Slasher's coffee beans

Jozi, Jozi. Yowsers. We went completely against the trend yesterday, there were a couple of reasons behind it, the first was obvious the second a little more nuanced. The German parliament passed the increase in size of the EFSF, their contribution, by a country mile. There was a competition in the FT online for a caption of a picture where Angela Merkel is casting her vote amongst several smiling parliamentarians, the winner would get a FT beer mug, I kid you not. Here is one that was similar to the FT one. And almost immediately the bear, Roubini and his merry gang suggested that the real fund should be four to five times bigger. Whatever-whatever is what I would hear you so, that is what I say anyhow.

I finally see people giving Meredith Whitney a hard time for suggesting thousands of municipal defaults in the US. Turns out that is not happening, time for the once mighty to be sent to the scrap heap, gosh we live in a tough space. OK, off the point here, in fairness she said we should wait, it is still going to happen. Blah-blah. So the Germans past the vote with 523 yes votes, three abstentions and wait for it….(drum roll)….85 no votes. When I read that the first time I almost fell off my chair. This was teed up as a tight vote. This looks like she won by a country mile, a landslide victory!!

Markets took off across the globe, but we came under pressure here. Why? Well, this is the second more nuanced reason, or at least my attempt to explain it. There is this sense that the Chinese cannot grow at the current pace and in fact there are stresses around, some of the economic data has looked patchy. Some still remarkable, total retail sales for the month of August was 17 percent better than last year. 17 percent? The proverbial holy cow line can be used. But the sense is that the commodities Audrey II (the Little Shop of Horrors giant Venus fly trap) is running into Beijing central’s measures to cool inflation. To me it is not about the infrastructural spend (that is important), but the internal consumption continuing to grow, that is more important in the long run.

For the time being, anything that has a Chinese flavour (should we call it the MSG effect, or is that unfair?) or that is geared to the growth machine, is getting a pasting. This morning there is another “sign” I guess that the Chinese growth is moderating. I thought that is what we wanted? This of course is the HSBC China PMI, which came in at 49.9, unchanged in September from August. There is a worry about inflation in the read again. Anxious? Or is it a time to get anxious? I guess with all the uncertainty going on in Europe this is not unexpected. Yes, there is a sense of worry around the globe. I also saw a suggestion from a Bloomberg survey that saw the respondents suggest that the Chinese economy would slow to five percent growth in 2015. How are you supposed to know what is going to happen in 2015?

Byron’s beats deals with the issues that I have been talking now, for what feels like months. No wait, years!!!

Yesterday I came across this interesting article in the Business Insider written by one of my favourite bloggers, Joe Weisenthal. It brings up some really interesting points about the European debt issue and what sort of problems they face. The crux of the article looks at how, in the 90′s when Mexico got bailed out they relied on the devaluation of the Peso which lead to more competitive exports. Now the nations in the Euro-zone clearly cannot do this because their currency is the Euro. The natural process would have been for their currencies to naturally start devaluing as the market realised these countries were in trouble which in turn would have helped them get out the mess somewhat.

After reading this article a few things came to mind. Firstly Sasha pointed me to an article which showed that Greece is not very reliant on exports as a percentage of GDP. In fact it only contributes 5%. Portugal is more significant but still only sits at 18%. Imports are a lot more significant for both countries so a stronger currency suits them. Italy however has a much bigger export market and so has Spain. This then may hold true for the bigger economies which I suppose is more significant to the situation.

The other thing that comes to mind is the concept of integration, competitive advantage and teamwork which the Eurozone was developed to create. Now that a few states are in trouble this has all fallen away. I understand why Germany and France do not want to pay for other countries issues but they shouldn’t forget that when everything was hunky dory and the PIIGS were building up all this debt, Germany was benefitting from the growth. In fact over 40% of all German exports stays within the EU. Not only does this mean that Germany has the EU to thank for its strong economy but it also means that its economy is now extremely reliant on the future of the EU. In my eyes they do not have a choice but to be a huge contributor in the bail out. In the bigger scheme of things the EU has GDP of $16.2 trillion and debt of $13 trillion. This gives them a debt to GDP ratio of 80% which is definitely manageable.

It is sad how politicking has got in the way of what is best not only for the Eurozone but the entire world. Leaders are worried that they will lose support if they bail out the lazy Greeks. So short term popularity polls are getting in the way of what is best for all of us long term. Yesterday however the Germans did pass a vote to expand the bailout fund, progress is being made. I believe that all though it may not be as quick as we like, a solution will be found in due course. The Germans realise that their own destiny relies on it. In the globalised world we live in, there is no going it alone. For now we will bounce along with this choppy market as one news flow follows the next.

Commodities and currencies corner. Dr. Copper has recovered a little to 327 US cents per pound, the gold price is higher at 1629 Dollars per fine ounce, the platinum price is steady at 1533 Dollars per fine ounce. I came across this interesting tweet from Adrian Saville, the CIO and founder of Cannon asset management, what do you think? “No fundamental reason for gold price > platinum price. Sentiment is in driving seat. Sell gold buy platinum. Fundamentals always triumph” I agree with him, but hey, we are fighting sentiment here. The oil price is 82.24 Dollars per barrel, flat for the time being, the price that is of course.

The Rand is weaker, 8.01 to the US Dollar, 12.54 to the Pound Sterling and 10.88 to the Euro. We have started worse again for the day, after yesterdays drubbing. Lets hope to end at the top of our group!!

Sasha Naryshkine and Byron Lotter
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Jozi, Jozi. The Jozi all share index went up and down Maude street all day long. For those who do not know Sandton (doll), that is one of the streets that runs next to the JSE, or exchange square as it is known. The mighty impressive JSE, beware the impressive corporate headquarters, isn’t that what they say? Maybe, Google’s building looks nice, the new Apple one looks awesome. Yesterday’s market action consisted of being up in the first half and then getting a caning in the second half, as folks worried about the bickering of European politicians again. There were of course ongoing votes around greater participation in the EFSF, today it is the turn of the Germans to decide if they want to continue. The suggestion is that it should not be a problem, the German parliament will OK the German participation. Gosh this is painful, can’t everyone just vote on the same day?

The Jozi all share index closed down 413 points to 30339, that is a loss of one and a third of a percent, the resource stocks were the ones feeling the heat, down 2.78 percent as a whole. The copper price this morning has hit a 14 month low on global growth concerns, that is the reason being given. Which I guess is fair enough, some of the recent economic data suggests we are in a holding pattern. Ultimately the commodity consumption story, in the long run, hinges on greater internal consumption in China, and that is starting to happen. Banks and financials eked out a small gain, just a little one really, but hey, against a market that fell, that was a good outcome.

There was a trading update from Telkom this morning. Yech. Let me do a copy paste and then find out who the offenders are. You already know where this is going:

“Basic earnings per share from continuing operations for the six months ended 30 September 2011 are expected to be at least 70% lower than the comparative period in the prior year. The decrease is mainly attributable to the losses incurred by the mobile business and the impairment of iWayAfrica of approximately R450 million.”

I am fine with the mobile business still making a loss, that was telegraphed to us, but I beg your pardon, another sizeable impairment on one of their African businesses? I feel like using late night news reader expletives, but I guess we are not in that category, perhaps we should start a 18 L newsletter, any takers? But wait, it does not get much better from there, another copy paste job:

“Multi-Links has been sold to Hip Oils TOPCO Ltd, an affiliate of Helios Towers Nigeria. The sale remains subject to the consent of the Security Exchange Commission (SEC) of Nigeria……” Which is fine, but it continues and gets worse. “The sale of Multi-Links will result in the recognition of a net loss of approximately R650 million.”

The company is a walking disaster outside of our borders. Racking up the losses and acting like a drunk would, overpaying and then the consequences come back to haunt them. But wait, locally “things” are not looking so much better. Telkom fixed line revenues fell 14 percent, as a result of a fall off in volumes, you see, we all like to use our mobile phones more. Although fixed to mobile revenue grew 2 percent. More contactable on our handsets. Interconnect fees fell 13 percent. Gee whiz this is a detailed trading update, preparing us for the results in late November, the 22nd to be exact.

Data revenue was lower too, but that was as a result of a comparable period that included the World Cup windfall. Before you slump your shoulders completely lower and get completely down on yourself, wait, for they are making progress in the Telkom Mobile space, or just simply 8ta as we know it.

“Telkom Mobile has incurred a loss of approximately R900 million for the 5 months ended 31 August 2011, but is progressing satisfactorily and is in line with our expectations. The overall subscriber base has grown 86.3% to 882 235 revenue generating customers from the start of the financial year. Post-paid customers grew by 490% while prepaid customers grew by 56%.”

A massive jump in the subscriber base, and now you have ARPU’s increasing too, it is almost like they made an effort to capture clients first at the bottom end of the ARPU spectrum, and now they are getting higher end clients. Good for them. Check: “The growth in prepaid customers was lower than expected because of sub-optimal distribution channels which have now been expanded. The blended ARPU as at 31 August was R61.97, an increase of 174% compared with 31 March 2011.”

In a dirty kind of way we feel vindicated at Vestact here for having always trumpeted MTN over Telkom, we were often told, oh, what about the dividend flow and Telkom looks cheaper. Cheaper for a reason, we often talked about poor management and poor execution at Telkom, whereas MTN have had far greater successes where Telkom have failed. And the dividend flow from MTN is about to trounce Telkom. As Hannibal would say, I love it when a plan comes together. But, never crow, just pay attention. BTW, Telkom are getting crushed this morning, down over four percent.

I was chatting to my six and a half year old daughter last evening about the things that we had when I was her age. And how those “things” are so much different nowadays. We all like music in my family, I have a very old generation iPod and my iPhone also has a whole lot of songs on it, which I play through my docking station. Now when I was her age, we used vinyl LP records to listen to music, that was the obvious one when we discussed music. She said “oh ja, I saw that on TV once”. Amazing, and that was cool technology, first invented in 1926, the LP. Prior to that of course was the Gramophone, often you associate the Victor Talking Machine dog listening to the speaker. Remember that iconic logo? “His Masters Voice”.

Then came the tape, the Sony Walkman (July 1, 1979 – October 25, 2010), which was relatively short lived, considering that “records” had been around for a long, long time. Then came the compact disc player, first commercial one October 1982. And now there are electronic methods of getting music, the iPod was first launched in late October 2001. It is perhaps fair to say that the iPod is already “old” in the original format.

Where is this leading? Other than trying to show you how quickly technology can change, even whilst you think you are paying attention, it changes quite quickly. And in the future technology is going to be wildly better than it is now. We have gone from the personal computer, the Commodore PET was launched in 1977 as the first PC, we are in an era when we are talking about the post PC era. In less than 35 years. My life time. My daughter also asked me about the internet, I said, that is quite new. The first photo was uploaded to the “internet” in 1992. Nowadays we use the internet for almost everything. There are hundreds and thousands (millions) of peoples livelihoods who are connected to the internet.

The first phone to phone SMS was sent back in 1993. Ringtones were cool a decade ago. The iPhone, which I guess revolutionised smart phones went on sale on the 29th of June 2007. That is 1553 days including today. 221 weeks ago the iPhone was launched. And we are on the lookout for version 5 next week. That is basically one a year. The version two is old already. And so will four be. These slowly (and not so slowly) changing facts were coined mesofacts by one of my favourite online bloggers and twitterati, Samuel Arbesman, I first stumbled across his work in this piece: Warning: Your reality is out of date. Here is his bio: The online home of Samuel Arbesman.

So, get to your point I hear you say. This piece is in part to a response to what I get irritated with, short-termism. The average time of holding stocks across all exchanges has plunged over the last decade and a half. In the sixties typically the average holding period was between 7 to 8 years. By the time the year 2000 rolled in, it had been reduced to just a single year. Average. In 2007 on the FTSE it was less than 8 months.

With High Frequency Trading accounting for an enormous amount of all volumes (according to Barry Ritholtz around 70 percent on the NYSE – No, Average Stock Holding Period Is Not 11 Seconds…), I have seen why Buffett is better than the rest.

A simple method of finding value and then you know what, he actually holds the stocks for a long time, and realises the greatest value through the dividend flow and stock price appreciation. Not by looking for a level, or expecting a stock to break out of a trading range. Quality first, pay attention, you will be rewarded. Berkshire Hathaway (Buffett’s company) started buying shares in Coca Cola in 1988. A bit late, bearing in mind that Buffett sold Coke door to door as a youngster to make some pocket money, that is where that comment comes from, a bit late…..

In closing, all I want to say is do not get sucked in by the short term anxieties. Easier said than done, there is a lot of noise around, terms like staring over the precipice, standing on the edge, that sort of thing. Yes, it always seems horrible in the midst of any crisis, but we somehow manage to get through and we keep innovating. Like I pointed out, that is where I want to tie this all together.

Please do send me all of your memories of what used to be big, back when you were a kid, or teenager, or young adult. It would be fun to compare notes. And any mesofacts that you might think are unique to you, get those to me too.

Byron’s beats has a look at one of my favourite companies, not the jungle people, but rather Amazon.com and their smartly named new tablet.

Do we finally have a competitor to the iPad? Ironically Amazon’s Kindle was the first (mainstream) tablet on the market. It was purely for reading however and Apple, as usual, took it to a new level with the iPad. Well yesterday Amazon presented its new Kindle Fire and the reviews, for the first time, looked good. From what was originally just a reader the new Kindle has directly taken on the iPad using Android software with access to Amazon’s new app store.

So why is this different to other competitors? It stems from Amazon using their competitive advantage. Amazon does not make its profits from selling hardware. This means that they can make the Kindle Fire extremely cheap. The tablet then acts as a gateway to Amazon’s online products. They have managed to cut costs by making the screen slightly smaller, skipping on the camera and by not producing a 3G version. This means that the device can retail for an absolute steal at $200. Many analysts reckon that they could in fact be making a slight loss on the product.

Once you have the device you have access to Amazon books, video streaming, music, Amazon App store and their clouding service. It also puts a lot of focus on wireless syncing which allows your Fire to sync all your Amazon products from your PC or notebook to your Fire and vice versa. Amazon is also really pushing itself as the ultimate cloud computing company. It already hosts plenty of content on behalf of other companies and by allowing Fire users to store and share content in the Cloud you gain access to a whole world of shared content.

It all sounds very new but I am pretty sure it will become part of our everyday lives, just like the concept of cell phones 15 years ago. I think it’s absolutely fascinating to see these huge technology juggernauts battling it out, all to make our lives better and easier. It is so competitive out there, we are bound to get some amazing products.

Both Amazon and Apple sit on our recommended list but for very different reasons. Apple makes its profits from selling hardware where as Amazon is setting itself up as the biggest online retailer in the world. The fact that they are competing does not worry us. Amazon is using this hardware to help sell their online content. All in all it sounds like a very compelling piece of technology. Hopefully the Rand will play its part so that by the time it gets to South Africa the clincher in the price won’t be ruined.

Commodities and currencies corner. Dr. Copper is also in the business of taking a haircut, down at 323 US cents per pound. The gold price is higher at 1627 Dollars per fine ounce, the platinum price is lower at 1539 Dollars per fine ounce. The oil price last clocked 82.07 Dollars per barrel. The Rand is steady I guess, 7.87 to the US dollar, 12.35 to the Pound Sterling and 10.75 to the Euro.

I guess we wait for the Germans to vote on the EFSF. Nice. Imagine that, a whole day determined on how the Greek economy is thought of. Someone suggested that the Maryland (US State) economy was bigger than that of Greece. Go figure.

Sasha Naryshkine and Byron Lotter
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Jozi, Jozi. Phew. A ripper here on the local market, one of those rallies that you see not too often, the Jozi all share added 1033 points or nearly three and a half percent to 30752. Huge. Expectations have been set high that the Europeans are going to use the so called Hank Paulson bazooka option, rather than firing off pop guns every now and again. We caught most of the good, although during the day there were suggestions that initial optimism over the EFSF size would not be greatly increased, but “better used”. The Greeks pushed through their property tax, which of course in their minds was a much better methodology in terms of collection. In my mind it is an admission of failure of the authorities. The Troika actually heads to Athens to have a look at the progress that the authorities are making in introducing their new taxes and implementing austerity measures. You have to in some way feel sorry for the normal citizens, the folks who are on the receiving end. Change, and austerity, those are always bad.

Company results. What a relief, we were starting to hit the outskirts of the Gobi desert, in terms of the results flow. First up, Capitec results, the darling that continues to impress, and looks great, ball after ball. Cinderella would imply that they used to do the dishes, clean and look after two (ugly) sisters, so perhaps this is a case of better than Cinderella.

The numbers still continue to sparkle like her jewels (I am pretty sure the fairy god mother gave her some), these are interim results to the end of August 2011. The number of active clients increased to 3.2 million, that represents an increase of thirty percent. The branch network increased to 474 outlets, a 12 percent increase on last year. The company grew their employee base by 34 percent to 6351 staffers, awesome, an employer!! Net loans and advances for the period increased by a whopping 85 percent to 13.393 billion ZAR, a bigger first half 2011 than the second half in 2010. Deposits also swelled by 59 percent to 13.6 billion ZAR.

Arrears and provisions seem to be stabilizing, arrears to gross advances and loans stands at 4.5 percent, which is better than this time last year and better than at the full year stage. Provisions might have swelled to 1.1 billion ZAR, but as a percentage of gross loans and advances is 7.6 percent, versus 7.1 percent this time last year and 7.6 percent for the full year.

Capitec are making good progress in their transactional banking income, which grew 54 percent to 361 million ZAR for the first half. Pleasing to see. There were some interesting observations about the unsecured lending market in South Africa from the commentary:

“The South African unsecured lending market has continued to grow in 2011. Credit disbursed during the first quarter grew by 55% to R28.5 billion. This growth is within our expectations and meets the objective of the National Credit Act to make credit available to consumers that did not have access to credit prior to June 2007.In this growing market Capitec’s market share grew to 20% (first quarter 2010: 16%).  


Consumers’ appetite for credit is expected to remain high as the demand for formal housing and durable goods in an increasingly urbanised market continues to grow.”

Two things, the “theme” which we have liked for so many years continues to gain momentum, and secondly, Capitec are gaining market share. Urbanisation means a greater demand for credit, this is a developing market phenomenon that should stick around for a few more decades. I saw a map of African Rural versus Urban populations and check it out, most of the desert populations understandably have big urban populations. But on balance, most of Africa is still really rural, check this map out: African Urban Population.

Earnings per share for the half increased 53 percent to 520 cents per share, the interim dividend declared was 125 cents, an increase of 47 percent. When you are growing quickly, you would expect costs to rise, banking operating expenses were up 36 percent, so no surprises there. I guess this is a stock that continues to look expensive, but that is because they deliver blowout results every time. Return on equity was one of the only key metrics that were lower than the last time, down at 29 percent versus 34 percent last time, and at the full year stage.

My overwhelming take away is that this is a good company operating in the sweet spot. Well run, good controls. The share price, well that is very lofty, but has always looked that way. Investors have always paid up for Capitec stock. Not quite the time for the big banks to even worry about a company of this size, yet, but just a reminder of which end of the market is growing. And this company is still in growth mode. One earnings stumble though would see folks revaluate their growth forecasts.

Byron’s beats is about to disappear for a while, he heads to the land of the long white cloud to watch the Boks. Exciting for him, let us hope that he can lend them our support. And in keeping with the theme, here is a little more about the Holdsport results!!

About two weeks ago Holdsport came out with a trading update that indicated a 20% increase in earnings against the last comparable period. Yesterday the company that owns Sportsmans Warehouse, Outdoor Warehouse and First Ascent came out with consolidated results for the half year ending 31 August 2011. Core headline earnings came in at R61 million or 159c per share from revenues of R546.9 million which was up 7.2% from last year. There were a few once-off costs and the amortisation of trademarks which brought headline earnings to 141c per share. An interim dividend of 47c was announced. The company is in growth mode so I would definitely expect this cover to increase going forward.

In terms of the divisions Sportsmans Warehouse is the big revenue driver with 72% from its 33 stores while Outdoor Warehouse brings in 24%. First Ascent brings in just 4% but is growing very quickly, 28% from last year. Like I mentioned in my note when the update came out, the company looks cheap in comparison to its retailer peers. I think a conservative prediction of full year earnings would be around 300c per share. The stock trades at R31 giving it a forward PE of 10.3.

I say this is conservative because in the prospects they remain optimistic regarding trading conditions in the second half. This is because the period includes Christmas which as you can imagine is vital for the company. I would also imagine that sales now, and throughout the beginning of summer would be increasing because people are more active when the weather is good. In terms of new stores, the company added one Sportsmans and one Outdoor Warehouse for the period while a further 2 new stores will be opened within the financial year. It doesn’t sound like a lot but the company only had 49 stores in the previous reporting period. 4 new stores represents an 8% increase.

Usually I prefer the bigger companies but I feel this company offers a lot of value and potential. That is because I think their brands are fantastic. Agreed, the industry is extremely competitive with Mr Price Sports and potentially Walmart offering the lower end stuff while stores like TotalSports and brand retailers offer the higher end products and services. Still when you think sports retailer in SA you think Sportsmans Warehouse. They offer that shopping experience you just cannot find anywhere else. In a country with good weather, active citizens and a growing middle class, they fall in a good space.

New York, New York. It was a whole lot better than the scoreboard suggested, even though that looked good after all was said and done. At one stage the gains for the Dow and S&P 500 were threatening three percent on the day, but stocks actually pared the gains and ended with half of those. But that is good anyhow, I guess we would have taken that at the start. The bounce back was largely led by the materials sector, something that we know better as commodities!!

The genius of Meredith Whitney was back at work, she cut her earnings prediction for Goldman Sachs. Who apparently rule the world somehow, Lloyd Blankfein is not really visible for the supreme leader. Forget that, the whisper is that Goldman are actually going to make a modest loss for the last quarter, that does not sound like the Goldman that I know, the share price has been crushed this year, year to date the stock is down 41 percent. Versus the S&P 500 which is down six and a half percent. The best of the bad bunch is JP Morgan, which is down 25 percent for the year. Bank of America Merrill Lynch is the worst of the grouping, down 51 percent YTD. Yech. They (the major banks listed in New York) are all traded below current price to book, except for Wells Fargo. Nobody trusts the book though. And most of them are trading on historical multiples of less than ten times earnings, which leads me to believe that everyone is anxious about future earnings.

On MarketWatch consensus on JP Morgan (which trades at 31.57 Dollars a share) for the next fiscal year is 5.68 Dollars worth of earnings. Seemingly Mr. Market does not believe this, so I am guessing that the estimates are horribly wrong. Morgan Stanley, which trades just shy of 15 Dollars sees analysts pencil in 2.77 cents worth of earnings for the next fiscal year. AND, so the list goes on. I guess if you wanted to use the phrase in response to these stocks looking cheap “it is about the economy dummy”, I am guessing that you might well be right.

If you had to ask me to pick three, in order I would say Wells Fargo, JP Morgan and as an outsider, I am going to side with that Buffett guy on Bank of America. But you are not asking me what I think of the sector, not a big fan really, too much stuff going on in the background way underneath the surface. Just to get an idea what we are talking about, think about the recent trading loss from the fellows over at UBS. And Paul once pointed out a picture of the UBS trading floor and asked the question, what number of strategies are these guys all dreaming up in order to maximise their bonuses?

Tell me, Paul certainly has a point, that seems very different from the types of mom and pop banking that we became used to in the past. Thanks, but no thanks, this is not the greatest sector to be invested in. That line that I started with a couple of days ago when Jamie Dimon basically said to his daughter that a banking crisis is something that happens every six to eight years.

Commodities and currencies corner. Dr. Copper is slightly lower at 336 US cents per pound, the gold price is much higher at 1653 Dollars per fine ounce, whilst the platinum price is steady after taking some heavy knocks, last at 1557 Dollars per fine ounce. The oil price is lower at 83.68 Dollars per barrel. The Rand is weaker after a run (after getting crushed), 7.88 to the US Dollar, 12.30 to the Pound Sterling and lastly 10.72 to the Euro. A bit mixed here at the get go, up and down, oscillating between positive and negative. European policy makers are talking about the EFSF and various votes are still happening, Germany tomorrow remember, that is a big vote!!!

Sasha Naryshkine and Byron Lotter
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011 022 5440

Jozi, Jozi. Friday we were stranded in my little study at home, it felt like we were in an internet cafe all staring at the wall and all browsing at snore like speeds. But that was a whole lot better than no speeds, at the office the power was out and we had to be mobile, so we picked up and left. Markets were fairly choppy, financials and banks continued to be under pressure as the (pressure) cooker heat intensifies in Europe, everyone is urging them to work together and get the job done. The Greeks are pleading, the rest are squabbling seemingly over austerity measures that are yet to be implemented. After all was said and done the Jozi all share index this side slipped away to the lowest levels of the day at around one, but gradually gained a little bit to close down 261 points to 30061.

The Rand finally caught some sort of bid, commodity prices continued to take some pain, but I think in Friday’s message we pretty much summed up why in explaining the pot of money around the world, searching for yield. And making decisions based on how they see the future. And hey, it is not altogether pretty at the moment, but this is just what we are going to have to live with until the world’s finances are a little more balanced. We will need the emerging world to catch up, but this is going to take decades, but at least it is happening.

Remember that song, oh no Joe, not again Joe? Maybe. But that is the case with Europe again this morning, we wake up on Monday mornings to the same problems over and over again. This was after a weekend of finance ministers from Europe, the IMF and the US along with the other important finance ministers from around the world thrashing out the problems of Europe again. The Americans of course know too well what dilly dallying can do to confidence and the banking structure as a whole, the Europeans are obviously in a trickier position of not having political unity. Nor a central Treasury, that is probably the core of the problem. So there were some solutions involving the EFSF, remember we chatted about the fund last week in our piece titled: Nudge nudge, wink wink, twist twist!

Angela Merkel is talking of a firewall around the Greeks. But, as Paul said this morning to a client, the Europeans are dealing with this in a particularly slow and bureaucratic way. This is true, coupled with the EU structure, which makes high school romance look easy. It wasn’t of course back then, it was the most complicated thing.

Still, I imagine that the alternative is a Euro disaster, making the Lehman Brothers bankruptcy and aftershocks look like a picnic. But that is exactly what the Germans are suggesting, orderly defaults somewhere down the line if sovereigns cannot meet their obligations. But not Greece, and not now. Check out the Bloomberg article: Merkel Says Greece Needs ‘Barrier’ Erected to Stave Off Default. Poor lady is suffering from high blood pressure and she is on medication.

I do not really understand that notion that it is the markets (or certain elements) attacking the Euro zone, rather than the countries themselves being undisciplined. That is the political perception, or at least the one that is conveyed to us. Sorry, that is not reality, quite simply, not all Europeans are the same. Important dates to pencil in this week, as per the Bloomberg article are tomorrow and then Thursday, tomorrow, curious George Papandreou visits Berlin and Thursday is the German vote on the EFSF.

In closing (for today) on the European issues, I think that this post about central banks and confidence about sums it up for me. It is specific to the United States, but I think that it applies to all markets everywhere: WHAT THE LOSS OF CONFIDENCE COULD MEAN FOR U.S. MARKETS. His conclusion on the short piece is interesting, and I am guessing that the fellows over at the PIMCO will be nodding about the new normal. I am not too upset about that, if you get a gap of efficient companies, that are still good quality, at lower valuations, that might well be the time to continue to accumulate the big names. Just keep going.

Byron’s beats is either going to make you very hungry, or the absolute opposite, it will make you skip some meals. Either way, interesting points, and the great imbalances in the world are once again exposed.

Paul referred me to an article which I think is a good sign of the times we live in although it is a sad tale to tell. The article refers to how more people suffer from obesity than undernourishment as we face a possible food crisis. Populations are increasing while bad weather depletes crops and raises prices. Globally 1.5 billion people suffer from obesity while 925 million are undernourished.

You can see where the problem lies. In the US, Government policies which subsidize farmers are making the wrong products cheaper. “If these agricultural subsidies went directly to consumers to allow them to purchase food, each of America’s 144 million taxpayers would be given $7.36 to spend on junk food and 11 cents with which to buy apples each year – enough to buy 19 Twinkies but less than a quarter of one Red Delicious apple apiece.”

There are three things I take away from this article. Firstly, it shows that we are entering a time in our history where overconsumption is exceeding deprivation. The human race has become so successful and efficient that people are dying because they consume too much. Tell that to any man who lived 100 years ago or more and I am sure he would be dumbstruck.

This brings me to my second point. When are we going to see stricter regulation? The regulation for cigarettes is making it more and more difficult for smokers. With developed nations struggling with debt issues surely this is one issue that needs to be tackled. Billions of dollars are spent on medical care and unhealthy obese people are sucking up these benefits. It’s already happening in Japan. Anyone who has a weight related medical concern and whose waist is bigger than a certain size must lose weight and face compulsory diet advice. And let’s not think it is just a developed nation problem either. Here in SA we have one of the fastest growing obesity problems in the world. Again it stems from the cheapness of unhealthy foods. It’s a lot cheaper to go to McDonalds or eat lots of maize meal than it is to eat and cook fresh vegetables.

The third issue that comes to mind is the fact that 15% of our global population sits hungry while 20% overindulge. This is a very sad situation. But it is one I think cannot be solved by taking from the over indulgers and giving to the hungry. It is never that easy. Objectives and goals need to be incentivised. I suspect more regulation going forward. It is a trend we are following very closely seeing that we hold McDonalds in our New York portfolios.

Commodities and currencies corner. Just remind me what the reasons are for owning gold? It is a real currency in a time of crisis. Just remind me where we are now? A Euro crisis. So, the price of gold should be soaring, is that right? But it is not, it is falling with all other commodity prices. The gold price is last at 1596 Dollars per fine ounce. I cannot believe that on Friday the price was 1700 Dollars per fine ounce.

And the silver price? Crumbling. Getting absolutely smashed. Check out this 30 day graph, courtesy Kitco:

The 24 hour spot graph is much uglier, the spot price for silver is currently 27.7 Dollars a fine ounce. Down over 11 percent. Wait for the market to open in New York. All I can say is that the price(s) deflating quickly point to speculation and speculative activities around the price. I do buy the longer term demand picture, more middle class people wanting jewellery, that is what is going to be the trend.

The chaps over at the Business Insider (I think Joe is in Paris) have the usual visual of what is happening in these precious metal markets:WAKE UP: It’s A Total Catastrophe For Gold And Silver.

But the reason that I think that there will continue to be a demand for gold and gold products is for that reason that I mentioned two paragraphs above. And this great piece reaffirms that: China launches gold vending machine. It is quite funny, if you step up to the machine and someone can see, where do you go next? To the safe deposit box at the bank? Into the vault at home with the family jewels? Wangfujing Street (the cool place to shop as I understand it) is where the action takes place, in Beijing and not Shanghai.

I am not a “hater” of gold (thanks to Serena Williams outburst at US OPEN final 2011 the word is popular again), but I am more interested in the utility of a specific commodity. From oil, the most useful for now, through to soft commodities that are again, very useful through to silver, which does have many industrial uses, but the price seems to be controlled by a whole lot of speculative trading activity. Like one type said, liquidating the stuff that has done well to cover trading losses is what we might be seeing now. I suspect that the folks are right about the gold price, we are still deep in the crisis and once the selling has abated, the price might trend higher. Trying to pick the point where the prices stock falling is the tricky part. Dodging pianos for now and perhaps a reminder that most of the commodity markets that we are so reliant on involve an enormous amount of speculative activity.

The oil price is last at 78.89 Dollars per barrel, the platinum price is also a lot lower at 1531 Dollars per fine ounce. The copper price is under pressure this morning, down at 320 US cents per pound. The Rand is steady to slightly weaker, 8.15 to the US Dollar, 12.62 to the Pound Sterling and 10.96 to the Euro. The Euro is below 1.35 to the US Dollar, the Euro versus the Yen has hit a ten year low. Money back home, foetal position, think about it later is the participants mantra at the moment.

To end this rather long commodities piece, I came across a decent article from The Economist from last weeks print edition, this weeks free web edition (shhhh, don’t tell them) titled Crowded out that talks about the developed worlds commodity demand. And how structurally it seems different this time, but Bill Miller’s experience would tell him that this is part of cycles that he has studied. For the time being I think that the industrialisation of the worlds emerging markets will continue to see elevated prices. And yes, act as a tax on developed markets. But hey, they are changing their consumption patterns too. See oil at the bottom there? Nice.

So far our markets have opened lower but trended higher, but there are patches of green on the screen, resources are the laggards here today. Flat now. US futures have pared their losses as European markets have trudged higher, slightly better reads from the IFO institute.

Sasha Naryshkine and Byron Lotter
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A heads up sports fans. Vestact is on remote control today. Our power source at the office is out (whole areas of Joburg are powerless) and will only come back during the course of the afternoon. So you know where to get us, by email and most of our clients have our cell phone numbers.

Jozi, Jozi. I am reminded of the answer that Jamie Dimon (the guy who runs JP Morgan) gave his daughter when she asked, what is a banking crisis, he answered, something that happens every 6 to 8 years. Something like that, I searched for an answer, but did not find it, but it goes like that. I think what he meant to say was that one had not happened for a while, and that is why everyone was so bummed this time. Can I say bummed? I guess. Bob McTeer had something similar to say in his note last evening: “Financial Crises will always be just around the corner. There is a positive relationship between risk and reward; so the temptation to incur more risk for more reward will always be with us. You don’t usually get rich seeking safety. Regulations may plug the gaps that caused the last crisis, but the next crisis is another matter.”

Exactly. He goes on to talk about regulation being another form of taxation. This is an ex central banker. Yesterday’s market action was ugly if you were long and long we are, always. But the bears were in complete control yesterday, sending the bulls snorting to the forest with their tails between their legs. Commodity prices were getting hammered, we were buffered a little by the weakening currency so the majors did not fall as much as they did around the rest of the world. But there was still very few places to hide. The All share ended the session down 988 points to 30323, that is a drop of over three percent. Yech. Retailers fell over 4 percent, more on why later. Resource stocks slipped nearly three and a half percent. Banks were down three percent. Phew.

To give you an idea of the carnage, the FTSE fell four and two thirds of a percent, the top 300 stocks in Europe, the Eurofirst 300 benchmark fell about the same as the FTSE. The authorities are taking action it seems, there was a statement from the G20 last evening to say that they would take all the necessary steps to ensure basically that the financial system (hate that word system) is stable. Liquidity folks, that has been the rush back to the Dollar and subsequent jitters about Greece defaulting and the lack of coordination of the European leaders and central bankers alike. Check it out here: G20 pledges bank support, eyes bolder euro fund. All the officials of the world are suggesting that we are in the danger zone. The only danger zone I know is the song from Top Gun, but I get what they are saying, the next few weeks for the banking system will be vital.

At the same time that everyone around was worried about the Fed’s outlook for the global economy and a couple of poor PMI reads from the Chinese and the Europeans, we had an MPC meeting. Where the door is ajar for another rate cut. Although, as George Glynos, an economist said, he was not quite sure what sort of difference it would make anyhow, a fifty basis points cut. I think I agree with that, if we really wanted to give it a go, perhaps a full one percent would be in order.

The full Statement of the Monetary Policy Committee is available at the link. Click on it. The main line is really the last line, this time I think that the bank is serious. “The MPC is however concerned at the potential impact of the current global turmoil on domestic economic prospects and stands ready to act appropriately should the need arise.”

So what about inflation? The weakening Rand is a serious concern. We saw this back in ’08 when all EM currencies were trashed. I follow a WSJ journalist who is in India and she was pulling her hair out as the Indian Rupee had plunged through 50 to the Dollar mark. Over the last three weeks the Indian Rupee has fallen nearly nine percent to the US dollar. So, again this has nothing to do with the Rand, have you got that folks?

This is in part the pot of assets, and the respective allocations from the developed world. Think for a second that you sat in Chicago (OK, Charlotte, better weather) and you had to allocate funds around the world. And you were searching for yield. But check this out, and you will see what I mean: The 11 Wealthiest Countries In The World By Financial Assets: Allianz (PHOTOS). Yes, yes, it is the Huff Post, but loads of people like this. And it is old, there is a new one on the Allianz website: Allianz Global Wealth report.

But wait, there is more: Allianz Global Wealth Report 2011, I managed to find that!! Excellent. Amazingly, according to the report, Eastern European Wealth is growing the quickest. Here it is guys, the table from the most recent report, which shows you that there are two countries, the USA and Japan, who have more assets than the rest of the world combined. So naturally in a time of crisis those currencies are going to strengthen, and almost anything else will weaken. Take time to review this hacked table from the report, these are the ONLY countries that have assets in excess of 1 trillion Euros. Everyone else does not.

Income inequality is clearly a big issue. This graphic illustrates it a whole lot better than I could ever write, even more amazing than the table above. Same thing, just better visually.

We sat here and initially said, see, communism is a terrible thing (for wealth creation, not for full employment I guess) and that is what held the Eastern Europeans back. But wasn’t that always the case, the French, British and Italians were always wealthier. Can anyone tell me otherwise? I suspect that I may have answered the flight to the Dollar and Yen in a time of crisis, I hope so.

I really loved this analysis of how banking used to be and how it is now: Arrival of the “Suits”. I do think that there are some sour grapes here, perhaps the guy wanted to play golf when he worked at the building society. Or got a bonus, but I guess his points are well made. I in a way like financial engineering, if humans can think of better ways to allocate capital, that would be good for everyone, not so? But some things that we have built like atomic bombs are not good ideas either. All I am saying is that financial engineering will continue to improve. But there must be some sense I guess and that is where the regulators step in. Balance.

New York, New York. It was a horrible no good session of epic proportions. It could have been a whole lot worse. The silver price, the gold price, the copper price, those all were trashed. The gold price kind of stood up, but was also lower. Basic materials as a sector fell 5.6 percent, on a day that the broader market S&P 500 lost nearly three and a quarter percent. The only thing catching more than a serious bid (people were falling over themselves to buy actually) were US treasuries, the ten year fast approaching the all time lowest yield. And in fact we were last at these levels in 1950, around 60 years ago. When the baby boomers were just out of nappies and learning their way in the world. The two year note actually sold off, the yield shifted up a little, perhaps the Fed have started operation twist already!

Byron’s beats talks about one of my most favourite companies. I try and run in their product every morning. This morning myself and the hound (a husky dog) pounded the streets. Getting fit, thanks to this company.

Last night we had numbers in the US from what has turned out to be a very resilient company in times where the consumer is supposed to be broken. I’m talking about Nike, pretty sure you have heard of them. They came out with Q1 results which comfortably beat expectations, managing to grow sales in all their regions except for Western Europe.

Earnings per share came in at $1.36 for the quarter whereas the general consensus sat around $1.21. Expectations for the year come in at around $4.92 which values the stock at around 18 times forward earnings. This is using the afterhours price of $88.71 which is up 5.4% on the news. Clearly the market likes what they have seen. The stock still trades about 11% below all time highs reached in July.

Revenues had grown 12% from last year’s first quarter while they saw a 30% increase in the online business. Times are changing. Per region, North America, their biggest market actually showed fantastic growth. I thought in that region the consumer was finished? Revenues were up 15% whilst earnings in the region grew 21%. In Western Europe revenues were flat mainly due to comparisons with last year’s Soccer World Cup. Of the Western European teams Portugal, Holland and France were sponsored by Nike. I suppose that’s a decent enough excuse. Plus Holland made the final although I doubt they sold many French shirts following their infamous exit. Maybe next quarter will improve if France or England succeeds at the Rugby World Cup. Personally I’ll be supporting the green Canterbury jersey thank you. They did manage to grow revenue by 14% in Central and Eastern Europe however.

In China revenues increased by 9% thanks to good growth of 21% from the footwear division. Earnings only grew by 4% in that region due to slightly lower margins and increases in investments. Surprisingly Japan revenues advanced 17% but only 5% on a currency neutral basis. You see, the yen is stronger so that had a positive impact on a company reposting in dollars.

Notice a trend? Good growth in developing markets. 24% on a currency neutral basis in fact. Unfortunately Africa is not even mentioned. Come on guys, Paul even buys his work pants from Nikes golf clothing, give him some credit! But again these results reiterate our thesis on developing market aspirational consumerism. Nike have a fantastic brand which very much represents the American athlete. Not only do people aspire to wear such clothing but with more and more people entering the middle class, more people will eat more foods and will need to exercise to burn off those extra calories.

Prospects look positive. Predictions for the next quarter sales can be reasonably accurately because retailers make orders for delivery in the next quarter. They expect revenues to be up in the mid to high teens. Margins are an issue (down to 44.3% from 47% which is still fantastic) as input costs increase. But they have planned price increases in the second half of the year which should mitigate this somewhat. We continue to add at these levels and look forward to next year’s Olympic games and The Euro Championships just as much as Nike.

Commodities and currencies corner. Dr. Copper is last at 333 US cents per pound, yes, you read right. The platinum price is last at 1687 Dollars per fine ounce. No, this is not the price from last year. The gold price is a touch lower (but still holding up well), last at 1729 Dollars per fine ounce. The oil price is 81 Dollars per barrel. Looking iffy. The Rand is last at 12.79 to the Pound Sterling, 8.26 to the US Dollar and 11.16 to the Euro. Having started a little better we are now lower on the day sadly.

Sasha Naryshkine and Byron Lotter
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Jozi, Jozi. We were doing well, until we were not. The Jozi all share closed down one tenth of one percent, or 32 points to end at 31311. It really was a mixed old bag, some good, the banks, some bad general retailers, I thought retail sales were not that bad. But it is not about that, it is rather about the much weaker Rand (see all about that lower), which is going to feed into inflation over the coming months. Any chance of a cut at the MPC announcement later today, I am guessing that it is gone. Expect to be paying around 11 ZAR a litre for Petrol soon, the Rand has weakened by around 12 to 13 percent in the blink of an eye. So perhaps the window is closed.

I have been asked this question a lot over the last few days, what is happening with the Rand, why is it getting so weak, what is the problem here with us? Why is it weakening like that? Well, the short answer is that it is not just us, it is everyone, because we pulled up a few charts of the Indian Rupee and the Brazilian Real and compared them to the US Dollar and overlayed the graph of the ZAR to the USD. And you know what, in the short term, over the last few weeks the graph is identical. Most emerging market currencies have been smashed against the majors, which is strange, because they have their problems, serious problems. A flight back home, that is what it is.

I was relieved to see Beyond Brics, the FT blog people who had written exactly what we were exploring yesterday, the day before, the day before that and so on, over the last few weeks. Check: EM currencies: here we fall again. See, often it has nothing to do with you, or me. And rather everyone in between, the Forex market sloshes around with around 4 trillion Dollars worth of daily trade, that is around ten years of our economic output. So, don’t get anxious about the Rand, just tighten your seatbelt.

Byron’s beats has a look at the land down under and our connection, which is now stronger. No, Marmite are not buying Vegemite. Rather SABMiller have paid up for Foster’s, who have said yes. Well done to the board.

So the Fosters board have finally accepted SABMiller’s offer to buy the company. Remember that in June SAB made a A$4.90 per share offer for the business which the board duly rejected. Then they went hostile and approached the shareholders with that same price. Obviously amongst the boardrooms negotiations were still taking place and today SAB came out with a SENS announcement stating that Fosters had accepted a A$5.10 per share offer. This values the company at A$11.2bn or R88bn, 20% of SAB’s market cap. Hopefully they are not paying for this in Rands because with recent weakness that price would have shot up considerably. The funding is said to be through a combination of existing resources and new debt committed by various financial institutions.

Now let’s look at the reasoning behind the transaction. when the first offer was put forward SAB stated the following “The proposal to acquire Foster’s is in line with SABMiller’s strategy to create an attractive global spread of businesses, with a focus on developing strong and successful brand portfolios. Australia has a strong, wealthy and growing economy with consistent long term population growth in key demographics, and is well positioned to benefit from continued economic growth in Asia. Australia has a profitable beer market in which Foster’s is the leading brewer with 7 of the top 10 beer brands, a national distribution platform and scale production.” So it looks like they are here to capture the growing Australian market. Remember Australia have been one of the few developed economies to keep on consistently growing thanks to the commodities boom.

I am sure there is more to it than just Australia. 2 things. SABMiller are a huge company. To grow a company that big organically is difficult so by buying Fosters the deal will definitely be earnings enhancing. Secondly, remember how Aspen bought Sigma, the Australian generics producer, not just for the Australian market but also for their access to Asia. Australia have strong ties with Asia and are often used as a gateway to the continent. I mention this because there has been a growing trend in SAB’s results that shows beer consumption in developed markets slowing whilst most of the growth came from Latin America, South Africa and the rest of Africa.

Asia is also a big developing beer drinking region as the culture there changes to a more western way. In fact China consumes more beer than any other nation. That is no surprise, there are people there. Per capita however they are 41st in the rankings with 30 litres per year compared to number one spot, Czech Republic who consume 158 litres per year per person.

The consumption in China is growing however at 10% an annum off a low base. Check out this article from The Economist which has some interesting insights. This is where I would imagine they want to take the Fosters brand even though they already have exposure in China through their JV with Snow.

Do I think this is a good purchase? It may be difficult to grow that brand in Asia and I am not sold if it is just the Aussie market they are after. At this stage Fosters only really has exposure in Singapore with regards to Asia. Even though the Australian economy is growing, trends in developed markets show less beer consumption as populations get older and more educated. I am also worried that they may have over paid due to lack of opportunities and the desire to grow earnings. That said, Fosters have a great brand portfolio and the acquisitions SAB have made in the past have proven to be successful so we will have to wait and see.

New York, New York. Twist. Not Oliver, although I was pretty sure that in the aftermath of the Fed announcement (which was a whole seven minutes late) the selling started. Which led me to believe that market participants did actually want more from the Fed, something more concrete, please tell us that it is all “going to be OK”. Perhaps we should call Operation Twist simply Oliver Twist, or O. Twist.

The main reason the markets sold off in the aftermath of the FOMC statement was because the Fed saw a weak looking economy. I mean, has the data not been suggesting that, this is hardly new news. And by the way, not all ten voting members gave their thumbs up to Operation Twist, there were three dissenting members, the other seven said that it was fine. Like we explained yesterday, the Fed are basically shifting their focus from owning short term debt to longer dated debt. Shifting their focus towards the long end of the yield curve, there, try that one this weekend with your mates, they will think you are on top of it all. Drop in a random new conversation starter: “Did you see that the Fed have shifted their focus to the long end of the yield curve?” Points aplenty for you.

I favourited (surely that become a word now) a tweet from a smart fellow called Cullen Roche, who is a bit of cynic, but aren’t we all, don’t we all have a little cynic in us. He goes under the Twitter handle of Cullen Roche and he lives on the other side of the plant to us, San Diego, California. What he tweeted was so very true: “We’ve become a bunch of monkeys waiting around for the man behind the curtain to tell us where he’ll sprinkle his magic fairy dust!” We are looking for signs that everything is going to be OK. Of course it is going to be OK, it is just going to take time. Be patient.

There was a whole lot of anxiety amongst the minute by minute people who got their knickers in a knot about the Fed being a little late with their statement. I kid you not, but Ryan Ruggiero suggested that “The Fed’s Statement Was Late Today Because The Treasury Press Room Copier Was Jammed” Still sending faxes over there at the Fed, that is the way that it works.

If you are looking for the whole FOMC press release, follow the link here: 2011 Monetary Policy Releases.

Some not so encouraging “stuff” that we already knew, like “economic growth remains slow”, “continuing weakness in overall labor market conditions, and the unemployment rate remains elevated” AND “Household spending has been increasing at only a modest pace in recent months despite some recovery in sales of motor vehicles as supply-chain disruptions eased” So, it is fair to say that the economy is still weak.

But, on the bright side, the Committee “continues to expect some pickup in the pace of recovery over coming quarters but anticipates that the unemployment rate will decline only gradually” And then the Twist part that everyone was waiting for, and in fact a whole lot bigger (the size of the program) than everyone thought:

“The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.”

And if anyone cared, rates stayed on hold at between 0 to 0.25 percent, and will remain this way through to the end of 2013.

I had a look at an ex Fed member, and one of my favourite bloggers, Bob McTeer, he had this to say: Come on Baby, Let’s Do the Twist. I like the personal touches there and I like the comeback of Chubby Checker. Nice.

All that happened with market participants is that stocks sold off hard, in the last two hours of trade there was a whole lot of selling. The Dow closed down 283 points to 11124, the nerds of NASDAQ got crushed (the least), down two percent to 2538, whilst the broader market S&P 500 lost nearly three percent, to close up shop at 1166. Transportation stocks were sent packing, down 4 percent. CSX, the big railway company got carried out, down over eight percent. Starting to look cheap and juicy. Cheap. But cheap sometimes gets cheaper.

Commodities and currencies corner. Dr. Copper is needing a nurofen, a hot toddy, a serious check up and to sleep it off. Last at 364 US cents per pound. Ouch! The gold price in Dollar terms is lower, 1771 Dollars per fine ounce. In Rand terms the gold price is flying, 14522 more or less ZAR per fine ounce. Our gold miners must be making money finally. We shall see in the next two to three quarters. The platinum price in Dollars is lower, last at 1741 Dollars per fine ounce. The Rand is a whole lot weaker, 8.20 to the US Dollar, 12.71 to the Pound Sterling and 11.11 to the Euro. Expect a whole lot worse start this morning, perhaps the Boks can brighten up your day with a clinical performance against our neighbours. According to time and date dot com, Windhoek is 1164 kilometres from Jozi. Lusaka is about the same distance from here. Strangely Cape Town is further away. Can that be right?

Sasha Naryshkine and Byron Lotter
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Jozi, Jozi. We got a second wind towards the closing bell, resources led the charge on a day where the directionless seemed to be this time waiting for the Fed to reveal their next step. It always floors me that “the market” is looking for something next, be it a bond auction from Greece, or weekly jobless claims, or a German sentiment reading from the ZEW institute, there is always something else. It is almost like standing on the platform not wanting to board the train, because you want to read the newspaper a little bit longer. You have to be in, and make sure what you buy is the right vehicle. When I hear investors are looking for this or that, I turn off, because the investors are exactly the opposite, their time frames are weeks, days, hours, minutes and seconds. That is not the sort of activity that we are in.

Session end the Jozi all share index closed at 31343 points, up a percent and a quarter or 384 points on the day. As we said, resources rocked, the sector adding nearly two percent and leading the charge, banks were marginally better on the day, industrials were up as much as the rest of the market, general retailers were slightly lower, ever so slightly. Fixed line telecom, OK, Telkom the only one, that stock was lower on the day. Perhaps the pricing war is starting to get them and their shareholders down. New, much higher data caps kick in October the first. Perhaps that is starting to weigh on the stock.

PPC released a trading update yesterday. As Forest Gump would then say, and that is all that I have to say about that. But that is not the case, yesterday PPC delivered a rather poor looking trading statement: “…. earnings per share and headline earnings per share for the year ending 30 September 2011 are expected to be between 25% and 30% lower than the previous corresponding period.”

Not great, but we are all well aware that we are currently in a deep trough, recent cement statistics suggest we might be starting to bottom, from the release: “cement demand in South Africa improved marginally during the second half of PPC’s financial year.”. But not everywhere, all my friends and family in the Western Cape, time to start building please: “…. cement demand in the Western Cape Province, where PPC enjoys high exposure, continued to lag the rest of the country.”

Another piece of information that you might need: “While a successful price increase during July 2011 will enhance revenues for August and September 2011, the overall pricing environment is expected to remain competitive and this together with ongoing input inflation, continues to present a challenging business environment.” That same old word that crops up when talking about the local economy, challenging. Results are on the 8th of November, and but there is a presentation that we can dissect tomorrow or Friday.

Operation twist is not trying to be a contortionist whilst keeping your left hand on the blue dot, and your right leg at a ninety degree angle on another blue dot, but rather the next Fed program nick name. Or just name. This is how I understand it, Operation twist has been done before, back when another young democrat was in the White House, JFK. Originally it was Operation Nudge, but because of a legendary song (yes it is 50 years old) from Chubby Checker (launched July 1960) the market participants at the time called it Operation Twist. Checker said that the Twist ruined his life, because after that nobody took him seriously, because they did not think he had real talent. But like Wiki says, he actually got adults onto the dance floor, who can’t ignore a ridiculous dance? Most recently the most ridiculous one I can think of is the Macarena and the Locomotive, the Chicken dance. Hey, at least everyone looks pathetic together.

So what does nudge or twist actually do, because the last thing it is intended to do is to make everyone look nerdy and geeky at the same time? Quite simply, without increasing the size of their balance sheet, the Fed will sell their short term government debt and buy the longer end of the curve, 10 year to 30 year debt. The yield curve will then flatten. The longer dated borrowing costs will then be more attractive to business owners and individuals who were not willing to stick their necks out, to jump at much lower longer dated borrowing costs. Question is, those long dated rates are so low as it is, what would the tipping point be, for most people?

There is already a whole lot of scepticism on the program, and whether it would work. The way I see it, getting out of the short term debt that has rallied hard might actually see the Fed make a sizeable profit, and achieve what they need and want, more risk taking and spending by the consumer and small businesses. Thereby boosting the economy short term. As I said before, it is not about the “cheapness” of money, but rather this is a confidence crisis. Once confidence is restored, then you can imagine that folks will be willing to take on risk. The Operation Twist is expected to be announced a little later today, later in the evening our time, around two fifteen in the afternoon in the US, East Coast time. Rates are expected to remain on hold. I can assure you that “investors” will be watching this event as the main event de jour.

The EFSF law passing (supposedly) next week Thursday in Germany is the other event you must look out for. Or not, if you just care about Ashton Kutchner and Charlie Sheen, that is also fine too. What is the EFSF? The EFSF stands for European Financial Stability Facility, which gives you a great idea of what the company (registered in Luxembourg and owned by the EU states) actually does. Fancy that, registering the company in Luxembourg. Because of the constitutional ruling last week, the right channels are now being taken by the German government. Letting the elected officials decide.

Philipp Roesler (or is it Rosler with a umlaut on the o) was interviewed by one of my favourite market anchors, Sylvia Wadhwa (say it Vad-vaa) in a CNBC exclusive yesterday. Who? Well, Roesler is the vice chancellor of Europe Germany. Amazing guy and story really, read it at Wiki: Philipp Rosler. Amazing! Roesler back pedalled on comments that he had made last week in which he suggested that Greece should default, now he is all for a unified Euro and they will succeed. Quite right, that is the prerogative of politicians, to change their minds. Anyhow, Roesler said that he thought that vote would pass comfortably and then the EFSF could continue doing its work, keeping the periphery countries “afloat”.

I quite liked this analysis of the Euro currency and the Euro zone from the Pragmatic Capitalism website: A FISCAL UNION FOR THE EURO – SOME LESSONS FROM HISTORY. It is something that we have been suggesting might actually happen, and strangely be fast tracked by the crisis. Useful insights into a complicated union.

Byron’s beats has a look at a company that would have rewarded you handsomely over the years. Once known as Rembrandt. And some amazing engineering of the businesses, well done to the Ruperts of yesteryear and present. Think of Richemont, Remgro, Venfin, British American Tobacco, Reinet Investments, which have come out of the Rembrandt group. Have I missed anything?

We had results yesterday from investment holding company Remgro. This one is slightly complicated because they have changed their yearend so these results are actually for 15 months. This makes valuations a bit difficult. Firstly and most importantly, let’s look at the group structure so we know what we are analysing. Check out this link from the website. See that through Remgro, we get exposure to financial services, diversified industrials, media, mining and technology. In truth however Industrial contributes 47.2% to earnings whilst financials contribute 46.9%. The rest are fairly insignificant.

Because the periods are not comparable I’ll just give you the earnings numbers without percentage comparisons. For the 15 month period headline earnings per share came in at 1082c. They do give us the 12 month results which came in at 788c compared to 690c from the previous period, growth of 14%. In terms of valuing an investment holdings company, the rules are different. Investors look at the intrinsic value of all the companies under management. According to management, this came in at R135.97 a share. The stock trades at R114 a discount of 16.1%. This means that the sum of the parts is worth more than what the market is valuing the company. Is this a buying opportunity?

Investment case for Remgro. People who like the stock like the instant diversification. By buying the stock you are putting your faith in management to make the right decisions and the right allocations. Many people also believe in the Rupert factor. Johan Rupert who is the Chair has a knack for making the right decisions at the right time. You also gain access to some assets which are not listed and which you would not normally be able to invest in. You are getting all of this at a discount to NAV.

Investment case against Remgro. 75% of all their earnings comes from listed companies. If you like their mix why not just buy these companies on the market yourself? Not only do you avoid the Remgro management remuneration but you also have the choice of hand picking which ones of their asset mix you like. For example they have a stakes in Nampak and Distell which are companies we would stay far away from. As asset managers we prefer to make those allocation decisions ourselves. Plus if you are looking for the Rupert magic you can buy Richemont shares where he is CEO. Lastly, if you don’t have the funds to get that instant diversification, rather buy into the Alsi 40. Cheaper fees and more diversified mix. Hence we feel they deserve that discount.

On a different note but concerning the same company, Remgro have offered to buy a 22% stake in Grindrod, the diversified shipping company. The structure of the deal is interesting. Basically Grindrod needs to raise money to fund new projects they are involved in. They are raising this through a rights offer to share holders. But instead of the offer being at a discount, it is at a premium to the current price. Remgro will subscribe for 133.3 million shares and assuming shareholders don’t want to buy new Grindrod shares at a premium (which is a given) Remgro should get most of these shares. Grindrod is not a company we particularly like. Although we are optimistic about global growth, the shipping industry is too cyclical and extremely competitive. Again this reiterates why, in a world of choices, we stay away from Remgro.

New York, New York. Yo-yo stocks last evening, not the yo who wants to know type, but rather the kids (and adults) toy that is attached to a string. Why am I telling you, that is dumb. The graph last night actually looked strangely like the most prized of all Cape Town possessions (?) Table Mountain. Sort of, sadly slipping away at the end of trade. Of course every Capetonian owns a piece of the mountain. Session end the Dow Jones managed to squeak into the green, the broader market S&P 500 closed down nearly one fifth of a percent, whilst the tech stocks slid by 0.86 percent.

Oracle results after the bell last evening seemed most pleasing. This is a company that I admire, their software is top class, and it is something that you use more often than you think. Many a website database uses their software, not cheap mind you, but you can’t doubt the quality. Enough of that, let us check the results out. These results were for the first quarter of their fiscal year. Revenues were 12 percent higher to 8.4 billion USD, with new software licences growing 17 percent. Basic EPS was 36 US cents a share, the dividend was six cents. After hours the stock is trading three percent plus higher to 29.29 Dollars, around in the middle of their 52 week trading range. Earnings estimates for the current financial year are just over 2 Dollars worth of earnings, and the following year around 240 cents worth of earnings. Pretty decent, so the current valuation is not that bad.

The commentary part suggests the change in strategy (they have been buying businesses over the years) is starting to pay off: “By moving away from low-margin commodity hardware and focusing on high-end servers, we increased our hardware gross margins from 48% to 54%. Our strategy to grow the profitable parts of our hardware business is paying off.”

Is this a particularly appealing place to be invested? Part of me says yes and the other half says no. Oracle compete with Microsoft, Intel, SAP, IBM and HP, those are mean competitors. They have an amazing software business, with four different types of licences that are able to for most business pockets. They also have a stunning hardware systems business, with servers running on their SPARC microprocessors. And then there is their services business, which consists of the old, consulting and the new, the cloud. A nice spread of businesses.

Oracle was founded exactly a year to the day after the Soweto uprisings of 1976, by Larry Ellison. Who pays himself too much money, after all he is a huge shareholder, why pay yourself so much? Agree or not? Surely the dividend must be enough for Ellison, he owns 21.8 percent of the company or 1,178,771,328 shares (as at 15 August) with a market value at yesterday’s close of 30.786 billion Dollars. That is a quarterly dividend check of 70.7 million Dollars, why would he possibly need to pay himself about that much a year? Ah, he can do what he wants I guess.

There is a load of cash on hand, 13.1 billion Dollars cold hard cash and 18.5 billion Dollars worth of marketable securities (liquid securities convertible to cash immediately) on their balance sheet. Ready for deployment. So that is nearly 635 US cents out of the 2929 US cents price. In the pre market of course. So, I guess they will continue to press hard into new territories (they have just opened a new facility in India) and continue with these smaller acquisitions along the way.

Commodities and currencies corner. Dr. Copper last traded at 377 US cents per pound, the gold price is higher at 1811 Dollars per fine ounce. The platinum price is last at 1788 Dollars per fine ounce. The oil price is 86.58 Dollars per barrel. The Rand continues to weaken, 7.77 to the US Dollar, 12.17 to the Pound Sterling and 10.63 to the Euro. We are being propped up here by the Rand, we are higher again. Hey, I am not complaining. Look out for that FOMC statement later.

Sasha Naryshkine and Byron Lotter
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Jozi, Jozi. Up and down, in and out of the black for much of the day is how we bumbled along. There was a little bit of news flow which saw us catch the raised bid train ride, a Michigan Consumer Sentiment index read above expectations hitched us up to end better on the day. On what essentially was a rip roaring week for the bulls, gains all around. But you might know how I feel about these sentiment indicators, that are supposed to be broad based, but only cover a few thousand people (or few hundred), but on balance does reflect the mood. And there was some sort of split, sentiment gaining amongst the lower income households in the US, and sentiment lower amongst the higher income folk. We will see how that trend will probably stay intact over the coming war, with a class warfare looming in the US. Stay tuned for that.

Anyhow, our market managed to squeak into the green, the Jozi all share index closed up shop at 31051 points, up 53 points on the day. Banks were bashed and dragged on the overall markets, down one and two thirds of a percent. Gold miners were over two percent better. Resources closed better by two thirds of a percent, really leading the market slightly into the green. Some of the smaller platinum mines rallied hard, there seems to be a lot of confusion about what sort of hold the Minister of Youth Development, Indigenisation and Empowerment of Zimbabwe has over the Minister of Mines in Zimbabwe. I must be honest, it still looks murky to me, so until there is some sort of resolution, we will be in a zone of uncertainty. Ja, that sounds silly.

Byron’s beats takes a look at Clover. This is a good example of a relatively middle sized company with huge and well known brands.

We had full year results from consumer goods and products group Clover Industries, coming out first thing this morning. We all know Clover as the milk guys but there are quite a few household brands that fall within their portfolio. These brands include Tropika, Super M, Ultra-Mel, elite and of course the Clover brand. The way I understand the business model is as follows. They receive the goods via contracts with dairy farmers. Then they use their own production facilities to make either the cheese or the yoghurt etc. They do their own distribution and in fact boast one of the best distribution networks in the country with 14 000 delivery points. They also arrange the sales and merchandising of their products.

Revenue came in at R6.5bn. R5.5bn of that came from the sales of products, R640 mil came from rendering of services which I would imagine is the distribution business, whilst R386 mil from the sale of raw milk. Unfortunately costs for sales and distribution are very high and margins are not great. Headline earnings came in at R175 million which equated to 113c per share. There was a lot of restructuring and once off operations so the 113c number is the one to look at with regards to continuous operations. The share trades at R11 and a historic PE of 9.7. Sounds fair for a company of this nature.

In the overview, management were happy with these results and said that the listing was not only the highlight of the year but probably the biggest highlight in the company’s history. They managed to raise R575 mil in capital which they will use to improve inefficiencies in the supply chain and expand the distribution capacity.

Investment case for Clover. The company is in a good financial position following the listing. This will give them some nice expansion opportunities. They fall in a similar space to a Tiger Brands or a Pioneer Foods. They are very defensive and expect to grow as this country’s economy, population and middle class grows. People will always drink milk and once you have converted to fresh milk from artificial or powdered milk you will not go back. Their good distribution system also puts them in a strong position for future growth, joint agreements and expansion.

Investment case against Clover. There is nothing there that excites me. It’s a sound business model but room for industry changing innovation is limited. They are also extremely sensitive to input costs which we know are increasing. Margins are already low, increasing input costs will put even more pressure on these. I’d also prefer to go with the bigger product mix that Tiger Brands has to offer. To conclude, a decent business but we feel there are better options out there.

OK, what is stinking the joint up this time? Well, the truth is that it is the same old problem of worries about European sovereign debt. This has been ongoing for nearly two years now. In July 2009, Greek two year government bonds were as safe as houses (selective houses), yielding less than two percent, reflecting that the market participants did not think that it was too risky to lend money to the Greek government. So, it is safe to say that the risks were very low at the time. Well, having yielded plus 80 percent last week, the yield has plunged to 55 percent, but basically reflecting that the risks of lending money to the Greeks are on a par with lending to your junkie cousin. Who says that he/she will pay you back? Right……. Strangely I read somewhere that Greece’s debt to GDP has been above 100 percent for 18 years. So nothing like a good old fashioned crisis to highlight the problems, because when the going is good, let us just say that nobody cares much.

So what is going to happen today? It is all about Greece again, the Greek finance ministry, led by Evangelos Venizelos will hold one of the toughest (conference) calls of his life, with what is now being called “the troika”. This particular troika consists of the EU, the ECB and the IMF. Half banking types, half politicians. Greece needs this next part of the bailout package. In the bigger picture, 8 billion Euros is not a lot of money, bearing in mind that the original package is 109 billion. But Greece needs the money now, because they have basically enough money for about three weeks. This is a fight for sovereign liquidity.

Markets are all mooted to trade lower this morning as many were expecting a coordinated approach from the European Union finance ministers (and Tim Geithner), but alas there was much disappointment from the market hungry bail out junkies. See, junkies of another kind. What the meeting did say was that the Greeks had not done enough to qualify for this next 8 billion Euros. The Greeks are scrambling, an emergency cabinet meeting was held yesterday, and prime minister curious George Papandreou cancelled a trip to the US to essentially deal with this life and death matter.

I was astonished to see a factoid last week, someone tweeted it and then I could not find it for a while, and then Paul found it for me last evening, check it out: “Little known fact: #Italy is richer than #Germany. Net wealth E8.6 trillon vs E6.1 trillion. Italians should bail own government out.” That tweet was from Hugo Dixon, who is the Reuters Breaking Views founder and editor. So it is not about the money, that exists, but rather the internal compliance. The citizens need to comply, and as such, this time the European politicians are putting their foot down with Greece. Because I am guessing that the Greeks suffer from the same problem that the Italians do, they are relatively rich, but do not trust government. Since world war two there have been 20 Prime Ministers, roughly one every three years.

All the while the German chancellor continues to lose the popular vote back home. I saw this interesting article in Der Spiegel on Friday, leaving me more confused when I had finished. Check it out: Could the SPD Really Say No to a Grand Coalition? All I know is that her party is losing ground. But word on the street is that it does not matter what actually happens in Germany, all parties are committed to the Euro. Meanwhile the Americans are more than a little worried about the European issues, the WSJ reports: Geithner Warns Europeans.

Washington DC This is the Barack Obama plan to basically tell the super committee how to go about their business. Almost immediately it becomes apparent that this is a plan to score politically rather than score on policy. There will be much gnashing of teeth as rich people curse that fellow Buffett, here is a *nice* mainstream take from the NY Times: Obama Tax Plan Would Ask More of Millionaires. Phew, the upshot of it all will be that the business channels and outlets that we are plugged into will be critical of the plan. Because, you know it hinders the opportunities that rich people would otherwise contribute to employment. Other perhaps left-of-centre rich people would welcome the plan. All will be revealed later, keep calm and carry on, as the article suggests, very little will fly in the meantime, and we are set for deadlock once again.

Commodities and currencies corner. Dr. Copper last clocked 393 US cents per pound, about the lowest I have seen this year, in fact the lowest I have seen since May this year. The gold price is higher, naturally as the Mr. Miyagi risk off trade takes place, last at 1823 Dollars per fine ounce. The platinum price is also better at 1809 Dollars per fine ounce, I saw a genius analyst note say “platinum is a precious metal too”. Quite! Excellent and people get (well) paid for this stuff. The oil price (WTI Nymex) last crossed at 86.67 Dollars per barrel. The Rand is weaker (thanks Mr. Miyagi). This is the quote from the movie made back in 1984: “Wax on, right hand. Wax off, left hand. Wax on, wax off. Breathe in through nose, out the mouth. Wax on, wax off. Don’t forget to breathe, very important.” There goes. The ZAR last crossed at 7.54 to the US Dollar, 11.87 to the Pound Sterling and 10.33 to the Euro.

We remain looking for answers. Not me really, I am not too sure what answers “the market” is looking for. Resolution on Greece’s debt problems, not likely anytime soon, some even suggesting that Greece is being set up for a default in December, they will get this package, and not the next one, but that will be telegraphed. Not sure. In the mean time we have hit the skids here and are trading lower. Too bad, I was hoping for green across the screen after the rugby performances this weekend, Ireland showing the Aussies how it is done. Remember, take nothing for granted.

Sasha Naryshkine and Byron Lotter
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Jozi, Jozi. Dim co-ords, or is that min co-ords? Remember the kid that could not catch the cricket ball, that used to field at long stop? Which ironically was the most important position, because the bowlers direction sucked and the wicketkeeper was just as bad as the bowler. When you were nine, of course. Sorry, I never played netball, I do not have the girl analogy, perhaps a netball score of 2-1 for a full game. Anyhow, the central banks of the world finally coordinated, after looking a little like the long stop, mostly through the politicians doings. Mud-slinging and finger pointing and vacillating has seen confidence sour recently from Bangkok to Buenos Aires, Canberra to Caracas, perhaps not that bad, but in the US and the Euro zone for sure.

But finally some coordination from the ECB, the Federal Reserve, the SNB, the Bank of Japan and the Bank of England on DOLLAR liquidity specifically, meant that folks minds could be put at ease on European banks. French banks, which have been under pressure this week (substitute week with month or year) rallied hard on the news, one got the sense that a short squeeze was on the go. OK, so what does this dollar liquidity and coordination actually mean? Well, start understanding it by reading the statement, which you can find over here from the ECB: 15 September 2011 – ECB announces additional US dollar liquidity-providing operations over year-end.

Basically these central banks will “conduct three US dollar liquidity-providing operations with a maturity of approximately three months covering the end of the year.” These operations will “… all take the form of repurchase operations against eligible collateral and will be carried out as fixed rate tender procedures with full allotment. Further information on tender procedures can be found on the ECB’s website.” Important question, what is eligible collateral? Seems that it might be a lot.

The market participants breathed a sigh of relief, check this WSJ article: Central Banks Boost Dollar Liquidity. I could tell that the bears were bummed. This coordination comes against the Christine Lagarde, IMF chief, warning that the path to recovery in Europe is narrowing. But good thing is, we are still on it (the path), that is what she is thinking!

Pinnacle technology released results for the full year to end June 2011. This company continues to surprise, year after year, after year. I kid you not, I remember when the stock was 15 cents or so, 7 years or so ago. In fact, the lowest the stock price got to in the year end to 2003, was seven cents. At the year-end (June 2003) the stock was 14 cents and reported 4.8 cents per share worth of earnings, the stock was grossly undervalued. NAV per share back then 53 cents per share. It is safe to say that Mr. Market got it completely wrong.

The stock now trades at 855 cents. Earnings per share have rocketed to 121 cents, up 58 percent on last year, on a revenue increase of 57 percent to nearly 5 billion ZAR. The group are paying a 23 cents per share dividend, that is also pleasing, I am guessing that in years to come shareholders can maybe expect more. Costs are rising, that is not great, but the acquisitive nature of the group means that they will always be looking for ways to grow revenue, and with that comes rising costs. As long as they can bring out the long knife afterwards, and cut costs. Which seems to be something that they do work hard at.

The question is, the stock is trading at 860 today, on much higher than normal volumes (we have traded the normal whole days volume already in the first hour or so) but flat on the day. There was a bit of insider buying leading up to these results (a while ago) and I can guess those insiders must be scratching their heads at the non movement of the share price. Here are the simple fundamentals, the stock trades at just over seven years worth of historic earnings, and a dividend yield of 2.6 percent. Perhaps that is the “issue” that market participants have. The growth story of the past, might not be that of the future. Maybe.

The prospects column does talk about controlling costs: “The key for the Group remains growth while continuing to focus on cost containment to reduce pressure on revenue generation. The Group is constantly striving to acquire new product agencies and businesses throughout the continent that will assist in the diversification of the Group’s existing markets, products, geography and clientele.” Yip, into Africa will be the next best push. Perhaps the lower rating is in part their product mix, if I look at many of their lines, Dell, IBM, Microsoft, Sharp, Samsung, LG, amongst other well known brands. There is a definite shift in market valuations of some of these stocks above, Dell, Microsoft and HP all trade on less than ten times earnings. Perhaps Pinnacle has the same issues to contend with, in terms of market perceptions.

I got a couple of responses on what could be done to solve the jobs problem in South Africa, first Mr. S sent me his thoughts:

“Not particularly original but what of the major construction firms coming together to improve chosen schools to upgrade them. There is no need for huge sums of money surely the money could be accessed from the 9 Billion which the minister of finance spoke about in July.

If the construction firms worked through BUSA more brownie points for Busa and big business. It can and does work (for) Sappi (as) did it for Inanda Seminary. The point is not so much the money as the time and expertise of the companies to train the staff; for example in the person at reception being good at that job, the groundsman–the need for a groundsman and maintenance man who must have budget for tools and equipment.

Schools in many ways resemble businesses in that they have to be solvent. There is no good rebuilding classrooms and toilets and leaving it to the school to get on with it as one rural school I had dealings with, for in the winter holidays one enterprising local fellow kept his cattle in the renovated classrooms!

The shipping industry successfully developed a course in a Durban school which feeds them with people interested in shipping. With a bit of imagination all sorts of developments could take place. In contrast I could take you to a school which has had a costly state paid revamp and with a short time the doors and windows are in need of repair because the job was done very badly. This is I know small scale but surely it could be replicated with hospitals.

 


It would appeal to the left wing and thus perhaps some of our powers that be if these and other teams which were established were said to be copied from Stalin’s attempts to improve productivity in the 1930′s. There has to be measurable improvement and accountability otherwise it becomes another sink hole.”

Thanks Mr. S, good ideas of what you have seen work and what you suggest. Stalin was a crazy though, perhaps his plans and not his methodology!!

Next up, Mr. W, both these guys from Durbs, the air must have been good there yesterday!!!

“….It is common cause that we have high and growing unemployment, and a high base load of unskilled workers. This would suggest that when we look for an appropriate labour policy we should towards freeing up the labour market rather than placing impediments in the way of employment.

However the excesses of a totally free labour market are not acceptable and must be tempered by a level of regulation. Once you start to intervene in any market there are consequences, and the obvious difficulty is deciding on the extent of the regulation. However as the extremes of free labour market or a totalitarian state are unacceptable a compromise is necessary.

I have a lot of sympathy for the quest for “decent jobs”, but when there are not enough to go around a compromise is needed and everyone should contribute to a solution (not just the unskilled). A nice sounding solution would be to have a largely unregulated labour market, and to create a “safety net” of an unemployment grant (dole). The “fat cat capitalists” would contribute via their taxes, while more flexible labour laws would assist in mopping up some of the unemployed. The trick would be to set at a rate of the unemployment payment at the right level – one that would want to keep people fed and clothed, but not be too comfortable, and of course the administration of the scheme would be fraught with difficulty.

 


I am glad I am not a policy maker.”

Phew. That last line is quite telling. I can agree with Mr. W from Durban, I am also glad that I am not a policy maker, you have so many “things” to balance. Thanks for your input guys!!

Byron’s beats has a look at another handset maker that has fallen behind the curve.

If you own a Blackberry maybe don’t read this. Or maybe do and consider a change when it’s time for that contract to be renewed. Research In Motion (RIM) the makers of both the Blackberry hardware and software reported disappointing quarterly earnings as it’s phones lose traction while it’s tablet battles to gain any traction whatsoever. This was not well received by the market. We know how ruthless investors in New York can be. The stock fell 19 % in after trading hours. Wow.

RIM shares have now lost more than half their value in the last year and things going forward do not look good. It shipped half the PlayBook tablets it did last period. Tablets represent a new market and huge growth potential. Profits were down 59% from this quarter last year whilst phones shipped dropped from 12.1 million to 10.6 million.

Why do I emphasis these results? None of our clients hold RIM shares and I have nothing against Blackberry. I like this story because it presents a good investment lesson. You need to pick up on trends which are not necessarily that obvious. RIM’s market cap is now 3% of Apple’s. At its height in 2008 it was worth $84bn. At that stage Apple was worth $147bn but that was almost entirely based on the iPod. In fact the Apple app store was only opened in mid 2008 when the first iPhone 3G was launched. This was only the second model after the original iPhone which came out in June 2007.

I suppose it is a difficult trend to pick up on. Especially when we are here in South Africa which, even now seems like Blackberry’s final frontier. We did not see the absolute craze for the iPhone and the shift taking place. But one needs to look at the bigger picture. One needs to take note when people queue for days to get hold of a product and when a product launch almost becomes a public holiday in some regions.

Now I am not saying that Apple can sit comfortably. Far from that. Blackberry users seemed like the most loyal of consumers, to South Africans. But in truth, consumers are fickle and if something better comes up, people will talk with their wallets. This is why you need to pay close attention and put your money where the future products are going to come from. And to be honest Apple still seems to be at the forefront of innovation. They invented the tablet and sold 9.25 million iPads (RIM sold 200 000) and it looks like there is more to come. Not necessarily in quantity of various products but definitely quality. I can’t wait to see what their next life changing product will be. Rumour has it the new Apple TV will be awesome.

Commodities and currencies corner. Dr. Copper last clocked 397 US cents per pound, slightly higher, the gold price is heading back up, 1779 Dollars per fine ounce, the platinum price is higher at 1801 Dollars per fine ounce. The oil price last clocked 89.39 Dollars per barrel for WTI. The Rand is steady, 11.70 to the Pound Sterling, 10.24 to the Euro and 7.41 to the US Dollar. We have bounced around between being slightly higher and a little lower, resource stocks leading the charge here today, banks heading in the opposite direction.

Sasha Naryshkine and Byron Lotter
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Jozi, Jozi. A ripper yesterday, stocks rallied strongly. Merkel and Sarkozy (holiday over) are committed to the Euro, or so they say and curious George has reached out to them, check it out at the WSJ: Papandreou to ask Sarkozy, Merkel to squelch criticism, default leaks – sources. Ouch. Greece is working hard, neh? I feel sorry for all the participants, including the man on the street, once used to a certain way of life you just carry on as if that will always be so. Session end, with industrials leading the charge (up over two percent), we managed to close up 427 points on the Jozi all share to 30460, 1.42 percent up.

Byron’s beats has a look at retail stocks. One of the easiest sectors to talk about with your mates, your spouse, you kids, hey, even your dog.

We had trading updates from 2 retailers yesterday, both sell very different goods in very different sectors. We’ll look at Holdsport first, the guys who own Sportsmans warehouse, Outdoor warehouse and First Ascent. Then we’ll look at the update from Cashbuild, the guys who retail low cost building equipment and materials.

The one from Holdsport looked good, stating that the company expected earnings to be up over 20% against the last comparable period. Remember these guys only listed a few months ago so we don’t actually have a comparable period. Fortunately they gave us the actual expected headline earnings which fall between 137c and 147c for the 6 month period. In terms of valuations this makes Holdsport look very cheap in comparison to some of the other retailers. The stock trades at 3020 giving Holdsport a forward PE of 10 assuming they manage to maintain these earnings. To compare, Mr Price trades on a PE of 17.6, while a diversified retailer like Foschini who own TotalSports trades on a valuation of 15.

I know Holdsport is different in certain aspect to these comparisons but as we have seen, the entire retail sector, especially in this space is doing well and growing earnings in double digit figures. I guess the market is still “sussing” this one out and waiting for the actual results to be released. It’s a very competitive industry as we have spoken about before and there is not much liquidity for the stock. None the less it’s a great space to be in and possibly a good buying opportunity.

Next we had Cashbuild announcing 5 to 10% higher earnings against the comparable 6 month period. For the full year however they are expecting a 25-30% increase in earnings. This is excluding the once off effects of a BEE deal done last year. This is fantastic to see. Although the private sector construction industry is struggling, we can see that private individuals are improving their homes and taking matters into their own hands. It’s a sign of tough times but probably also a good indication that things in this industry are getting better.

There are not anymore details in the update so we will have to take a closer look at the actual company when the results come out. From a macro perspective, both companies are reiterating that the consumer is still strong regardless of the sector.

Remember yesterday when Byron suggested that we did not like the big banks, because there are too many moving parts? We have said this often enough, there is too much hidden away from investors to have a clear view on the inner workings of bank operations. I know they are all smart, work incredibly hard and are often great at what they do, and I know that sometimes (often) the criticism in unwarranted, but it is for reasons (almost on cue) like this today: UBS Hit by $2 Billion in Unauthorized Trades. Yes, you read right, 2 billion Dollars. Like Paul said, you never hear of the unauthorized trades that make the banks money, only the ones that lose heaps of money.

This loss features high on the list of largest trading losses of all time. Check it out: List of trading losses. Bloomberg have reported that there has been an arrest in London associated with the UBS trading loss, a 31 year old man. Rumours suggest that it is a currency related loss, makes sense, the Swiss Franc and “that event” when the SNB decided to peg their currency to the Euro.

The FT have quite quickly explored what it might mean for UBS, suggesting that this loss is manageable. I think I am allowed to post this link (it is the FT’s), here goes UBS rogue trade – the wider costs. Oh dear, a confidence thing, what would you be thinking as a client of UBS? If you are one, I would like to know. A Reuters breaking news journalist, Peter Thal Larsen, tweeted something very interesting: “UBS’s estimated $2 billion rogue trading loss is 24 times the investment bank’s daily value at risk in Q2.” Wow. Some manager, and their manager, and their manager (and the respective risk managers) are sweating in fox holes right now. Larsen also tweeted: “$2bn is also the same amount UBS plans to save by axing 3,500 jobs”. A few less today no doubt.

The conclusion of all of this is simple for us, this is one of the reasons that we do not like to own banks with trading activities, because like an anchor on the box said, how does that exactly happen? Time for more introspection and cannon fodder thrown the way of politicians calling for more regulation. What do the UBS shareholders think about all of this? The stock is in the toilet, pre market in the US the ADR is down eight and a half percent. That tells you what the market participants think. Can you imagine being Oswald Gruebel this morning. Talk about feeling defeated.

When one talks about investments it is always fun to get another view, be that an outsider, or someone with a different way of thinking to you. We always have a good chuckle when Mark Mobius comes on the box and we launch generic statements like: “Invest in emerging markets to capture higher growth rates and an expanding middle class”. Or even better, we ask one way questions (no matter how hard you shout at the TV, nobody ever looks back, remember that when you watch sport, OK, no matter how hard you clap, they don’t listen) like, hey Mark, what do you think about Brazil? And then of course we shoot back the Mobius answer: “Brazil….yes, lots of natural resources, a large growing population starting off a low base, high employment, politically stable, yes, I like Brazil”. Something like that, Byron says I gave away too much. Byron then said, why don’t you go to his twitter stream – Mark Mobius and find a good one, we liked this one:

“Urbanization could influence the demand and prices of commodities.”

How useful and insightful. Hey, I love Mobius, we are just kidding around here. But this is a lead into a story that Byron picked up on in the Economist: Long walk to innovation – South Africa has been slow to innovate. That may be changing. That decades behind part does not exactly fill me with a great deal of excitement. What do you think about the economic path we are on? It is too easy to say as middle to upper class South Africans that we should be a low wage labour intensive industrial economy, which could solve unemployment. Very easy for middle to upper class South Africans to say. What would you do, if tasked to tackle unemployment, and how long do you think it will take? Email me your suggestions.

New York, New York. The opposite of the prior session, stocks gave up a lot in the last half an hour, but fear not, another “winning” Charlie Sheen day. Tech stocks rocked, the broader market S&P 500 ended the session up 1.35 percent. Still four years ago (nearly, mid October 2007) the S&P 500 topped 1560, we are down nearly 25 percent since then. Four years on. Yes, we are all feeling the extreme poverty that exists in America, but it exists on a far grander scale all around the world, in particular here on our continent and in Asia.

I think that this is something that you must read, Here Comes Apple’s Real TV. That part about TV channels is dead right, not watching 86 percent of your digital bouquet, I like very few channels. And very few magazine programmes. Reality TV is fine where the person has a skill, dancing, singing, cooking, that sort of thing. Although there were multiple football games on last evening and you know what, I watched a bit of each one. But the possibilities I guess of what you can and cannot do are endless, and if Apple are developing such a product, that would be awesome. I do not hold my breath for an event so far out though. But we continue to buy the stock.

Commodities and currencies corner. Dr. Copper is (lower) last at 394 US cents per pound, the gold price is lower at 1805 Dollars per fine ounce, the platinum price is lower, having fallen through 1800 Dollars per fine ounce, last at 1799. The WTI oil price is higher at 89.19 Dollars per barrel on Nymex. The Rand is steady to weaker, 7.41 to the US Dollar, 11.73 to the Pound Sterling and 10.24 to the Euro. We have started advancing like the clappers, up one and a half percent currently.

Sasha Naryshkine and Byron Lotter
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