mining analysts for their pricing models. Check it out, sensitivities to commodity price moves and currency moves:

You will be surprised to see that the coal assets in Australia are the BIGGEST SWING, in both the local currency to the US Dollar (what all commodities are priced in) and the thermal coal prices. But of course iron ore and platinum prices are just as important. Interesting and informative, if nothing else.

And then perhaps more illuminating and equally unpredictable, the consumption side and why commodity prices are up so much over the last decade. The demand picture. Anglo have a great chart of steel consumption per capita relative to where we are in the cycle of urbanisation. This is very interesting:

The interesting parts are that South Korea, more recently urbanised and industrialised has seen steel consumption per capita go through the roof. Remember that South Korea is a huge manufacturing hub too, something that the Chinese are too. And in time the Chinese could be manufacturers of innovative goods, rather than cheap copy cats. Dr. Martin Davies of Frontier Advisory was on Paul’s show last week, and he kind of echoed this sentiment. A senior Chinese government official once said to him tongue in cheek “we are not very clever, but we learn really fast”.

On a pricing level all the diversified miners look cheap, really cheap. We still prefer BHP Billiton, it can be argued that their collective assets are better distributed geographically and are much meatier. But these results are encouraging and put the company on a forward basis (as per the analyst predictions) at less than 9 times earnings.

Qaddafi and his son are dealing with perhaps the most volatile of all the Arab world uprisings, the Arab revolution perhaps you could call it, because the protests are from Tunisia to Bahrain and Yemen. Algeria, Egypt the most high profile and now Libya, where Qaddafi has been divine leader for over four decades. I can’t find too much nice to say about the guy, I must be honest. They (Libya) have the continents biggest oil reserves, but produce only 1.7 million barrels per day. Think around two percent of total oil consumption. So, ironically, this is how it impacts us. Hundreds of thousands of stupid dinosaurs decided to die here hundreds of millions of years ago.

As the Daily Maverick put it (you must subscribe to their daily newsletter): “The son of Libya’s Brother Leader, Seif al-Islam Gaddafi, gave a speech even more stupid than that one by Hosni Mubarak, saying protesters could either back down or face an army that would fight to the last bullet in full-blown civil war.” Agreed. I am sure Marie Antoinette said something similar once upon a time and we all know what happened to her. Out of touch and definitely remaining out of reach. Bob to our north, sorry, the honourable president Robert Gabriel Mugabe has managed to hang in there with his own tactics, Qaddafi is in a league of his own. I would be quaking in my boots if I was either a once-upon-a-time elected official or Royal Family who DID NOT have a plan to reform.

Dinosaurs were truly stupid (very small brains) to set up shop in what would turn out to be volatile areas. Iraq, Iran, Venezuela, Russia (then I guess I better mention Saudi), Libya, Nigeria (let’s not sugar coat here) and Algeria are all big oil producers. Bahrain is not on that list. Bahrain is an island kingdom which has a population of around the same size as Mauritius, around 1.25 million people. But the difference is that Bahrain is a kingdom. The theme that runs through all these protests (that are met with bullets) are that people are protesting against the regimes. There is very little violence other than the ones dished out at the protestors. I am all for these protests and even though we could see political instability, these are revolts against oppression. Perhaps Qaddafi could assume the throne and a parliamentary democracy could rule. All hail King Qaddafi.

Byron’s beats. He is chatting about Famous Brands who are on a tear, from an acquisitions point of view, this time Juicy Lucy and Milky Lane.

This morning Famous Brands announced the acquisition of well known outlets Milky Lane and Juicy Lucy from Java Brands for a price of R30.95 million.

Short term debt and existing cash reserves will be used to fund the acquisition. The company’s market cap sits around R4bn so a R31 million acquisition is not hugely significant but it reiterates the company’s business model of acquiring well known and established chains who have perhaps fallen to the way side in recent years and reviving their brand.

They also have a great supply chain already in place which will be able to support these franchises adequately.

CEO Kevin Hedderwick had this to say about the acquisition. “The acquisition of these iconic South African brands serves to further round off our franchised food service leisure portfolio. The compelling purchase consideration and synergies afforded by the integration of Milky Lane and Juicy Lucy into the Group`s business model make this transaction an exciting, low-risk one, which will deliver returns for shareholders from the outset.” So some positive outlook from the CEO, that is to be expected, he would have organised the deal. So let’s take a closer look at these two brands because after all, the reputation of the brand is what’s going to make it successful and create franchisee interest.

Milky Lane is over 50 years old and is South Africa’s original quick serve, ice cream and desert retailer with just under 100 outlets. Soft serve is the fastest growing ice cream category in the world at the moment and Famous Brand management reckon the brand is perfectly geared to benefit from South Africa’s emerging market with loads of potential to open up new stores in areas of growing wealth.

Management were also seeking a dessert solution for their other brands so don’t be surprised if you see Milky Lane brands being integrated into some of the other franchises. In terms of supply, Famous Brands have the Baltimore Ice cream plant with enough spare capacity to absorb the Milky Lane business. Sounds like a good fit.

Juicy Lucy has also been around for an age, over 40 years and has 18 franchises. Although it is a competitive industry, I really like the convenient health food sector as more people become health conscious yet time constraints forced by busy working lives hamper the cooking at home option. The brand definitely needs a revamp and more stores need to be opened but that is Famous Brands speciality. Expect to see a lot more of both these brands for here on.

Mondi. You don’t need too much to excite me. Even so, this company however is in a sector that I can’t seem to find myself too drawn to. Packaging and paper production. Perhaps because I print very little and shopping with packaged stuff, well that is something that we all just do. There is nothing too innovative about their products, and I mean that in the nicest possible way. They are not going to stumble across the most innovative technological advancements that is going to change the world. Perhaps in their field of expertise they will.

Having said all of that, the numbers from the company’s results at face value this morning look sparkling. The company reports in Euro’s. Admittedly the outlook has improved significantly. But they are worried about rising costs, hey, who isn’t? They do not quite meet our metrics, profit margins are a little too low for our liking. Debt is increasing less of a problem and they are servicing that. But I don’t know, starting point is, does one like the industry, is it transformative? Packaging, newsprint? I buy the first part, not the second.

New York, New York. Blue chips rocked whilst the other two majors just managed to squeak into the green by the time the bell rang for closing time in New York trade Friday afternoon. Because the Dow Jones is a price weighted index (the bigger the share prices, the more impact and vice versa) when a stock like Caterpillar moves two and a half percent, it has an impact. And Chevron was up 1.6 percent. Travellers was also up a lot, nearly two percent. All these stocks have “big prices”, the biggest of them all is IBM, up at 164 bucks a share. Berkshire Hathaway could never be a Dow component, and they (King Warren) would never agree to a stock split. You want a share, you pay 127 thousand Dollars. You can buy the B’s, which are a different class of the same company, but as far as I understand it, have no voting rights. There are only 1.65 million Berkshire A’s in issue. Best two performing “Dow stocks” this year, General Electric and Walt Disney. GE remains top of our buy list.

Caterpillar, let us see what was up there, because that is one of our favourite stocks in New York. We like the longer term theme of mining and infrastructure development and know that companies like Caterpillar and General Electric will benefit. Developed world infrastructure needs an upgrade and the developing world does not have an infrastructure. Caterpillar said that their January sales had jumped 49 percent across their dealer network, when compared to last January. And that was also against the backdrop of specialist machinery maker, Bucyrus, who is soon to be part of Caterpillar, reporting strong numbers. And with an order book that has swelled significantly.

Commodity corner. Dr. Copper last clocked 445 US cents per pound. The platinum price is higher at 1846 Dollars per fine ounce. The gold price is also higher at 1397 Dollars per fine ounce. The oil price has spiked, last trading at 92.19 Dollars per barrel. That is WTI, quoted on NYMEX. The Rand has firmed, last at 7.14 to the US Dollar, 11.58 to the Pound and 9.76 to the Euro.

Where to from here? It is Presidents day in the USA. Which means that there are markets are offline. Which means globally not much will happen on the markets front.

Sasha and Byron
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Jozi, Jozi. Meh. A pretty nothing day after all was said and done, the Jozi all share index gave back 55 points to close up shop at 32722. I heard one genius in the lunchtime show suggest that the JSE was down on profit taking. That is code for either “I don’t genuinely know”, or more likely “it was the first thing that came into my mind”. I remember in the dealing room that I worked in prior that the simple line in a sarcastic tone: “more sellers than buyers”. I said to a journalist writing the market report the other day that I felt sorry for him having to find a reason every day for why the market is up or down or flat, it must be a whole lot harder than you think. Without being wildly sarcastic like I can afford to be.

When faced with this dilemma I normally browse immediately to the resources entry on the scoreboard. And hey, presto, down over 0.6 percent on the day. And there is always a reason why the resource stocks are down, they all have a underlying commodity to trade against. Even those without visibly quoted spot prices, like copper, gold, oil, platinum and gas, still have spot markets a few layers beneath the real action. I am talking about coal and iron ore. Here is all the coal news you ever wanted —> Coalspot.com and here is all the iron ore news that you ever needed —> Metal Bulletin – iron ore index. These two are just amongst many more resources on the web that were not there 15 years ago.

Remember the world before the advent of the internet and mobile phones? Laptops and desktops? Before you knew about Oracle, Microsoft, Apple, Cisco, Dell and HP. Nokia 21 years ago used to chop down trees as their main business. The Berlin Wall. Tiananmen Square. That was twenty years ago. And what will the world look like in twenty years time? Who knows, but part of our job is to look for the investable themes, the ones that are going to transform. So, think, the opposite of typewriters. Less paper, at least it was supposed to be. Book stores, that sell the physical stuff are tiring and going bust. As are music sales, the guys who sell the physical stuff. Video stores (you don’t call them DVD stores) are falling out of fashion.

As Katlego Mphela struggles with his clubs (and by extension owner Patrice Motsepe’s) decision to turn down offer after offer, the super striker would do well to remember that strike in the Confed Cup against Spain. Remember that cracker? Anyhow, poor Katelgo, but not so bad Patrice Motsepe and African Rainbow Minerals, who released a trading update yesterday after the market closed. Or just plain old ARM, you can call them that too.

Tell me if I am wrong, but you could just about substitute ARM with any other major producer, when they tee you up in the trading update: “ARM’s interim results … have been positively impacted by a significant improvement in commodity markets and US Dollar prices for commodities. ARM’s results have further benefited from continuing growth as the Company’s key growth projects ramp up production. The results for the period were however negatively impacted by the strengthening of the Rand versus the US Dollar.” Yip, heard that.

And then the actual numbers, or what they are expected to be: “ARM announces that it expects headline earnings per share to increase for the six months ended 31 December 2010 to between 710 and 750 cents per share”.

Whoa. Annualise that (they might well do a whole lot better) and boom, you are sitting with another commodity producer that grew into their current price (230 odd ZAR) so quickly. They grow up so fast you know? The analyst community expect that the full year numbers to June will be half of those in 2013. Yowsers. Can that be right, 40 ZAR worth of earnings to June 2013? If that is the case, why worry about what the stock trades less than three years out? The big problem is that the commodity trade is notoriously volatile and fickle.

And then possibly the oldest and best recognized South African company, Anglo American reported their full year numbers to December this morning. We have of course seen all the moving parts, Kumba Iron Ore, De Beers and then the “big one” (although that is not fair to Kumba) Anglo Platinum. So, we have had a few entrees and this is time for the main course. Without further ado, here goes: Group revenue 32.929 billion Dollars, underlying earnings at 5 billion USD. That translates to underlying earnings per share of 4.13 USD per share, 93 percent higher. So, in ZAR at the current rate (which is close to the average rate achieved for the year) is about 29 and a half Rand per share.

So, the stock at current levels trades on 13 times historic earnings. We are running out of time here, so are going to have to look at these results closer on Monday, when I have the presentation at my disposal. Currently listening into the webcast. I can sit at my desk and not waste time going along to the presentation. Although I would miss out on cupcakes, light snacks and hobnobbing. Rather be here with my colleagues.

I was pleased to see that the experienced Brian Molefe was appointed as head of Transnet. First job, as when he was in Treasury, raise some money at good rates. Because the minister of transport Sbu Ndebele is talking big about a rail system and a transport infrastructure development of around 450 billion ZAR which is A BIG NUMBER. I must say after some recent narfy appointments this looks like the most serious sign that parastatal development and expansion is serious business. And job creation.

We were really putting the rising costs at Impala Platinum under the spotlight here. Electricity and labour costs have been rising steadily. In fact you could say alarmingly so, not steadily. Costs per ounce mined since 2003 have risen three and a half fold. Previously when an ounce mined cost around three and a half thousand ounces, we now sit with a situation where we sit with costs per ounce of above ten thousand Rand an ounce. In eight years!! This was always the worry. The only big plus is that according to them, Impala that is, is that they have some of the cheapest platinum mines grouping out of all of their peer group. Remember this graph from yesterday?

We currently have the stock “on watch”. And will revert shortly to everybody. Costs are a worry and the Zimbabwe finalisation on ownership is also a worry for shareholders here. It is not apparent what the final outcome will be, but I am not hearing “good things”. This requires more investigation and is ongoing here.

Byron’s beats. This is very important. It is all about the State of the Nation and action on jobs. We need that kind of action. Byron takes a look at what could possibly happen on this score.

Jobs, jobs, jobs. That’s what it was all about when it came to Zuma’s state of the nation last week. South Africa has the 29th highest unemployment rate in the world with 25.3% of our nation looking for jobs. The countries worse than us are mostly tarnished by political turmoil and dictatorship. This includes Zimbabwe at number one with 95% (great job Bob), Liberia and Afghanistan.

We have been a full democracy since 1994 now and it’s time to stop blaming our flawed history for such disparities in our demographics. Government realises this and have called a business summit to be held on the 10th of March whereby government will get a chance to chat to business leaders around the country.

Zuma has committed R9bn to meet government’s ambitious goal of creating 5 million jobs by 2020. The IDC has also committed R10bn in infrastructural spending with huge job growth potential. It is encouraging that government is looking towards the private sector for answers. It is crucial that both small and large businesses grow and create sustainable jobs. That’s a given.

I think this meeting will bring in various benefits as business and government need to start cooperating in order to fight this huge problem. I think business needs to play a more important and directly involved role.

Yes they naturally go about their profit driven ways and create jobs but I think business needs to realise that we have an unusual situation here. If more jobs are not created government are going to have to do something drastic and probably anti-business.

This meeting will also allow business to discuss certain draft labour bills which could hamper job creation and make hiring more difficult. You see we need cooperation and business to explain to government the possible negative effects of such legislation. So if business say, committed to using more labour intensive methods, government could make hiring and firing easier. Compromise is needed.

Zuma has also arranged a meeting with organised labour on the 31st of March.

I can imagine he gets constant ear wrappings from both sides of the spectrum and has to keep the left and the right happy. It’s a tough job. Both summits will look at the behind the scenes negotiations which Ebrahim Patel has been conducting with both business and labour concerning our new growth path.

I’m all for meetings and talk but only if action takes place in the best interests of job creation.

New York, New York. Stocks rallied in the face of a higher inflation read and a higher than anticipated jobless claims read, but not so much. But having said all that, perhaps it was a relief of sorts that inflation does not look like getting out of control anytime soon. As James Paulson, the Wells Capital CIO said yesterday in an interaction with US CNBC chief economist Steve Liesman, “isn’t it great that we are talking about inflation!!” What he means is simple. The fact that we are no longer getting anxious about the recovery means that it is happening and now we can deal with real issues at hand, like inflation.

There has been a lot of anxiety in the face of increasing commodity prices and food prices, but I must be honest, I think that the central bankers will act as they see fit. That will happen, but they (the central bankers) are walking across a ledge. If so, then I have faith that the central bankers will find their way back into the window. For the record, here are the inflation anxieties: “The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in January on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.6 percent before seasonal adjustment.”

And then the increases were as a direct result of “Increases in indexes for energy commodities and for food accounted for over two thirds of the all items increase.” So, these are variable and volatile, but more importantly, have ticked higher in the short term. Let me just say this: I am not anxious. Session end the Dow Jones Industrial closed 29 points higher to 12318, the broader market S&P 500 closed better by 4 to 1340 and the nerds of NASDAQ added 6 to 2831.

Silk road, riced and diced. So much for all that bad inflation stuff happening in China, at the beginning of the week the CPI read came in lower than expected. Yes, lower. The basket was tweaked a little I must be honest. I read the Economist *blushes* and this piece was really interesting —> Inflation revisionism. The housing portion is running away. That is why there are a whole lot of new rules on housing, and that is why the banks are being told to tighten their lending criteria.

I turned around and said to my colleagues when everyone always mentions a housing bubble in China on the telly, well, I didn’t see the Fed, or the Bank of England or the ECB getting worried and actually DOING SOMETHING about an asset class overheating in the developed world. Did you? Perhaps rates were rising in those geographies, but clearly not quick enough. All I can say is one thing, the Chinese authorities are on the case and have a harder time balancing free market aspirations of many more people now, than with the socialist realities of those in rural areas. That is all.

Commodity corner. Dr. Copper last traded at 444 US cents per pound. The gold price is higher as inflationary concerns and the protests in the Middle East and North Africa which have gone viral. 1386 Dollars per fine ounce is where the gold price last traded, the platinum price is lower at 1831 Dollars per fine ounce. This is my measure of risk on or off, the widening price between the two precious metals means risk is on, the prices coming closer together means risk is off. The WTI NYMEX oil price last traded at 88.89 Dollars per barrel. The oil that we buy, is quoted on the Dubai Merc, traded last at 99.48 Dollars per barrel. The Rand has been pretty strong I must admit, 7.20 to the US Dollar, 11.68 to the Pound Sterling, 9.78 to the Euro.

Where to from here? Markets are a little worried about Portuguese debt issues. Here it starts again. What I make of it: Buying opportunity. Even though we are half way through football season the Rugby starts today and the Cricket tomorrow. Should be awesome!!!!!

Sasha and Byron
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Jozi, Jozi. We slipped off our best levels which were almost exactly at 11am in the session. Someone rang a bell as the poms central bank, Mervyn King, to be exact implied that inflation was a problem for now. But was NOT going to be a problem soon, because inflation would get back into the target range by 2012, so all you England nay-sayers (wait that is me) that is that, more on this later. Locally the BHP Billiton share price came under pressure, the “sell the news” effect, and in part it was exacerbated by a much firmer local currency to the Pound. Because the poms were under pressure. I must be honest, economically, out of all of the places around the world, le rosbifs look most insipid right next to the Japanese.

BHP Billiton sent the broader resources market lower by 1.9 percent and we were always going to struggle after that, the Jozi all share index closed up shop at 32778, down 282 points or 0.85 percent. There were clusters of green, financials and banks were two of the major indices that closed in the green, but not by a whole lot.

Impala Platinum released results this morning for the half year to December. Phew, this has been a bumpy ride over the last three years. I remember 360 Rand plus for the share price, when the lights went out at the beginning of 2008 and the platinum price roared to above 2000 Dollars per fine ounce. I remember the depths of despair a year and a bit later when nobody was ever going to buy a car ever again and we saw platinum and gold price parity. The stock traded down to around 84 Rand a share. And then the long haul back over the last two years to around 215 ZAR a share now. That, friends and sports lovers is a WILD ride.

The highlights from the presentation —> Consolidated interim results (reviewed) for the six months ended 31 December 2010. “Gross platinum production up 6% to 952 000 ounces. Revenue 38% higher, mainly due to increased volumes and stronger dollar metal prices. Unit cost per platinum ounce rose by 4%. Healthy gross margin, 33%.”.

Divisionally, Impala Rustenburg had a *nice* turnaround and Zimplats is power. It really is, as is Mimosa. Marula is not, and feels like an Amarula after party headache. Impala Rustenburg is still the crown jewels, but one has the feeling that in time, Zimplats will start becoming a whole lot more important. The margins are better, because the costs are much lower. But there are issues with regards to ownership that they are ironing out with the Zimbabwean government. I suspect once sorted that there could be a little more juice in it.

This is interesting. From a cost point of view all the way through to 2015, Impala Platinum are suggesting from an investor presentation given in November 2010 that their mines as a whole will be the lowest cost mines around. I am pretty sure that the rest of the industry will have their own views on this. I have asked the investor relations person at Implats for a higher res picture and more importantly where the data is from:

From the same investor presentation given back at the end of November last year, check out what I mean about Zimplats and the future of Impala, and how it all stacks up.

Here is all you need to know about the numbers specifically: “Basic headline earnings improved by 63% to 345 cents per share from 212 cents. A key feature in earnings growth was the increase in revenue which was up by 38% to R15.3 billion as a result of higher sales volumes (R1.4 billion) and metal prices (R4.0 billion). The average rand/dollar exchange rate achieved during the period under review strengthened from R7.70 to R7.16 which resulted in lower revenue of R1.2 billion. The closing rate of R6.62 compared to R7.39 at the end of the comparable period resulted in additional foreign exchange transactional losses of R375 million. The combined effect of the stronger rand is equivalent to 185 cents per share after tax.”

I guess in the plus columns for Implats and this is a big plus, higher metal prices have remained, but the Rand has weakened around 8 percent so far this year. And motor vehicle sales across the globe have remained much stronger. The outlook is rosy. Check it out:

“The growing influence of the emerging market economies and the injection of further liquidity in the US augurs well for a sustained recovery in world markets. These coupled with the containment of Europe’s debt problems and challenging supply prospects will result in tight market conditions for both platinum and palladium. In line with this the rhodium market is expected to move back to balance.”

We are pleased with these results. We continue to accumulate them and anticipate higher production coupled with higher metal prices and should see much higher earnings in years to come. And of course the supply demand fundamentals are tight. Real tight. Expect everything from leaf blowers to locomotive engines to be forced to fit in with higher emissions controls standards. That is good for Impala Platinum and the other producers.

One of our other recommended stocks, City Lodge (two in one day) reported interim numbers yesterday afternoon late. They were pretty much telegraphed to the market. First things first, the group now operates 52 hotels with 6440 rooms across the country. The first hotel was opened back in 1985 opposite the Sandton Clinic, you know, behind the Chicken Licken and opposite the new developments diagonally across from the Sandton Clinic. Those familiar with the area should know where I am talking about. The first manager of that hotel, Clifford Ross, now runs the group, having taken over the reins from founder Hans Enderle. Enderle still owns 10.5 percent of the company. As per the City Lodge website, the company is in the top 250 hotel chains in the world.

The stock price is down over 15 percent from their recent highs, the trading update was not favourable at all. OK, so here goes, lets jump straight into a period that in their words a “slowdown that reflects the overall lack of economic activity in South Africa, a lack of confidence emanating from our core business travel market and an oversupply of hotel rooms in certain parts of the country.” You heard that a while back I guess.

Including new hotels, occupancy levels have fallen to 59 percent, excluding that number is 65 percent. You must remember that City Lodge like many hospitality and hotel groups ramped up for the World Cup and those plans were in place long before the global economic downturn. So the two events coinciding with each other was not the best outcome.

Sales for the period, 405 million Rand, were twenty percent higher than in the previous comparable period, profits for the period were 28 percent lower at 54 million Rand. Operating costs have ramped up sharply, up 42 percent. There are some pointed comments about costs specifically:

“Considering that the operating costs now reflect a R24,6 million rental charge in respect of six of the new hotels, overheads were very well controlled. This is evident in the fact that although operating costs increased by 42% overall, they increased by only 25% excluding the rental, which is well in line with the 26% increase in rooms available. Municipal charges continued to show large increases with electricity in particular increasing by 41% on a per room sold basis.”

Normalised earnings per share was 204 cents per share, 124 cents worth of dividends, both of which are comfortably lower than this time last year. Margins were flat. That is actually good news. The start of the year has not been great: “Trading conditions in January and the first half of February remain soft and are unpredictable for the remainder of the financial year. Whilst we will continue to manage costs and overheads as tightly as in the past, management will remain focused on providing our guests with a superior product, warm hospitality and efficient service.”.

So, what to do? I guess first is to recognise that we got the timing wrong on this one. It would have been better if we were only looking now. I suspect that patience holding the stock will turn out to be the best thing to have done. Quality of company remains, share price is another matter and reflective of the operating environment.

Byron’s beats. Woolworths is where his focus lies today, he has a look at the numbers and the outlook.

Woolworths or ‘Woolies’ came out with some decent half year numbers this morning reporting a 9.8% increase in turnover and profits before tax growth of 22.1%. Adjusted headline earnings per share were up 25.8% to 100.8 cents. Annualise that and you get just over R2 a share. So with a share price of R25 the stock does not look so expensive anymore. If you remember correctly, WHL was one of the best performing shares since the crisis. The stock traded at R10 in October 2008 and reached R28,80 on the 5th of November 2010.

So the market was right yet again as earnings have grown nicely with the share price. Food sales were up 11.8% while gross profit margins improved from 23.1% to 24.2%, clearly a very profitable business. Clothing sales also increased nicely as South African consumers open their wallets more and more, sales up 11.5%. General merchandise grew by 8.1%, hampered by the unprofitable cellphone handset business. I suppose that is an extremely competitive business and when you think Woolworths you don’t think cellphone retailer.

So where to from here? According to management the outlook of the second half will be similar to that of the first, judging on what’s happened so far this year. The share price however is off over 10% from its highs in November. I think this has a lot to do with foreign investors seeing some inflationary risks in developing markets and pulling their money out. Yet we are sitting well within our inflationary target band. There were also talks that retail in SA was possibly overcooked and people were shifting their money out and into other sectors.

This is trader talk to me however and at current valuations I like the stock, I like the brand and I think as more and more people in South Africa can afford it, a shift to a healthy and environmentally friendly lifestyle will ensue. This is where the strengths of the Woolworths brand lie.

Ye olde worlde The bank of England’s inflation report was released yesterday. I think that making such precise predictions like this is hard. But of course necessary as that is the job of economists and central bankers and comes with the territory. If you really want to sink your teeth into the guts of the report (sounds like haggis eating) then have a go here —> Inflation Report.

The opening line of the report reminds you of the dual mandate that the bank has: “In order to maintain price stability, the Government has set the Bank’s Monetary Policy Committee (MPC) a target for the annual inflation rate of the Consumer Prices Index of 2%. Subject to that, the MPC is also required to support the Government’s objective of maintaining high and stable growth and employment.” Because the first function of the bank is not being met, they need to then fall to the second function. Which is looking tricky too.

Schwerving Mervyn is setting us up for the worst: “CPI inflation is likely to pick up to between 4% and 5% in the near term and to remain well above the 2% target over the next year or so, reflecting in part the recent increase in VAT. The near-term profile is markedly higher than in November, largely reflecting further rises in commodity and import prices since then.”

But, but, but……. “Further ahead, inflation is likely to fall back, as those effects diminish and downward pressure from spare capacity persists. But both the timing and extent of that decline in inflation are uncertain.”

So don’t stress is all that I am saying, the result of central bank intervention in a stagnant economy is starting to bite, this is the first example. That could change, but as you can see, UK companies are struggling: “The outlook for growth remains highly uncertain. Private domestic demand could grow rapidly, for example if some businesses choose to use some of their cash balances to increase investment.” The question is, why are companies not spending. What can they see ahead? Very little. Has the government been or perceived to have been helpful to business. No is the short answer. Are the poms more adaptable and nimble as politicians as the Americans? Perhaps not.

Three charts to help you mill your way through all of this, firstly, GDP projections over the next three years, the darker the green, the more likely the scenario:

The next chart is the CPI projection from the Bank of England. Sure, in the short term inflation will become a problem, but then the real problem of deflation is on the horizon as much as three years out. Remember that the more red, the more likely the scenario:

And then this next graph is quite interesting, it speaks for itself, check how low the yields in the developed markets are:

And then lastly, even though economic performance has been poor relative to their peers, the stock market has beaten all and sundry. See how the Japanese have lagged, and lagged badly. This is as a direct result of a strong commodity bias in the UK stock exchange, where of course absolutely no revenue is generated in mining activities from the majors.

I think that the conclusion is as follows. Inflation is a real problem in the short term. In the long term who knows, but moderation is expected soon. Are central banks paying attention? Yes. Should we get anxious? Perhaps yes, but there is nothing you can do about it. Unlike with some historical examples like Hungary post the Second World War, The German Weimar Republic post the treaty of Versailles, Argentina from the mid 70′s through to the early 90′s. In Eastern Europe post the fall of communism (yes, it didn’t work). In the Soveit Union post the revolution. A lot of these events can be associated with violence and shocks.

All I can say is that I do not think that we are at the same point. And this is a topic that will die down as the problem resolves itself. End of story.

New York, New York. Turnaround bright eyes. I mean old blue eyes. I have now gone and mashed the whole thing up. Frank Sinatra cross that Bonnie Tyler cheesy 80′s songs. OK, they were not that bad at the time. Stocks initially started well, then settled lower and went to the lowest point in the session at midday, but rallied all the way through to the close by then. There were ever improving housing numbers, this time in the form of housing starts, which nearly topped 600 thousand. It sounds like a lot, but this is still well below the long term averages. In fact this is the worst market for American housing since 1959. There you go. 2010 was slightly better than 2009, and so far, 2011 is about the same as 2010. We are of course only one month in.

Dell rocked, up nearly 12 percent. Wow. Over ten years Dell is down 33 percent. Double wow. We used to own them a loooooonnnnng time ago in the NY portfolio’s but dumped them as it became apparent that the hardware market was becoming a whole lot more fragmented. We liked them for their direct sales model. Sold in late ’05. A long time ago. Hardware, I don’t know, unless you are niche, jeepers, seems like a tough ask. Cheaper than HP, cheaper than IBM, the same as Intel, perhaps that is what you need to know. And all these guys are chasing Apple in some way or other. Coincidently Dell have poor margins, worse than IBM and HP.

Session end the Dow closed at 12288, up 61 points while the nerds of NASDAQ added 21 to 2825 and the broader market S&P 500 did the double, up 8.3 to 1336.

Commodity corner. The copper price is last at 442 US cents per pound. The gold price last clocked 1376 Dollars per fine ounce, the platinum price at 1817 Dollars per fine ounce. 84.57 Dollars a barrel is where the WTI oil price last traded at, Brent at 103.85 Dollars per barrel on NYMEX. On the Dubai Merc Oman crude trades at 99.68 Dollars per barrel. To give you an idea of what imported inflation is going to look like soon, the Oman crude price is up around 10 percent this year, and the Rand is 8 percent weaker, so in Rand terms we are paying around 15 to 20 percent more for our crude this year. Yech. The Rand is stronger (long live) at 7.23 to the US Dollar, 11.64 to the Pound Sterling and 9.80 to the Euro.

Where to from here? Markets will be focused on US inflation today. No really. That is around three thirty our time. Expectations are pretty low, 0.1 percent at the core.

Sasha and Byron
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Jozi, Jozi. It could have been better, it could have been worse, but the truth was, the highlight of the day was a fighting match between CNBC’s Rick Santelli and Steve Liesman. Another one. And, ex Fed member Fred Mishkin giving a clearly irritated “the Nouriel” Roubini a bit of a rev himself. Check this bit out Checking Economy’s Pulse. Check out Nouriel’s bearishness at 4:30 into the clip and ex Fed’s governor Fred Mishkin having a go at Nouriel. Saying that he is depressing. Hah-hah. Agreed Fred. If this is the only clip that you watch today, it will be the most important!! Do it. And then the funny parts are 7:30 into the clip. Awesome.

This is very exciting for us here, BHP Billiton’s half year numbers which were released during daylight hours in Sydney. The presentation was perfect for those with insomnia in Jozi, that started at 1am this morning. Which is/was ten in the morning in Sydney. Cool. OK, the actual landing page for all investors is here —> BHP Billiton Results for the Half Year Ended 31 December 2010.

Revenue for the half up 39 percent to 34.166 billion USD. Profits up over 70 percent to 10.5 billion Dollars. That all translates to a basic earnings per share of 189.2 US cents, with a ten odd percent increase of the interim dividend to 46 US cents. At current exchange rates that translates to 1380 ZA cents worth of basic earnings per share and 335 ZA cents worth of dividends. So, if the company were to repeat the first half, you should see around 27 and a half ZAR per share worth of earnings and 6.70 ZAR worth of dividends. That means the stock trades at under eleven times earnings and a rather iffy dividend yield of 2.25 percent. But fear not, the share buyback is another way of returning cash to you, a better way for other shareholders in other geographies.

Here are some of the highlights from the presentation to investors. That is you and I, not me, my father has a “thing” with that, or perhaps it was his English teacher. Here goes:

“Underlying EBIT of US$14.8 billion, up 74%
Attributable profit (excluding exceptionals) of US$10.7 billion, up 88%
Earnings per share (excluding exceptionals) of 192.4 US cents
Interim dividend of 46 US cents per share
Expanded share buy-back program of US$10 billion”

Operationally there were strong performances from their Iron Ore division, lets revisit the production report for the half in question:

Sorry, that was rather boring getting your way through all of that production gumf, this next chart hacked from the presentation is far cooler, it is EBIT margins and earnings contributions from the various divisions. The iron ore division with the best margins that I have ever seen, great prices. No wonder the SOIC is so juicy for ICT, this was definitely not the case ten years ago, a point that I make a lot.

Firstly, the divisional breakdown of revenue and EBIT:

And then much easier to read a visual, giving you a breakdown of the margins and contributions. And it is true, the EBIT margins for Iron Ore is the best ever, over 60 percent. Wow:

OK, the next two slides in the presentation show that net gearing is at zero. From a high of around 35 percent in 2005. This is also one of the three best halves EVER, comparable to the second half last year, and the first half of the 2009 financial year.

What about the future? Well Kloppers for starters has ruled out any more chasing takeover targets, and rather focussed on the buyback program and expansion plans. This is where shareholders funds are going to be invested over the next five years, check it out:

And then a nice graphic of their “tier 1″ assets that Marius Kloppers the CEO always refers to, the life of the resource base. Quickly, Olympic Dam (that amazing asset north west of Adelaide in Aussie) has a life of 100 years plus, the coal assets in Queensland has a life of mine of over fifty years, ditto the iron ore assets in Western Australia. The large copper asset at Escondida in Chile has a life of 40 years plus and lastly the big potash deposit in Canada will be mined out over the next fifty years.

And then the outlook for the coming year. I quite liked this graphic, because it gives you an idea of the depths of despair in the second half of ’08 and the beginning of ’09. See the dark blue line, Japan, fell off and then bounced back quite strongly in recent months.

The company says the following, first about the general outlook: “BHP Billiton is cautiously optimistic on the short term outlook for the global economy given the continuation of robust growth in emerging markets and further positive signs of a sustainable recovery in major developed economies such as the United States.”

And then more importantly about their major customer, China of course: “In the 2010 calendar year, Chinese Gross Domestic Product (GDP) grew by more than ten per cent, with fourth quarter growth accelerating from the third quarter level, while India’s GDP growth approximated nine per cent. The strong growth has been accompanied by higher inflation in these and other emerging economies and will inevitably bring further tightening measures.

And then perhaps the money line, one that media are focusing on at least, BHP Billiton are a little cautious on metal prices: “Macroeconomic themes are still a dominant influence on short term price movements and sentiment. While we expect a slowdown in the growth rate of global commodity demand in calendar year 2011, the economic environment still underpins a robust near term outlook for our products.”

We continue to buy the stock. We want to own what we think (and is largely thought) is the best mining company in the world and should be so lucky to have access to the company here in South Africa. Great assets, great geographical spread, a fantastic pipeline of quality projects coming on stream, coupled with awesome margins and debt levels that are the envy of their peers. The risks of course are the demand picture. Many struggle to read the Chinese buying patterns. Equally tricky to read are the developed world bounce back.

One overwhelming theme remains however, read through this UN piece: Global Trend Towards Urbanisation. See that one line that captures the theme totally: “By 2030, it is expected that nearly 5 billion (61%) of the world’s 8.1 billion people will live in cities.” If you are looking for a whole lot more information on urbanisation, check out this UN group website —> UNFPA – Unleashing the potential of urban growth.

Byron’s beats. Today it is about gas. He has gas. I mean he is talking about gas. He loves gas. You get the picture:

Everyone is talking about energy these days and I’ve stressed the growing importance of shale gas as an alternate source. On Monday it was announced that GE, one of our NYSE recommended stocks, has agreed to buy the well support division of John Wood Group for $2.8bn. The John Wood Group specialises in the engineering, production and maintenance of the oil, gas and power generation industries worldwide.

The division will add to GE’s drilling and production business as they try and grow the division through acquisitions, obviously seeing a lot of upside in the long term. GE also stated that they are not finished adding to their assets in the broad energy sector.

There were competitors such as Halliburton also bidding for the division which forced GE to pay up to 17 times 2010 earnings. So why are these big conglomerates so keen to get hold of energy assets? Paul sent us an interview a few days ago with an energy analyst called Charles Maxwell who has been in the energy industry since 1957. Here it is —> Whatever Happens in Egypt, Oil Will Hit $300 by 2020.

He reckons oil is going to climb up to $300 a barrel by 2020 based on the reasoning that we do not have enough reserves to meet our growing demands. Now that’s a bold statement. He also talks about the significance of Egypt and why it is causing the price to surge even though they are only responsible for 1% of oil production.

30% of Middle East and North African Arabs live in Egypt so the region is extremely important in terms of governance and leadership in the Arab world. Therefore they have a big influence over other countries with much bigger oil reserves. A general uprising in the Middle East following Egypt’s example could have a significant impact.

Going back to the oil price long term, is he worried about the impact of such a high oil price on the global economy? No, like me he is a believer in human innovation. He calls natural gas one of the saving graces as a substitute for oil. He also mentions that solar, wind, hydropower and biofuels will become more significant and economically sustainable substitutes.

As investors we are constantly looking for opportunities in this sector hence our investment in GE. Fortunately they have also picked up on this theme and do the searching for us. One of the great benefits of investing in profit driven companies. The right ones of course.

New York, New York. OK, so hopefully you watched that video at the beginning of the note, the fact that US retail sales were slightly lower than anticipated. And then the Nouriel told everyone how awful everything is slash was. And then the rebuttal from ex Fed governor Fred Mishkin. Of course there was a whole lot more merger activity in the form of NYSE Euronext and the Deutsche Boerse. But apart from that big news, market participants approached it all with a bit of a narfy approach. Session end the Dow closed 41 points lower to 12226, the nerds of NASDAQ gave back 12.8 to 2804 and lastly the broader market S&P 500 down 4.3 points to 1328.

Commodity corner. Dr. Copper is lower at 452 US cents per pound. The gold price is higher at 1376 Dollars per fine ounce, the platinum price is also better at 1833 Dollars per fine ounce. The oil price (Dr. State of the industrial world) is last at 84.76 Dollars per barrel. That is Light Sweet Crude, Brent trades at 102.3 Dollars per barrel. I suddenly asked myself (as one does) which oil price are we importing here? To South Africa? Paul suggests that we are importing sour high sulphur crudes from the Middle East, Egypt, Saudi Arabia and lots from Iran. The refineries in Durbs and Cape Town are built to refine this type of crude.

The Dubai Merc suggests as much: “The DME is the premier international energy futures and commodities exchange in the Middle East, providing a financially secure, well-regulated and transparent trading environment. The Exchange has developed and trades the DME Oman Crude Oil Futures Contract, addressing the growing market need for price discovery of sour crude oil destined for East of Suez markets.” And that price, as you can see, trades at 98.05 Dollars per barrel. So that is what we, as South African’s pay.

The Rand is trading slightly weaker at 7.31 to the US Dollar, 11.82 to the Pound Sterling and lastly 9.92 to the Euro. Bring on ten.

Where to from here? We have advanced as the day has gone on. BHP Billiton are noticeably lower relative to the rest of the market. Not a lot, but lagging the rest of the market by a percent.

Sasha and Byron
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Jozi, Jozi. We saw an intraday high printed in the first hour and half, remember it at least for now 33334. Which eclipsed the previous all time high set on the 22nd of May 2008. So this is a two and a half year process then of getting back to the same levels. I know that there are always anxieties that set in when equities markets reach an all time high, but to be perfectly honest, I don’t share that sentiment. There are a lot of stocks that still have some way to go before they reach their all time highs, and specifically Anglo American. The closing high was well below our best levels of the day, we ended up at 33094, up 139 points.

In case you missed it, the Competitions Commission has given the thumbs up to WalMart to take a 51 percent stake in Massmart. The official line from the Massmart SENS announcement is as follows: “Massmart shareholders are advised that on Friday, 11 February 2011, Massmart and Walmart received notification that the Competition Commission, in terms of section 14A of the Competition Act (Act 89 of 1998), had recommended to the Competition Tribunal that the Scheme be approved without conditions.”

At first glance it is as boring as the intro of a text book (written by your economics professor) and his colleague has written a glowing bio on him. But wait, this is very important. WalMart have committed to the country, by being flexible, and let us be honest, not getting what they wanted. Being all of the company, that would have been first prize. And secondly, more importantly, the local authorities have said, ja-no-well-fine, go ahead.

Now the Competitions Tribunal convene and decide whether or not to go ahead and then the dates will be available to us. Ummmm…. so the Competitions Commission investigates for the Competitions Tribunal and recommends that the scheme goes ahead. The Competitions Tribunal then looks at the scheme and then says yes, we agree. Is that the correct interpretation? Methinks so. Expect the dates soon, around then end of February, and then perhaps sewn up before the end of March. Quite a process you will agree.

Spar good for you. Ed Jordan used to do those Spar adverts, not so? Spar released a trading update for the quarter to end Christmas day, when quite frankly nowadays you expect the Spar down the road to be open. Am I right? You feel lost when “stuff” is not normal and closed. Cast your mind back twenty years. NOTHING was open on a Sunday other than the Cafe down the road that shut before midday. And then you were on your own. Ahhh, a period when you knew your neighbour because you asked them for milk, sugar and butter. Don’t get nostalgic on me, it is much better now, OK?

Spar trading update: “Shareholders are advised that the Group has experienced a challenging trading period for the quarter ended 25 December 2010 (“the Period”), during which turnover increased to R9,6 billion, up 9,5% from the previous corresponding period.

ABSA out with their full year numbers this morning, this is for the year to end December. Flat. Not too much to get inspired about. Paul hosted a fascinating show last week in which the role of the banking authorities was discussed and the banking crisis, how it came about. The general consensus at the end of all of it was that Basel 3 will be too onerous whilst Basel 2 was too weak. And that would impact the profitability of large banks going ahead.

I have hacked a graph from the ABSA presentation from their website, so that you can see that divisional contribution. Home loans has bounced back sharply inside of the retail bank umbrella. Inside of the same segment the retail bank portion has performed less well. The credit outlook a whole lot better: “due to improving early stage delinquencies and a successful collections strategy.” And you can see that, total loans extended were off a little, standing at a total of 498 billion Rands. Gulp.

If you want to get a better picture of how the last few years have been, check this out, some flying years back in 2006 and 2007 and then flat.

And then this is awesome, both these next two pieces from the investor presentation, as above, which you can find here —> ABSA Financial results to December 2010.

First, you always wanted to know about market share and the big banks. Check it out, ABSA red, Standard dark blue, FirstRand light blue and Nedbank green. And the other smaller folks (Investec, Capitec, ABIL and the like) are grey. Hah-hah, a grey area for the big banks indeed.

OK, so that is loans, you see that observation that the outstanding mortgages in the ABSA retail and business books is around 300 billion ZAR. And at 30 percent of the market, the entire mortgages outstanding in South Africa is around 1 trillion Rand. Quite a large number. Next, savings. Which has actually increased, so useful insight into both the banks and consumers behaviours. Consumers and businesses have been reluctant to borrow and banks have been reluctant to lend. And, more importantly savings rates have increased across retail and business clients. Yip, siree, consumers are more conservative and that will coincide with banks being more conservative.

And (drum roll) right or wrong, the reason for not getting excited about the big banks are some of the aforementioned reasons. But Basel 3 tough rules are a worry for us and the future profitability of the big banks. We don’t think that they are going to return to the levels that they did in the past. As such, we will steer clear for the time being.

Byron’s beats, he (that is Byron) has had a look at the V&A Waterfront transaction. Bryon wrote this. Not me. OK, so it is Byron. Hah-hah:

Yesterday it was announced that Growthpoint, a JSE listed property company, and the Public Investment Corporation (PIC) were making a joint acquisition of the famous V&A Waterfront in Cape Town. The two companies are looking for a 50-50 stake for an amount of R9.7bn. The sellers consist of investment firms, Dubai World and London and Regional Properties as well as a few South African Black economic empowerment shareholders who bought the asset from Transnet in 2006 for R7bn.

The Victoria and Alfred Waterfront which is situated between two of South Africa’s most famous landmarks, Robben Island and Table Mountain, was named after Prince Alfred and his mother, Queen Victoria in 1860 when the harbour was constructed. It is the gateway to various museums, hotels, retail, restaurants, the Two Oceans Aquarium and Robben Island boat trips.

Growthpoint have been looking to purchase this highly prized asset for a while now. It is South Africa’s most visited tourist destination with over 21 million visitors a year. That is nearly half our entire population. The asset also has a lot of developmental potential with 36% of the land still being available for development.

Was it a good deal or did they overpay for South Africa’s ‘Crown Jewel’ that Growthpoint have been so desperate to acquire? I’m no property expert but it seems to me like a good price. Since the land was bought in 2007 the One and Only hotel, the Link Mall and retail on street level have all been added along with a 9% increase in income per year. I’m sure it will also go down well with the authorities as South Africa’s pensioners now have access to the well known asset via the PIC. The asset is also back in the hands of South Africans.

Obviously we have to take into consideration the massive property crash of 2008 and 2009 where the assets value would have taken a huge hit a long with the rest of the sector. Maybe such a large acquisition in the property market shows a huge vote of confidence in our local property sector which has not yet fully recovered.

Ye olde worlde GDP reads across Europe today from Germany to Italy, Austria (that place where Arnold is from) to the Netherlands. France first though. All these places are expected to show moderate growth, with the overall EU number expected to come in showing growth of 0.4 percent. Hey, I don’t care, as long as progress is being made, kind of like it has happened in Euroland for the last 2000 years. Ever since the Romans decided it was a good idea to take on the Goths and Gauls. And then another important piece of news out a little later is the ZEW (Zeed Eeee Double U) Economic Sentiment read, released at the same time.

The what? You know, the ZEW Indicator of Economic Sentiment. I chuckled a little when you read who is measured and on what, simplistically: “Up to 350 financial experts take part in the survey. The indicator reflects the difference between the share of analysts that are optimistic and the share of analysts that are pessimistic for the expected economic development in Germany in six months. The survey also asks for the expectations for the Euro-zone, Japan, Great Britain and the U.S.A.”

So, those folks are most likely to feel that the world is not what it was in 2006. And therefore feel a little hard up on their luck. If you want to answer the incredibly stupid and childish insightful questions —> Financial Market Survey Month Year. Now, after having seen that, how do you feel about the relevance of the survey?

If you can’t download the PDF, these are the genius questions asked, here are two of the nine questions: 1) “In the medium-term (6 months) the overall macroeconomic situation will: a) increase b) decrease c) no change d) no estimation”. Your checkboxes are for Eurozone, Germany, USA, Japan, Great Britain, France and Italy. So, no China. No India. And not a single emerging market. And then 2) “In the medium-term (6 months) the following currencies (US-Dollar, Yen, UK-Pound and Swiss Frank) compared to the Euro will: a) stay constant b) appreciate c) depreciate d) no estimation”. Sounds like a guesstimate that traders think is so important.

New York, New York. Hunting down “the double” is where the broader market S&P 500 was at, a solitary point away at the close from doubling up from the March 2009 lows, 1332, up 3.17 points. Read that again. Doubled since March 2009. Less than two years. Remember when the world had ended? The Dow closed off 5 points to 12268, whilst the nerds of NASDAQ added seven and three quarters of a point to 2817. Oil and gas stocks rocked, even though NYMEX WTI slumped, Brent continues to remain strong. But the overwhelming feeling was that volume remained low and the participation rate low.

Commodity corner. Dr. Copper is last at 4.58 Dollars per pound, so it is hovering at and around records. The gold price is last at 1372 Dollars per fine ounce. The platinum price is last at 1837 Dollars per fine ounce. 85.28 Dollars per barrel is where the oil price is last. The Rand is steady to weaker, 7.29 to the US Dollar, 9.86 to the Euro and lastly 11.71 to the Pound Sterling. Earnings, please come to me. BHP Billiton tomorrow. Can’t wait for those.

Sasha and Byron
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