Slasher's coffee beans

Whoa! There was an enormous amount going on, both on and off the field as the sports folks would say. The biggest and most well received news of course was the news that Europe had been saved. Or has it? A whole lot of reaction to the solution, we will have a look at some different viewpoints. There were subscriber numbers released from the MTN Group, which at first glance were iffy, but then you must take a harder look and then put it into perspective. And then to top off a good day and change it to great, there was a US GDP first take on the 3rd quarter this year that met expectations -> Real GDP Recovers to Above Its Pre-Recession Level, but more importantly grew at 2.5 percent. Nope, sorry “the Nouriel”, doesn’t even feel like a double dip like YOU SAID IT WOULD!! OK, I am angry that so many people think that big talker (who is exceptionally talented and super smart) “the Nouriel” somehow holds the key to predicting the future.

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. An explosion of bulls and perhaps a whole lot of bears being squeezed too saw markets rocket higher here in Jozi on Thursday. In fact the US markets have seen their major indices for the month of October (so far) up the most since 1974. Two trading sessions left for that record to be maintained, US futures are a little lower this morning. We managed to add 715 points to end at 32452 on the Jozi all share, that was a gain of 2 and a quarter percent. The strongest movers out of a wild running pack were the resource stocks, which rallied as a whole over three and three quarters of a percent. Platinum stocks added four and a quarter of a percent. Banks “only” added a little over four fifths of a percent. The currency did weigh on some of the dual listed stocks, and perhaps some of the stocks that folks might say are defensive. Like I said, I am not too sure what that means.

One of our longest held companies (from the start) reported subscriber numbers yesterday. We are of course taking about MTN. Here is the copy paste from the release:

“MTN Group recorded 158 590 000 subscribers at 30 September 2011. This is a 4.1% increase for the quarter from 152 272 000 subscribers recorded at 30 June 2011. During the quarter, MTN has successfully maintained market share in most of its markets. Although social unrest remained a factor in some countries, Syria, Yemen and Cote d’Ivoire increased net connections during the quarter.”

This is when measured against the last quarter, 4.1 percent up, or 6.3 million subscribers. Do you even remember how many subscribers they had this time in 2010? 2009? 2008? No? OK, so I checked it out. Here goes, same time 2010 MTN recorded a 4 percent increase in their subscriber base from 129.2 million subscribers to 134.4 million, an increase of 5.2 million subscribers. In 2009, on nearly the same day, the subscriber base grew five percent on the prior quarter from 103.1 million to 108.5 million folks, 5.4 million folks. In 2008 at the same point (Halloween in fact) the subscriber base grew 9 percent from 74 million to 80.7 million, 6.7 million new subscribers in the quarter.

So it seems to me that they are adding more or less the same number of subscribers a quarter (for this quarter) for the last four years. Ex growth? Hmmm… no, I would not say so at all. They have more than doubled their subscriber base over the last four years. Quite unlikely that it can happen again, but they are not ex growth. Here is the full RELEASE OF SUBSCRIBER NUMBERS FOR THE QUARTER ENDED 30 September 2011. I have taken the top three subscriber bases for MTN, Nigeria, South Africa and Iran. I was pretty surprised with the South Africa increase and the jump to above 20 million subscribers.

The next “thing” to look for is the average revenue per user number or ARPU, if you like acronyms. In South Africa over the quarter, they were flat. I have always maintained that the rest of Africa ARPU’s are low, but that would grow off a very low base. Data is the key to me for the future of almost all mobile businesses. And I think more so in an African context, where the fixed lines are far and few between. And I think I can say that they are flattening out and not declining any more. That is a pretty dangerous assumption, I know, great examples of falling ARPU’s because of pricing wars exist in India and East Africa, and that is recent. I am pleased with these numbers. I am pleased that data still has a long way to go in an African and local context. We continue to accumulate this stock.

Byron’s beats has a look at one of the major producers of platinum on the planet, Aquarius Platinum. Who have had problems lately. The beats that are back make me really happy.

More results coming at us, this time from the fourth largest platinum producer in the world, Aquarius platinum. That makes them sound big but in truth they are only an R11bn company. Sasha is right when he says that in truth there are really only two platinum miners out there to take note of. That is Impala and Anglo Plats. The capital expenditure to sink a mine with the hope that the grades are as good as the geologists expect are extremely high and for mid tier miners, it is very risky because you have to allocate such a large proportion of your capital to one project.

Unfortunately this seems to be the case with Aquarius. Year on year total production was down 14%. This was as a result of mining contractor underperformance, failure to achieve budgets and unit cost targets, failure to maintain safety standards and lastly industrial actions from labour. Wow that is a lot of excuses. Some of them within the control of management, some of them not. In terms of their financial performance, earnings were up 24% compared to the comparable quarter to $34.9m because of the weaker rand and strong PGM prices. However due to forex adjustments they actually made a $91.8m loss. I would assume that their reserves were held in South Africa before the Rand weekend so much.

After scouring through the results and the production report the biggest stand out for me was the success of their joint venture with Impala in Zimbabwe at the Mimosa mine. This mine was the only one out of their 7 mines which actually met targets. It now constitutes 22% of platinum mined by the company. It is also had the lowest costs out of all the other mines. Is it coincidence that this successful mine is the only one outside of SA? I think not.

As a devout patriot it kills me to keep bringing this up but South Africa is just not a very friendly place to mine at the moment. Pravin Gordhan admitted so in his budget speech the other day. After he mentioned this I asked Paul what exactly we needed to do to make us a better destination to mine. We already know that increasing electricity tariffs are uncontrollable. Without those we will have no electricity at all as Eskom struggles to supply historically cheap electricity. The crux of his answer came down to less intervention. Just let the miners do their thing. Less strict labour laws, weaken the unions, more clarification on mineral rights and very importantly transport. Either privatise rail or get Transnet into gear. I prefer the former.

I understand that mines are profit driven organisations that need regulation otherwise they will exploit the environment and the people in the vicinity. But you have to find a balance. Look at Australia, the only developed nation not to touch a recession this decade and that is because of their mining sector.

Has Europe really been saved? Well, the jury is still out. Some say yes, this is awesome and others are completely sceptical. So the magic that the Europeans managed to sprinkle across the markets is either seen as very good, or there is not enough detail seen from some quarters. I really like the FT Blog view from yesterday -> So. Many. Bailout questions. Phew. So many questions for sure. DO NOT WORRY IF YOU ARE CONFUSED!!! You are not alone, and in fact many of the smart folks sticking out notes are having conflicting views. Which is sometimes refreshing to see!!

There is of course news around that the Chinese central investment vehicle, who is looking to diversify their bond holdings, could be a buyer of European bonds through the EFSF. Just have a look at this picture to see what could be done with the EFSF. It came on the Twitter thingie -> EFSF leverage via Credit Enhancing bond insurance. But here is the picture from that link, thanks so much RBC Capital markets for doing that flow chart for everyone.

Everyone seems to be talking about option two. Perhaps the EU put out some sort of statement and then waited to see what the market thinks and then take that advice. I am of course kidding about that last statement. We are of course expecting some sort of detail in the next month. But interesting, don’t you think? I will tell you what The Economist thinks, they are not convinced -> Europe’s rescue plan. Poor politicians, they are not there to solve these crises, they surround themselves with people to solve these issues. Wishing somehow for a quieter period in history. I can’t think of one though!

This is not designed to be a personal attack on “the Nouriel”. OK, perhaps it is. I have heard from people who have attended his talks that he has a real impact and talks with an enormous amount of conviction about events. But it turns out that many of his predictions have been wrong. This is not just me having a go at him, check this piece out -> Who Predicted the Financial Crisis. If you cannot click on the link I have (selectively) taken a table snapshot of his equity market predictions:

So the man who predicted the financial crisis (give it to him, even thought the article does not) has failed to get too much right thereafter. My question is a more pointed one though. Surely the people who monetized the financial crisis (after all we are in the business of money) are the predictors. And as such I always fall back to that Michael Lewis book, “The Big Short”, and the different strategies that made money out of the disaster. Guys like John Paulson, who has had a very bad time this year, and that has been very well documented. That is unfair, because he “monetized” the crisis by shorting the subprime market, he made many billions of Dollars. Steve Eisman, Michael Burry, these lesser known guys made serious money for themselves and their clients.

Nouriel is trying to sell his loss making business -> Nouriel Roubini’s Firm Is Losing Millions And Now He’s Trying To Sell It. Would you buy it if you had the money? To own his speaking prowess over the next few years? What happens if things get a whole lot better and he sounds like a stuck record again?

My next and related point comes from two pieces and they were fuelled by what Paul said in that video from yesterday -> Euro summit conclusion. Paul basically said that if you had been sitting out, then you wouldn’t have caught this recent rally. And what were you then doing managing money?

So that is the background to introduce you to this Abnormal Returns piece -> Doing yourself a favor by doing less. Now, this Barry (Ritholtz) piece has a little shorter time frame than what we usually suggest, but you get the point. Flipping, flopping, tracking, jobbing in and out has a huge amount of stress when trading, anxiety about being in and holding is also a big factor. But often we refer back to this visual:

Yes, keep calm and carry on. This year many a trader type has had a bad time, this sort of reporting is definitely not helping -> Can a monkey pick a hedge fund? I am pretty darn sure that all the people managing that money are smarter than monkeys, they probably just have extrapolation disease. Or prone to quarteritis, too much short term guessing. The richest investor is also the most patient, that counts for a lot.

And then lastly, now that everyone has been rubbished, let us see what you guys think about us. Read this one and tell us if we are no different from the Nouriel, I would be curious to know what you think: Portfolio manager performance art.

Commodities and currencies corner. Dr. Copper is last at 364 US cents per pound, the gold price is 1739 Dollars per fine ounce. Both a touch lower. The platinum price is up a touch, 1643 Dollars per fine ounce. The oil price, the only really useful commodity that we consume daily (more on that next week), is last at 92.71 Dollars per barrel. The Rand is steady after having a ripper yesterday, 7.72 to the US Dollar, 12.44 to the Pound Sterling and 10.94 to the Euro. We have started better again here today. I see the headlines already next week, “Market still not seeing clarity on Euro plan” or even better: “Profit taking sees market lower”.

Sasha Naryshkine and Byron Lotter
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OK, we are drawing closer to a name for our piece. Just like the Europeans edged closer to a solution, announced in the wee hours of the morning. 4am in Brussels and there was an announcement finally, perhaps the shock and awe that we were waiting for, is sort of there. Of course there was reaction from various quarters about the mini budget speech that I think Pravin Gordhan delivered so well, but understandably if someone in my boots thinks that he did a good job, then someone else in our diverse country would have an opposing view. Imagine how boring it must be to live in Scandinavia somewhere. There were also results from another one of our favourite companies, Visa Incorporated. Or just Visa. And turn your head north to the skies if you are in Gauteng, those things are clouds and there were a few drops of rain on my way to work this morning. Phew, we live in hope. A preview of US GDP is on hand too.

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. Sadly for the great bull run of spring (south spring) 2011 the momentum for the full day was not quite maintained through to the end. We literally fell in the last half an hour of trade as the US rally fizzled. There is good news though, US markets bounced hard from around the time our market was closing all the way through to the end and registered healthy gains. And wait for it, the US futures market is pointing to a much better open. Hurrah. The Euro has been saved. Pfff… saved? What does that even mean? Back to the local markets though, the Jozi all share closed at 31736, up nearly a quarter of a percent or 73 points on the day. At one stage yesterday we were within striking distance of the years breakeven point, it feels almost like getting excited about the Currie Cup final this weekend. Go the MTN Golden Lions, there, I nailed my colours to the mast. The poor Jozi team has not won since 1999, give them a break. Like give Mr. Market a break. I get the sense that at the beginning of the session today we will break into the green. It feels like being a retailer on black Friday, the day after Thanksgiving.

Resources stocks added half a percent on the day, gold miners were lifted by a much higher bullion price and rallied over one and two thirds of a percent. In the losing column, the banks lost nearly nine tenths of a percent. The biggest news for investors (not sure what that means anymore) is the fact that entities can own stocks that were considered inward listings and as such part of their offshore allowance. This was bad news for financials and resources, good news for BATS, which will be around one fifth of the top 40, is that right? I still have to work it out, it still has little bearing on ourselves, we have mostly bought whatever we wanted to in the past.

Taking the most selective data point to prove your point is a classic human trait. In yesterdays COSATU news piece I was quite amused with this piece written by Patrick Craven in response to the mini budget:

“At a macro-level, the current account deficit was 1% of GDP in 2010 Q4, when the growth rate was 3.6%. However, in 2011 Q2 the growth rate slowed down to 3.2% and the current account deficit widened to 3.3% of GDP. The main driver of this deficit is the sharp appreciation of the real exchange rate. The real exchange rate has strengthened by more than 40% since the beginning of 2009.”

In particular that line: The real exchange rate has strengthened by more than 40% since the beginning of 2009. This is true, that has happened, but now you are being selective for the benefits of your own purposes. At the same time inflation has also moderated significantly Mr. Craven. So I decided to correct him and took out those extraordinary movements in the currency when everyone pulled money back home (the US, Japan and Europe) in a hurry and present you with a longer dated graph sports eeer… watchers. This is a seven and a half year graph of the Rand versus the US dollar.

If you are looking for the link to manipulate it however you want and perhaps you can tell people that the Rand is weaker by 18 percent since the end of July, then do with this link whatever you want -> US Dollar (USD) in South African Rand (ZAR). And in fact at one stage the rand had weakened by a quarter in 8 weeks through to the 22nd of September. But confidence has been back for a little while now, and equities and riskier assets (read developing market assets) are catching a bid now. Do not use selective data points, I must admit I think we are all guilty of this, I just wanted to point it out. OK, and yes, some union bashing, I must stop that too.

There is that gruesome part in the Gladiator where Russell Crowe (the Spaniard section in the Desert) shouts something along these lines “are you impressed” as he single-handedly managed to “deal with” err…. all the other gladiators as swiftly as he could. Well, then are you impressed will apply today, with regards to the European debt solution that we see today, but I wonder about those folks having taken so long. So what do we need to know about this particular solution? As ever the details are not entirely clear, we are only going to get those next month seemingly. Paul said to us here in the office yesterday that they are going to save Greece in a bigger way than everyone is thinking. It seems that he is right.

Here is how I understand it. Greece will “get” a large portion of the available funds, 130 billion Euros, and the rest will be leveraged up (not sure how) four to five times to be in excess of 1 trillion Euros. To guarantee the bonds of those countries that are too huge and cannot be allowed to “fail”, Spain and Italy. And by fail I mean continuing to raise funds in the open market. That is the most simple explanation that I can give so far. We were asked to do a simple video, which we did, here I question Paul -> Euro summit conclusion. Three minutes long, watch it. Paul gets quite excited at the end there.

Here are some other pieces that I was able to read and you should too -> EU Sets 50% Greek Writedown, $1.4T in Rescue Fund. Or this one, Spiegel Online has the following, perhaps a better mainstream explanation of the “solution” -> Euro Zone Frees Greece of Half its Debts. I almost get the sense that nobody cares about the details, which are set to be revealed next month. But, Sarkozy seems pleased, as does Merkel, Lagarde was thrilled, what is not to like. Oh, Zero Hedge doesn’t like it of course, the world is always falling in a hole, it must be tiresome to live with that person.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. The worst point of the day was around mid morning on Wall Street at the NYSE, for the bulls that was, from then onwards to the end of the session it was upwards and onwards. Only the tech stocks lagged a little, but the overall market managed to add a full percent for the day.

There was a durable goods order that beat at both the headline and core level. Core of course ignores volatile transportation items. Aircraft, vehicles, trucks, those sort of orders that only yuppies would buy more often than their washing machine or tumble dryer. What is noteworthy from the official release -> Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders September 2011.

“Inventories of manufactured durable goods in September, up twenty one consecutive months, increased $0.4 billion or 0.1 percent to $365.6 billion. This was at the highest level since the series was first published on a NAICS basis in 1992″

Inventories at an all time high? Or, at least since the series was introduced back in 1992. Investopedia says the following: “High inventory levels are unhealthy because they represent an investment with a rate of return of zero.” So either business is expecting an improvement from here, or the exact opposite is true. We shall see. Another important economic read is US GDP today. So what are people expecting? Things are so terrible (or so you keep hearing) that it must be one percent or something like that. Nope, the expectation is for 2.4 percent. Err…. double dip? This might well be the ninth straight quarter of positive economic growth in the US. The last time that a negative quarter was recorded was middle of 2009.

The definition from Investopedia is as follows: “When gross domestic product (GDP) growth slides back to negative after a quarter or two of positive growth. A double-dip recession refers to a recession followed by a short-lived recovery, followed by another recession.” Does this look like the explanation above? US GDP Growth. At all? It certainly doesn’t look like the best growth that you have ever seen, but good enough. And perhaps one should refer to another period of economic contraction, versus the last period. Yes.

Let me put it this way, when this graph (courtesy of Trading Economics) appears in a text book (online of course) in 10 years time, how will people think that the folks living through the times would have felt?

I am curious to know what your answer will be.

Byron’s beats takes a look at a company that has margins that is the envy of many others. Visa. Great adverts too, as are those of their competitors at MasterCard.

Yesterday, Visa, one of the most exciting companies around came out with quarterly earnings yesterday which beat consensus. Just for the record Visa have beaten estimates for every quarter since listing in March 2008. Either that is very impressive or analysts need to raise their game. That’s not fair. Remember that these guys do not actually take any credit risk, it’s the banks that do that. They are the ones sitting at the forefront of the evolution taking place in the way we pay for just about anything.

Let’s take a look at the numbers. Earnings per share were up 34% compared to this time last year coming in at $1.27. Expectations were for $1.25. This came from revenue of $2.38bn whilst boasting an outstanding operating margin of 57.2% which was slightly below consensus of 57.5%. This was the fourth quarter release which gave us full year earnings of $5.18 giving the share a historic valuation of 17.7. Estimates for next year however come in at around $6 which gives us a forward PE 15.3. For a company with such exciting prospects, this looks cheap.

From $970bn of total payments (that is 3 times our annual GDP in 1 quarter!) $228bn came from US credit cards which showed a 10% increase and $288bn came from US debit cards which showed an 8% increase. This is the first time credit cards in the US showed faster growth than debit cards. This is because the new laws on swipe fees have incentivised banks to promote credit cards. Interesting. International credit payments amounted $369bn (up 25%) while debit card payments only amounted to $85bn (up 40%). As you can see debit cards are growing as developing nations adopt this newish method. They have a good mix between local and international income.

In terms of consensus the company seems positive. Not only are they issuing new cards but current holders are also spending more. I thought the consumer was finished? They fall in a space where people are shifting to their service more and more as cash becomes more of a liability. It is so much easier to pay by card. It is also a lot easier to use Visa if you travel abroad instead of dealing with foreign exchange and sitting on cash. Basically they make our lives easier and as consumers we barely notice the small amount they take each swipe.

At the same time the global population is growing and so is the middle class. This means more and more people will use their service. I can barely remember what a cheque book looks like, children being born now will look at cheque books like we look at the typewriter. Cards are the way of the future and when that shifts to something else like wallets on ones phone, Visa, with all their processing systems will be at the forefront of that to.

Commodities and currencies corner. Dr. Copper is higher at 359 cents per pound, the gold price is lower at 1712 Dollars per fine ounce, the platinum price is higher at 1601 Dollars per fine ounce. Industrial metals trumping fear I guess. The oil price is higher at 91.84 Dollars per barrel. The Rand is firmer to the US Dollar, 7.82 and firmer to the Pound Sterling, 12.51 but weaker against the Euro, which is firming up. 10.96. We have started here so much higher. In fact markets for the year are up one percent now. Don’t pop any corks just yet please.

Sasha Naryshkine and Byron Lotter
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In the newsletter today there will be a whole lot of focus on the mid-term budget speech, there of course is a whole lot of detail out there, this is our little look. Then Byron will have a look at Amazon.com results, which have disappointed the market, but fear not, this has happened before. We also take a look at British America Tobacco results this morning. Plus also remember today is the day as far the European leaders are concerned. But as we know well, this is the 14th summit in 21 months, I am getting the sense that Mr. Market is pinning less on these guys as perhaps before.

We have a few names here that we like, that have been put forward for the newsletter:

Stock take
Bits ‘n bobs
Blue chipped
Soliloquy
Salient snippets

Which one do you like, or do you have any further suggestions?

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. Initially we were a whole lot higher on the day, markets improved at the get go. US earnings seemed to confirm what we had seen all along, better than anticipated has been the trend, but that changed with the 3M results, which is supposedly a lead indicator. And then news that the European finance ministers were NOT meeting today, but the leaders in Europe were still on confused folks. I cheekily said that perhaps their work is done and they have agreed on something, finally. Silvia Wadhwa is probably right, there is more chance of pigs flying today. A fairly late in the session US consumer confidence number also missed expectations, the afternoon held neither rain, nor a rally for stocks.

The Jozi all share index still managed to end in the green, up 9 points to close up shop at 31663. Banks added a percent and a third. There was news yesterday that the iron ore spot negotiations (quarterly) will see the prices around eight percent lower, that would explain why all the iron ore producers were lower. Anglo American, BHP Billiton and Kumba Iron Ore, African Rainbow Minerals all comfortably off their highs yesterday BUT are all OK this morning. Yes, no, maybe, we will see what this means in the coming weeks.

Who will flex their muscles in Brussels? Or as my favourite currency guy (one of my two favourites) David Bloom from HSBC said on the box this morning, they will alleviate some uncertainty, but not answer all questions. Politics. Yech. Germany perhaps will be the winner in all of this and perhaps the Italians will have to walk away a little less cock a hoop. Talking about roosters, the biggest loser is expected to be the French. So we will see a little later, but my sense is that nobody actually knows what to expect really, perhaps the bigger the better. Pfff… I expect very little.

British America Tobacco reported results of sorts this morning, this is for the nine months to end 30 September 2011. The company sees revenue increase 7 percent on lower stick volumes. Volumes were lower by 0.6 percent. “The benefit to Group volumes from exceptional sales in Japan was offset by industry volume decline following the significant excise-driven price increases in that market last year.” They even refer to these as shock excise increases. And which markets would those higher government taxes be coming through? Well, the only market showing gains in stick volumes is their biggest segment Eastern Europe, Africa and the Middle East. Not Asia Pacific, which was flat over the year.

So this is a company that is owned on the basis that they are defensive in nature and people will always smoke. Well, that might be true for the time being, but you can see already stick volumes have been doing nothing for a number of years, going backwards actually. Tobacco is still a great crop however, one of the best yield crops. And margins are still very good. But they are cutting costs, this is what they have to say: “The Group continues to improve its operating margin by addressing the cost base through factory rationalisation, systems standardisation and productivity savings.” There is only so much of that you can do.

We will eventually be right on the idea that there is a tipping point, and that nears each year as excise duties globally rise at a rate comfortably above the inflation rate. For the time being we are completely wrong on the price of the stock, but we are not short the company, we are just not long the stock. Tobacco companies are working hard to develop alternate nicotine consumption methods, smokeless cigarettes and the like. I am sure that the health implications are about the same as they are with drinking coffee, the only legal day time drug that nobody frowns at/on. You don’t hear anyone say, mmmmmm, that cigarette smoke smells so good.

I would suggest that if you are looking for a defensive stock, food is better in the long run. The company perhaps in ten years time there will be more serious problems to deal with. National health schemes globally are under pressure to raise money, this is a soft target. You cannot argue otherwise about the product. It kills people if they use it too much. Strangely most products are like this, too much bacon or steak or cheese will do the same for you too. But it does not harm the people around you, and come with many health warnings.

As I highlighted about McDonald’s, expect the Danish example to become adopted by other developed world countries. As I often say though, there might be organisations like PETA promoting vegetarianism, but there are examples of organisation that want to eradicate tobacco products entirely. A balancing act for governments though, specific excise duties in a South African example is just a little less than four percent of total tax revenues. Not big, but not small either. They would like to see it grow. To own a non resource global company, we continue to prefer Richemont and like the theme aspirational consumerism.

MTBS. Or, the Medium Term Budget Speech, which was delivered by finance minister Pravin Gordhan yesterday, starting at 2 in the afternoon in Cape Town. I thought that he was good. Nope, I thought that at times he was more than good, he was brutally honest. I wrote a piece for a journalist at the BusinessDay last evening, here it is:

My first thoughts were that this was much of the same, but the honesty was pretty refreshing compared to much of the European flip flopping that we have seen over the last eighteen months. Honesty is not so easy when the truth is not what everyone wanted to hear, lower projected growth than initially anticipated and that means lower revenue collection. Which is the hard message to convey to our politicians, but he seemingly did a good job. One gets the sense that Minister Gordhan GETS IT, perhaps more than a little coaxing of his colleagues in the ruling party will be in order.

The budget cuts and highlighting of the right way to act in a position of power when it came to the country’s finances and the hard earned (and collected) tax monies perhaps was more forceful than we have seen in a while. Ministers (strangely those with a strong socialist steer) have been in the media for all the wrong reasons, more recently Agriculture Minister Tina Joemat-Pettersson. The story happened to be the most read on BusinessDay Tuesday (Minister spends R1,5m on posh hotels) and the comments about the world’s largest employer and retailer would be well directed towards the free spending political elite. The fact that WalMart execs share a hotel room, drive the cheapest rental and fly economy class tells you that they value shareholder funds. Government should treat tax payers money with more respect.

My initial thoughts about wage moderation in the public service were that this won’t sit well with the unions, and predictably so, most people forget that the contributions to their coffers are boosted by members increases, although their mandate is to champion the working class. The initial negative reaction from organized labour to that line was as expected, not in agreement.

Trying to attract investment by loosening to an extent the ability by entities in own inward listings and having them classified as domestic investments is a huge positive. South Africa has to stop negative perceptions from the rest of the continent and must move to be the financial capital of the future on the continent. I liked the long term thinking and approach to growth and investment.

Whether or not the decision to help the struggling manufacturing sector is money well spent, government cannot stand idle. Equally we need to recognize that we cannot really compete with cheaper labour elsewhere in the world. I am happy that government recognizes businesses role by supporting them when times are tough. That means more than 25 billion ZAR over six years.

On balance it met or perhaps even exceeded expectations of the conservatives, it told the truth and there was very little sugar coating. Another great job to those who steer the South African financial ship, well done Treasury and the Minister of Finance who work well with Revenue Services, who do such a underappreciated job. Not by me, we as the tax payer appreciates your tireless work.

OK, that is what I wrote last evening. If you are looking for the full speech and tables then follow this link to the Treasury website -> Medium Term Budget Policy Statement 2011. In direct contrast to what Mining Minister Shabangu has been saying, the finance minister told us what you knew already: “The debate on nationalisation has fed uncertainty among investors.”

The overview of mining in South Africa is where this one line comes from, here is the insert and the background, because it is important I guess. This is from chapter two under the heading Weak performance in mining, manufacturing and agriculture. And goes as follows: “Overall mining value added grew by 6.3 per cent in the first half of 2011, year on year. Production of platinum group metals rose by 16.3 per cent over this period. In the year to August 2011, overall mining production has declined by 4 per cent, with steep falls in diamonds and gold, despite a 12 per cent increase in primary commodity prices. Strikes and safety related stoppages disrupted production.” All the reasons listed there are reasons why we are not too excited about owning South African mining assets and choose BHP Billiton as our primary investment in this theme.

But then the ugly truth is exposed for all to see: “Value added in South Africa’s mining sector was flat between 2001 and 2008, compared with 12 percent growth in Chile. Investment growth averaged 7 per cent per year during the 2000s compared with 24 percent in Australia.” So we have lagged our global mining peers. One of the reasons above has been given already, although minister Shabangu disagrees. The other reasons, the first of course is where the minister has oversight herself:

• Uncertainty in the regulatory environment governing the transfer of mining rights, and an opaque permit granting process, compounded by inefficient administrative processes and lengthy waiting periods for the issuance of water licences.
• Logistical challenges, including operational inefficiencies in the rail system and high port charges.
• Investment in electricity generation capacity remains crucial to prevent production stoppages.
• Volatility of the exchange rate leads to widely fluctuating rand commodity prices.

 

• Gold mining now occurs at very deep levels, with higher costs and risks.

Is there anything in there that you did not know already? Probably not, but it is refreshing to see the honesty. Because now there is honesty, the issues can be addressed. Some of course cannot, the high cost of electricity is not going to go away. But spend on upgrading rail facilities and ports, which are coming should help alleviate some of the problems that we have with SOE’s. The best way I think is that one must privatise the whole lot, let the motive be profits. Jobs follow and skills are enhanced. Plus more importantly productivity is much improved, nobody went to work for the government because they wanted to be entrepreneurs. Just my view.

All in all, it was good. Thanks for the truth. My two favourite tables from the release, first these are the projections over the coming years:

And then I am sure that you always wanted to know where the tax in South Africa was collected. It turns out that five million odd tax payers are more important than even VAT collections, and companies. Check it out:

Individuals and persons (Huh? Not the same?) contribute one third to total tax revenue.

I was sent some great quotes a few weeks back, I have not had a chance to use them yet. So here goes just a few, thanks AM for the message.

“Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it”. – Ronald Reagan

“Giving money and power to government is like giving whiskey and car keys to teenage boys”. – P.J. O’Rourke

“A government which robs Peter to pay Paul can always depend on the support of Paul”. – George Bernard Shaw

And then my personal favourite:

“I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle”. – Winston Churchill

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. Stocks sank fast as the news flow looked not great, 3M results indicated too much exposure to Europe, that is one way of viewing it, the stock gave up six and a quarter percent. Check out the full release, this is most certainly an interesting company -> 3M Q3 Sales Rise 10 Percent to $7.5 Billion; Earnings Were $1.52 per Share, Down 1 Percent Year-on-Year; Company Adjusts Full-Year 2011 Sales and Earnings Expectations. Doritos and Post-it’s. Scotch tape and plasters. Stethoscopes. All types of interesting tapes. Last quarter was a disappointment too ironically, two in a row. Over five years the stock is flat, that tells you about all that you need to know I guess, perhaps it is a case of management execution.

Poor Netflix got cleaned up, the stock lost nearly 35 percent to just over 77 Dollars a share, after reporting that they lost nearly a million customers. They raised their prices remember? In the middle of July the stock was trading at nearly 300 Dollars a share. I suspect that they will make a comeback, short interest is huge in the stock, I think nearly one third of the company’s outstanding stock has been sold short. Abandoning the stock is what I am reading and laughably what is happening is that folks covering the stock are downgrading their price targets from around 200 Dollars a share to between 50 to 70 Dollars. Thanks for that folks. The US launched their streaming online videos in 2007, Canada only last year and in South America the launch is very recent. The competition will come from Apple (who are onto the TV thing, panel beating their version too) and Google TV is something that has been tried too. And of course Amazon, which leads us into the next piece.

Byron’s beats has a look at a high flyer, Amazon.com, who are going to change the world. Or have already anyhow. The worlds biggest retailer online.

Yesterday we had disappointing results come out from one of our recommended technology stocks in New York, Amazon. The online retailer posted a 73% drop in third quarter profits mainly because operating margins were hurt by big capital expenditure in warehouses, data centres and digital content offerings. Even though quarterly sales were up 44%, this was overshadowed by analyst earnings expectations of 24c compared to the actual earnings of 14c. Understandably the stock has tumbled 11% post the market close.

The numbers need a closer look however and although there was an earnings miss the main reason for the drop in price was actually the guidance for the next quarter which was to be impacted by the introduction of the new Kindle Fire which is being sold at a loss. If you remember, last month I did a review on the product and from what the company has said about it, the hardware is not there to make a profit. Sounds crazy right? No. They make the hardware extremely affordable so that people who buy the product use it as a gateway to Amazon’s real business and that is the online retailing, streaming, books, music and the cloud.

This is why most analysts focus on sales growth when it comes to Amazon who are an extremely fast growing tech company that looks to change the face of retail. And sales growth was up 44%. I do understand why the market has reacted the way it did. The company trades on extremely demanding multiples and expectations are high. Expected earnings for the year come in at around $3.50 a share while the stock trades at $200. That gives us a PE of 57. Investors are obviously getting impatient and another soft quarter is not acceptable.

That is not the way I see it however. Patience is key with a company like this. How can you blame a company for making big investments which compromise margins in order to grow in the long run? Especially for a company which seems to be in its infancy in terms of development. The avenues open to Amazon seem endless and once everyone has a kindle the results will come. Remember the FedEx report that Sasha wrote about yesterday? The national retail federation expects to see $465 billion of sales in the last 2 months of the year which is a 3% increase from last year. But FedEx themselves expect a 12% increase in deliveries. Why is FedEx so much more than the increase in overall sales? This is because people are shifting to online retailers and getting the goods delivered. Amazon sits at the forefront in the shift of the way we consume.

I guess it again comes down to that yearn for instant gratification. Maybe companies should stop reporting quarterly, it just fuels our impatience. As long as sales are growing at fantastic levels I am happy to accept reinvestment into capital. We see this drop as a good buying opportunity.

Commodities and currencies corner. Dr. Copper is last trading at 350 US cents per pound, the gold price is last at 1714 Dollars per fine ounce, getting a serious lift ahead of the European end point. Much later tonight sadly. The platinum price is also higher at 1567 Dollars per fine ounce. The oil price is higher at 93.61 Dollars per barrel. The Rand slightly weaker, 7.95 to the US Dollar, 12.72 to the Pound Sterling and 11.09 to the Euro. We have started a whole lot better here this morning, Asia improved markedly from beginning to end, we caught the second half. Now we wait.

Sasha Naryshkine
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Today we have a look at a few results a little later from Caterpillar and McDonald’s, plus also the upbeat Christmas season outlook from the fellows over at FedEx. And then we have a look at this notion of whether or not the Americans are all that poor and whether or not you should feel too sorry for them when they talk about the unequal society that exists. Do not forget to watch Mad Markets this evening on CNBC Africa, that is channel 410 on the DSTV at 20:30. Ditch Top Billing, or PVR it, come on people, get with the program.

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. Did you ever see the flag of the city of Joburg? No? Me neither until I came across this trying to get the coordinates for the city (above) -> Flag of Jozi. Nice or too similar to another flag we know well? Perhaps. Yesterday the city experienced the hottest October day on record, it is still waiting to be confirmed by the weather department, but I tweeted a picture of my own, on the way back from the SABC news at one, check it out -> That is how hot it is. 41 degrees Celsius?

Markets were also hot in the city founded on a freak of nature gold deposit, everyone breathing a sigh of relief that the Europeans could be close to a deal of sorts. Although one of my absolute favourite market anchors, a German woman, Silvia Wadhwa said when asked that question, yes and pigs will fly too. By Wednesday. That is the one good thing about having loads of meetings on the same subject, nobody thinks that you are going to reach a resolution any time soon. So we are the villagers and the European leaders are tending the herd and keep crying wolf. In fairness it is probably more like ten sheep have been eaten already and the villagers are telling the flock watchers to do a little more.

The Jozi all share did manage to close at the best levels in nearly three months, but we were also off the highs of the day. After the dust settled on another bull run (bring on the rain), the market closed at 31654 points. That was a gain of 204 points which translated to just shy of two thirds of a percent. The leaders of the pack were most definitely the resource stocks, which managed a gain of 1.82 percent. Most of those gains were made as a result of a Chinese PMI number which was markedly improved from the month before. Should we pay too much attention to these numbers? I am a bit mixed on whether the answer is yes OR is it no on this issue. Check out the release -> China: HSBC Flash China Manufacturing PMI. The problem that I have with these surveys is that all the data is based on 420 responses (in this case, read down the bottom) from purchasing executives in manufacturing companies. 420 responses. Phew, and the copper price surged 7 percent plus in New York. Go figure.

Remember I showed you the graph yesterday of the four commodity stocks listed in London, all of whom were down between 22 and 35 percent? Yes? Well, the resources cluster here is down 7.6 percent for the year, the cushion we have here is the weaker currency. Retailers are now the best performing stocks for the year, up nearly 8 percent. The two worst on my screen are the construction stocks (down 27 percent) and the platinum stocks (down 25 and a half percent). The Jozi all share index is one and a half percent away from breaking even for the year.

Today is quite a big day if you are a local economist, there are of course quite a few of those around and they certainly take a bit of flak. Economic forecasting must be harder than predicting the weather. Because almost anything can happen that changes the course, I won’t go into the Rumsfeld language specifics. For an aerial view on the economy as it stands now (and not the most palatable one) check out the Cees Bruggemans column titled The mixed message of slip sliding prospects. I am naughty because Cees always reminds me of Goldmember, the Mike Myers portrayal of the Dutch fellow obsessed with the yellow metal. “I vont gooooollld”.

Silvio “the lover” Berlusconi has fired a few salvos back across the bows of Germania and the Gauls (No Silvio, Germany and France, neither are barbarians) suggesting that the ECB does not have enough powers to deal with the issues at hand. The WSJ reports Fresh Worries of Recession Grip Europe after some very average looking PMI numbers yesterday from the region. Let us leave this round of having a look open, the geniuses will come up with some sort of plan tomorrow. Whether or not the banks will have to take a 40 percent haircut (as they would like) or whether the governments of the region can force through a 60 percent haircut on Greek bond holders, as they want. All I know is that curious George Papandreou (Greek Prime Minister) has had a serious hair cut himself. Of what he has left. Check picture below

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. Those are the coordinates of New York city as per Wiki, I am guessing that they might well be not spot on, but we will work with that. Markets (those long) also had a crazy good time Monday, and the rally remained intact. For the same reasons. You could take this headline “Market rally on hopes of a European debt solution”, shuffle the words around and add a couple to get “Market rally fades as hope of a European debt solution dissipates”. You can then use these as your two generic headlines and you would have been right over the last three months or so. Because every now and again some focus returns to the “slowing” growth in China, or the jobs picture in the US improving as a slower than needed pace, but for much of the year the focus has been on Europe.

FedEx (not the guy that used to be married to Britney, that is Ex Fed) gave the markets some reasons to cheer with a simple announcement. They indicated that they would be looking to hire as many as twenty thousand seasonal workers to help with a projected more than double the daily load on peak delivery day, which is 12 December in the USA. 12 December? I suppose that gives you some room to manoeuvre if the gift is not quite what you imagined. For the holiday season between Thanksgiving and Christmas (a really poor time of the year for all turkeys) FedEx expects to ship 260 million items, which represents a 12 percent increase on last year. AND the National Retail Federation expects holiday sales to grow just shy of three percent to 465 billion Dollars in the last two months of the year. That is the entire 2010 GDP of Belgium!!! I just fell off my chair.

We need to start a new hashtag, #thingsaresobad that the average US household (112 million) will only receive two and a third parcels from FedEx in the next two months. Two months to Christmas today. Eeekkkk. #thingsaresobad that the average US household will only spend 4150 dollars over the next 60 days on retail items. That is so bad that it equates to 69 Dollars a day, per household. Divide that by number of people per household (2.76) and that is roughly 25 Dollars per day spent by each and every American on retail items over the next sixty days. I am tired of this nonsense that the imbalances in the US are so huge this and that, and that they are so unequal. Compared to what? The amount that each and every American will spend over the next two months is the average contribution of each and every citizen per annum to the Indian economy. Want to talk inequality?

OK, but we know that the Americans are rich and like spending, and deserve to have got to where they are now. Good for them and their society and everyone wants to aspire to that way of living, or have I got it completely wrong?

And then perhaps the most important news of yesterday from a company point of view, were the results from Caterpillar which comfortably beat the streets forecasts. The stock surged over five percent in normal trade to nearly 92 dollars a share. The 52 week high is still a long way away, 116.55, reached at the end of April. The stock took a dive as folks started to worry about a hard landing in China and subdued growth in the developed world. Perhaps this was just the tonic needed for investors to be reminded that Caterpillar is delivering their product around the world.

All the cost cutting and focus has paid off for shareholders, revenue for the third quarter showed a 41 percent increase against the comparable quarter last year, profits increased 44 percent. On a per share basis, including the impact of Bucyrus diluted EPS came in at 193 cents, an increase of 58 percent on the comparable quarter. The Bucyrus transaction was finalised in January this year if memory serves me right. Come on memory, it is all that I have!! Sales excluding the business complimentary Bucyrus were at a record high. There, that must have allayed fears of a slowdown of sorts.

The outlook was also really pleasing, Caterpillar “expect sales and revenues to improve 10 to 20 percent from the 2011 outlook of about $58 billion. The 2012 outlook includes a full year of Bucyrus-related sales of about $5 billion, up from a partial year of about $2 billion in 2011.” Here is the full release -> Caterpillar Third-Quarter Sales and Revenues an All-Time Record.

Now if you were in North America or in Europe you could easily be duped into thinking that “things are so bad” to borrow a phrase from the Nouriel. “It is going to feel like a double dip recession” he would say. In their construction industries segment, in China “machine industry sales to end users were lower in the third quarter of 2011 than in the third quarter of 2010 as a result of economic tightening by the Chinese government to reduce inflation” That is what people want, not so? Chinese growth to moderate, whatever that means. As if 9 percent is moderating. They continue, just a line later: “However, our sales in China were higher in the third quarter of 2011 than in the third quarter of 2010 as dealer deliveries to end users, while down, held up better than the industry overall, and machine production was sufficient to allow dealers to build inventory for the upcoming selling season.” Selling season? I don’t want a soil compactor for Christmas thanks.

In the resources industries, the second most profitable division, companies are still gearing up, mostly in Asia Pacific and our region. Although North American sales were more than Latin America. So, mining related buying of heavy equipment still taking place across the globe, notwithstanding lower metal prices as per the Caterpillar commentary.

The most profitable division, Power systems, reported stronger sales for all their regions, other than Latin America. Which is strange because the fellows over in Latin America were a strong region, perhaps they have just gone to sleep for a little. “Worldwide demand for energy at price levels that encourage continued investment has resulted in higher demand for engines and turbines for petroleum applications. Sales of our rail products and services and industrial engines also increased.” I like this theme, we like this theme, energy extraction with growing demand. The 7 billionth inhabitant of planet earth is supposed to be born next Monday, more people requiring more resources.

The analyst commentary I have seen so far has been bullish, justifying the price having jumped higher. There might be as much as twenty percent juice in it in the next year or so. Price of the stock is one thing, that takes care of itself as the business does well. I suspect that we will continue to see energy development globally, that is a key area to their growth, mining expansion continues to take place, keep a close eye on commodity prices and the demand picture. That is a whole lot trickier than you may think. Downright tough. We will continue to buy the stock, it hardly looks expensive on 12.65 times forward earnings at the top end of the range, and a two percent dividend yield. Not as juicy as you might think, but remember that a two year US government note yields 0.28 percent. I am pretty sure of the one that I would rather own.

Byron’s beats has a look at another of our favourite stocks. McDonald’s. What I have learnt in this business is that you don’t really have to like the product, or approve of the product, you must just know what the consumer is up to. I must admit, one will have to watch the fast food space closely in anticipation of greater government intervention in peoples lifestyles in the future, the Danish example springs to the top of my mind immediately. And why do governments across the globe want to do this? Because if people want access to universal health services, then you must make sure that they are healthy. McDonald’s have tweaked their menu to provide healthier options, wraps, salads, but I suspect that there is still a long way to go. They even serve Oatmeal and the McCafe has become HUGE, bigger than they might have suspected. Fruit smoothies and Frappes are quite a hit too, that is a recent launch, last year.

Byron sent an email that contained some “rare” pictures, including this beauty, the very first McDonald’s and signed by the owners at the time:

And then their first advert, this is quite fun: McDonald’s Corporation first magazine advert. A little historical background to the company, now that you have seen their first outlet and first advert. Ray Kroc actually was the father of the business, not really the McDonald’s brothers. The stock first listed in 1965. 22.50 Dollars a share. But before you get too excited, they have done many splits over the years. In fact on Google finance (which goes back to 1978) the share price is up 7353 percent in 33 years. They have paid 112 dividends since the beginning of 1978. Adjusted for the split that equates to over 15 Dollars worth of dividends. They have become more generous over the years. More than just a brief introduction to their last earnings report, which was Friday, here are the beats of Byron:

Whoa, that nearly slipped through the gaps. We looked at them but forgot to relay them on to you guys. I’m talking about the McDonalds’s results which came out on Friday and beat expectations. This was mainly due to a strong increase of same store sales in September whilst consensus for October looks to be just as strong. This was a nice surprise as Europe managed to blast expectations especially in France and Germany where results have been fairly choppy in the past.

Global comparable sales were up by 5% with the U.S increasing 4.4% with a 6% increase in operating income, Europe by 4.9% with a 6% increase in operating income whilst Asia, Middle East and Africa increased 3.4% with a 15% increase in operating income. Diluted earnings per share came in at $1.45 which was up 12% against the comparable period. However they report in dollars and because of the strength of the dollar over this period, currency adjusted earnings were up 6%. The share trades at $92 with earnings for the year expected to be around $5.22. That puts the stock on a forward multiple of 17.6. Some may say that is expensive but for a company expanding heavily in developing economies and is seen as recession proof I would beg to differ.

I took a read through the investor’s conference call and things certainly seem positive. Consensus looks good going forward as the McDonalds strategy seems to be working. This is what James Skinner, the CEO had to say. “McDonald’s continues to drive results around the world by offering what customers are looking for today more than ever: great value, outstanding convenience, a modern restaurant experience and relevant, great-tasting menu offerings”.

Not all was happy days however, if you are interested, check out the interview where you will see that the environment they are operating in is extremely tough and competitive. “The stock market just ended its worst quarter in 2 years, and many major economies are barely growing, if at all. Consumers everywhere continue to be cautious and hesitant to spend, and the informal eating-out industry is growing at a very slow pace. So we remain in a market share battle, with every victory continuing to be hard won”. Food inflation has also been a tough challenge. However they state that their extremely competitive prices have room for increases.

The increase in dividends will also please investors with a 15% increase recently being announced. The company has also implemented a few share buybacks which proves their strong financial position. We like this company because it falls within our aspirational consumerism theme. Everyone loves McDonalds and believe it or not, many people who are entering the middle class from a poverty stricken background aspire to eat there once in a while. At the same time it is also defensive as people downgrade from fancy restaurants when times are tough. They really do offer good value. We continue to add at these levels.

Hah-Hah, we continue to supersize our positions from here. Err… hold the mayo.

Commodities and currencies corner. Dr. Copper has been enjoying a rip roaring few session, last at 349 US cents per pound, a few cents off the best point in the session. The gold price is last at 1657 Dollars per fine ounce, the platinum price is better at 1550 Dollars per fine ounce, gaining some traction finally. The oil price is last at 92.41 Dollars per barrel, having been lifted with the rest of the commodities complex over the days, the Chinese PMI number saw to that. The Rand is firmer, Mr. Risk is back on, 7.87 to the US Dollar, 11.02 to the Euro and lastly 12.64 to the Pound Sterling.

We have started better than anticipated here, a short one more day rally and we would have broken even for the year, it has been tough going and quite a slog. And Byron’s McDonald’s analysis has made him hungry. But eating is cheating as we continue to aim to #occupymyseat and help everyone.

Sasha Naryshkine
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OK, today is Friday. And I am going to #occupymyseat. I am going to let you in on something, we never eat out here, even though we are at Melrose Arch, but on Friday’s we have market research. We order in an sit at our desks, or now that it is warm, outside, two rings from the phone. There were results from Clicks, which we should have dealt with yesterday, but with Byron back I was too excited and struggled a little. The beats are back! Yeah baby. There were results released in the US by Microsoft post the bell last evening. Front and centre of the screens today will be the meeting of the finance Ministers pre the big pow-wow of their European leaders in the Euro summit this weekend. Expectations are all over the map. And of course, the headline that captured the main stream media across the globe was the demise of Brother Leader, who was found in a hole, or a drain pipe.

We are still unnamed. Quite a few folks have suggested that I use my name for the message, but Byron’s beats contributes an enormous amount to this letter. Thanks for that, I am flattered, but I am looking for something like “the boom box” or “the market map”. We can put the suggestions out there in the middle of next week. Keep them rolling in please, we appreciate the feedback.

Jozi, Jozi. We had the screen on AlJazeera and our other favourite markets TV (two TV’s) as soon as we heard the news that perhaps Gaddafi had been captured. He was first said to have been injured and then news came through that he had met his end. Some pictures and video footage was rather dodgy, Byron with his time zones all over the show suggested that the picture could even look like Mickey Rourke after a huge party all through the night. Then there was confirmation and the folks on the screens went wild. Clearly of course the folks fighting to oust him were overjoyed. And when asked whether or not he should have been captured and tried, the answer was an overwhelming no, being dead was a better outcome.

I suspect that the reason that AlJazeera decided to show the footage was simple, perhaps this was a warning shot to the others (Yemen and Syria) in the region that are seemingly resisting the masses. Libya is a small country, but key to everything is the 1.6 million barrels of oil a day that they were producing before the uprising. It went to nothing, as far as I understand it, current Libyan production is 0.6 million barrels a day, 1 million off the peak. There are only 6.5 million people in Libya, so roughly daily exports (pre the uprising) have been a quarter of a barrel per citizen per day. At the current price that is roughly 20 Dollars US of exports per person per day.

This is a country with huge potential, but many obstacles to overcome, this is just the start of the most tricky bit that lies ahead, hopefully everyone is tired of violence and oppression. I quite liked this take from the WSJ -> Eccentric and Brutal, He Met End as a Fugitive. If you are looking for much more detail, then check out the AlJazeera in depth analysis of Gaddafi’s death.

Down at the other end of Africa the Jozi all share index started on a negative footing and never quite managed anything else, stocks staged some sort of comeback towards one pm, but sorry, that was not enough. There were of course earnings cruising in from the US, if you are looking for a revolving calendar, I quite like the simple Bloomberg one -> Earnings Calendar. The Jozi all share index ended the session down comfortably over a percent, off 360 points to 30836 or 1.16 percent. Copper prices were getting a hammering, this drifted through to the majors, resource stocks were down over one and three quarters of a percent, the weakening Rand did cushion the blow a little. Banks were off around half a percent, industrials lost nearly a whole percent. Choppy folks, real choppy.

Byron’s beats is back!! And he has a look at Clicks. The sense is that having done well, they might struggle from here!

Yes I am back from the land of the long white cloud, I am sure you missed my informative insights. I can see where New Zealand gets its name from. But wow it is a fantastic country which I highly recommend. Yesterday, while I was still recovering from the time difference, Clicks came out with full year numbers and at the face they looked pretty good. If you did not know, Clicks compromises more than just the Clicks retail stores and pharmacies. They also own Musica, The Body Shop and UPD which wholesale and distribute Pharmaceuticals, mostly to the Clicks pharmacies but also to independents.

Let’s look at the numbers. Turnover was up 10.9% whilst diluted headline earnings were up 18.1%. They have done a whole lot of share buybacks which would have been earnings enhancing so don’t be too fooled by the big increase. Earnings for the year came in at 248c per share from revenue of R14.8bil. Total dividends for the year equated to 125c which gave the stock a yield of 3.1%. the stock has a PE of 16.

Investment case for Clicks. They are a great success story and have managed to implement a fantastic model making pharmacies accessible and more affordable. The way they have positioned the pharmacy at the back of the store to entice clients to walk past their high margin consumer goods has been a stroke of genius. As the middle class grows and more people can afford healthcare, they will sell more products.

Investment case against Clicks. They need to get rid of Musica. These stores are slowing retail sales as a whole. It is self explanatory, just ask any iPod user who I would assume is basically everyone. UPD also faces some tough headwinds. Syd Vianello, the retail specialist from Nedbank made some interesting points on the tele last night regarding the distribution businesses. Firstly the caps put on by government for drug sales are obviously a huge negative. Especially since the rand has weakened so much. This is because the chemical inputs are imported so margins will be squeezed. Inflation will also have the same effect.

Secondly more and more generics are being consumed which have lower margin opportunities than the branded goods. Along with this they also face stiff competition from Dischem who have bigger stores and are really pushing high turnover. They will also face the tougher conditions ahead which I guess all the retailers will have to deal with.

Unfortunately for me the pros outweigh the cons. There are better options out there. In the retail sector we prefer Massmart and in the healthcare sector we prefer the guys who actually make the drugs, Aspen.

Deal or no deal this weekend for the Europeans? There are already suggestions that there is another meeting being setup next Wednesday to follow on from this complicated one. The anxiety levels of market participants is well understood, but really, let us be honest the problems that Greece has are not that big. My markets hero Jim O’Neill was guest host on CNBC’s Squawk Box in New York yesterday and added more than just a little sense to the whole argument. He is tops old Jim, he of course is the fellow who coined the phrase BRIC and supposedly understands these markets very well. I am going to go with Jim on this one. He said something that put it in perspective for everyone. Everyone is getting so excited about Greece, so much so that Jim had to tell us like it is. Watch the interview here -> Global Economic Outlook.

Here are some key lines for me anyhow:

“I think your notion is Spain and Italy are not going to turn into Greece. Greece is — the key about the whole thing is it’s — I mean, the fact you guys have got one of your — what’s it, chief international reporter in Greece just shows you how much the whole planet is focused on Greece, per se. Do you think — it’s only a $350 billion economy, as I was saying before we went on air. China will import another Greece this year. So you know, if Greece was completely written off the map, within a year, China’s created another — could the Chinese — in terms of importing. That’s mainly — Italy — China creates another Greece every year.”

See that, it does not matter really. Sadly, China will import the economy of Greece next year. For the Greeks and their economy, massive protests are doing very little for tourism, they need solutions for growth. Serial defaulters as far as I understand it, unless they break the cycle, default from time to time, it is just that common sense seems to evade them. Jim thinks that Italy is the real issue in all of this, check out his views about the boot of Europe, if you have not watched the video:

“Italy needs microeconomic reforms and growth. this is as close to the end of my 30th year in this business. Debt-to-gdp ratio isn’t much different today than it was then. so, it can survive with it. The idea that Italy’s debt thing is now a real issue, it’s not really — what Italy needs is growth.”

So, hopefully at the end of this weekend, or early next week we can have the folks from Europe saying the following. The banks need to be recapitalized and this is the number. We are confident (no, we are certain) that Spain and Italy will get their act together, and this is our coordinated growth plan through to the end of 2013. Start talking about the positives, instead of being so negative.

New York, New York. Up and down all day, eventually the blue chip index, the Dow closed in the green, the broader market S&P 500 actually did better than that, after lagging for a while, whilst tech struggled a little. But tech stocks were the focus afterhours, results from Microsoft. Which I thought looked very good, considering that people have been talking about a struggling PC business. I remember seeing an interview with Michael Dell from err…. Dell Inc. last week who suggested that personal computers were not where it was at for him and his company. And that personal computers were less than ten percent of all of the hardware market, which tops three trillion Dollars worth of annual sales.

So whilst Microsoft might well be perceived as the “Windows” operating system, there are many divisions to the business. From Google Finance: “Microsoft Corporation is engaged in developing, licensing and supporting a range of software products and services. It also designs and sells hardware, and delivers online advertising to the customers. It has five segments: Windows & Windows Live Division (Windows Division), Server and Tools, Online Services Division (OSD), Microsoft Business Division (MBD), and Entertainment and Devices Division (EDD).”

So how did each of those businesses do? First, as the headline suggests, this is and was a record quarter -> Microsoft Reports Record First-Quarter Results. Annualise this quarter and I get to 272 US cents worth of earnings and 80 cents of dividends. And where does the share price trade? In the pre market, the stock is down at 26.86 Dollars. Less than ten times forward and a yield of three percent, certainly Mr. Market is saying that the company is going to struggle from here. The Windows operating systems on the mobile phones is going to have to work hard against the likes of the Apple iOS and especially the android operating system. Again, an enormous amount of cash on hand, nearly 57 and a half billion Dollars, which is 25 percent of their market cap. Wow. So take that out, and then basically you have earnings of 270 odd US cents on a share price less cash of 20 Dollars a share. You are looking at valuations of less than seven and a half times earnings!!!

Surely the future for Microsoft is not that bad that the market must give them such a poor rating. Perhaps only a re-rating will come with a steadily improving dividend policy. Their server business is growing nicely, so are there entertainment businesses, that could be one of the future growth areas for them. OK, pretty much not the growth business that it once was (they will argue otherwise) but I suspect that by holding Mr. Softy over the next half a decade you will be rewarded for having hung on there. If only the market would not view them as a Utility type company.

I absolutely positively loved this one, listen to this video and you will nod and agree no doubt. I hope. I think. The fellow being interviewed is the legendary Jack Bogle, who is the fellow who founded The Vanguard Group. The Vanguard Groups key selling aspects in recent years have been through Exchange Traded funds, which they have championed. Wiki lays down the history quite nicely:

“At the time, the proverbial riposte to the observation that most funds underperformed the S&P 500 was “of course, you can’t invest in an index.” John Bogle tried to create a way in which an individual investor could effectively invest in an index. Index funds had already existed for a few years, but were only available to institutions such as pension funds. Having founded Vanguard as a broker-sold mutual fund company, he quickly turned the company into a no-load fund firm (meaning that the buyer pays no sales commission – called a “load” – when buying or selling fund shares) and in 1976 introduced his first index fund. This first index fund for individual investors, called the Vanguard 500 (which invested in the 500 companies that made up the S&P 500), has since out-performed many other competing large mutual funds.”

John Bogle is Jack Bogle, same person. But in recent years Jack has been outspoken about too much trading, not enough focus on what you are trying to achieve as an investor. This is why this clip resonates so well with me -> Bogle: Speculation Dwarfing Investment. Great start there, the S&P 500 spider, the tracker, turns over 10 thousand percent per year. Jack chuckles as he says that in his book 25 percent a year is a lot. I agree with him. He also points to 200 more times speculation than investment, saying the croupier in the middle is making all the money. Patience is what is needed. Folks need to focus on what they are trying to achieve participating in the equities market. And that is owning companies, not speculating about share prices.

There is another piece on ETF’s, in the same interview that is also worth a look, Bogle: Investors Have Tough Time with ETFs. I have taken a couple of paragraphs from this piece:

“So, what’s the matter with having the flexibility to trade? Well, I think you can argue nothing is the matter with it, except it’s there and it’s tempting. I always thought being able to get your money out when I first learned about this industry 111 years ago, or was it 211 years?, I thought it was remarkable, you could take your money out on any day, and now it’s any second.  


So, how much of that is going on in ETFs? ETFs by the long-term investor looks to be fairly small, and you can do a lot of things with them that are not self-destructive, but the overall picture is very, very high turnover. I mean there’s an emerging-market ETF from iShares, I think theirs is about 1,200% to 1,300%, less than the [S&P] 500, which is a big speculative thing for institutions often. And the same thing for Vanguard; it’s lower, but not a lot lower, it’s like 700% to 800% a year. So, the trading is going on there, and it is that which I object to. So it’s using a long-term investment and trading it.”

Exactly, thanks Jack, using a long term investment for trading. But hey, unlike Jack I appreciate the liquidity, but perhaps this is just too much. The only way that it will change is if trading fees are higher, and that seemingly is not going to happen.

Commodities and currencies corner. Dr. Copper is surging today, after taking a spanking yesterday, last at 316 US cents per pound. The Gold price is up a fraction to 1621 Dollars per fine ounce, the platinum price is lower at 1489 Dollars per fine ounce. The oil price is slightly higher on the session, 86.14 Dollars per barrel. The Rand has been all over the show as the Europeans scramble. 8.20 to the US Dollar, 12.94 to the Pound Sterling and 11.27 to the Euro.

OK, so we wait until Monday. Or perhaps not. I do unfortunately not place too much emphasis on what politicians can or can’t achieve. After all, they have muddled their way through it all this time, why should we see any sort of solution this time? I am more excited about GE results a little later, thanks so much!!

Sasha Naryshkine
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In the unnamed newsletter, although I had a few good suggestions yesterday, we will be looking at some more corporate results today, well mostly. We have local favourite Pick ‘n Pay who reported interim numbers yesterday, as well as market darling Famous Brands who dished, errr…served, up results for their half year this morning. Byron, who gets back to work this arvie will be devastated that he did not get a chance to have a look, I mean have a write about it. As promised yesterday, we will have a look at the results of Coca-Cola and Johnson & Johnson, two of our core holdings in New York.

Jozi, Jozi. After a big rush up recently you do get the sense that there is a bit of a pause going on here, in part because everyone is always waiting for the next event. The next event in the short term is the EU pow-wow over this weekend, so Mr. Market has his attention there. Mrs. Market, well she cares more about the long term. I did see an article in the WSJ, which about summed up the European flip flopping -> in “Heard on the Street” -> Europe Again Risks Flawed Bailout Plan. Yip, the same stuff that we have heard all (European) summer long. Not good. More news today -> Franco-German policy dispute pushes Bunds higher.

AND, Nicolas Sarkozy, the rock star president of France has been dashing around Europe -> Franco-German policy dispute pushes Bunds higher. AND, his even more rock star wife gave birth to her second and his fourth kid yesterday. Yes. An unnamed baby girl, bless them. Phew, the lives of these politicians (well the Mediterranean ones) are more than a little complicated. They are downright strange. Europe. Strange.

We did however enjoy a day of gains here in Jozi, the all share index claimed back 143 points on the day, closing at 31197. Just a little less than half a percent. Banks were on the losing end of just over 0.6 percent, some of the results from the US banks have been OK, perhaps the quality not that great. Or perhaps it was a case of inflation expectations being neither here, nor there, and hopes of a rate cut here perhaps fading a little. Not too sure.

General Retailers rallied over a percent as retail sales came in better than anticipated, these though are for the month of August. Remember August? The month before the rugby world cup started, that was so long ago I cannot remember. Anyhow, here they are -> Retail trade sales (Preliminary) August 2011. Here are the two key tables that you need to see (I think):

Actually. These are very pleasing, you can do a mini wave, don’t let your colleagues see you, and don’t talk about the cricket last evening. One name that everyone is throwing into the hat, Jacques Rudolph. Off the point, we are now led into our next piece using the retail sales quite *nicely*.

Pick ‘n Pay results were released yesterday, in amongst all of the ‘other’ results that were surging towards us. I can promise you that it felt a little overwhelming having a look at all of these, but hey, as long as I #occupymyseat I can get on top of things. I am not too sure this movement of mine is going to take hold, but hey, work smarter and harder, and make everyone proud. That way you can maximise economic output and make sure more people are hired.

Darn, off the point again, last time I promise. Pick ‘n Pay stores increased their sales by 7.4 percent to 27.1 billion ZAR for the first half of their year, trading profits fell to 492.2 million ZAR. Headline earnings per share from continuing operations dropped 39.3 percent to 54 and a bit cents (90.17 cents H1 2010), an interim dividend of 22.5 cents has been declared for this half (37 cents H1 2010). Now you can imagine that all the investments that they have sunk into their business has had a marked impact on these specific set of numbers. The smart shopper program came with a high cost, a centralised supply chain and the launch of a centralised buying function for the first time, this restructuring has all taken its toll. This begs the question, when the large rebranding was done, all the fanfare that went with it, not to mention the cost, surely the business restructuring was more important? Yip. Lost focus and now trying to get back their mojo.

As they say in the commentary, they are going to be “focused on realising the full potential of our South African businesses” and are “focused on improving our customer offer and streamlining our operations.” Loads of new focus. Well, the smart shopper program seems to be working well, they have exceeded their own forecasts and signed up 4.1 million people on the program. You get incremental savings on your next purchases, which sounds like a great idea. The other more challenging part of restructuring will be the central distribution program, which will take around five years. I have been indifferent to the stock over the years, suggesting that they have lost market share to the more nimble and now bigger Shoprite and Massmart. And I think until that changes it will be the case, they, Pick ‘n Pay, are going to be lagging the pack. Lastly, the one thing that puts me off more is that shareholding structure, where the Ackerman family still have that control. I do not like that. Would prefer to be in Massmart with WalMart as a controlling shareholder.

Famous Brands released results for the six months to end August, revenue increased 12 percent to 1.013 billion ZAR, with operating profits up 8 percent to 184 million ZAR. Fairly muted I guess is what you could say, no trade in the stock as of yet (at the time of writing this), the bids look a little weak though. This translates to headline earnings per share of 125 cents, which is 9 percent better than last time and an interim dividend of 80 cents, up 14 percent from the corresponding period last year. Hey, remember the other day, last week when they were excited about finally having opened their 2000th store, that is worth celebrating too.

Famous Brands refers to “the resilience of its business model and strength of its brands.” Margins were compressed, but management seemed happy enough. There is one thing worth pointing out, about beef prices and what they have done about it: “….increased beef stocks bought forward to secure current input prices, which are expected to continue to escalate.” Escalate is a bad word.

Strong brand, no, great and well loved brands here locally. Franchising makes most of the profits (around two thirds of total profits), but the supply chain is where most of the revenue is, nearly three quarters of total revenues. But you have to have all the divisions in order to maintain the quality, because the consumers of their goods have to know that if they are in a city travelling the country (or small town) that the Steers, or Wimpy is going to be the same everywhere. So of course you have to have control over it all.

Liquidity is always a problem when wanting to own these shares, 40 thousand or so shares trade a day, which at just below 45 ZAR (there have been a few trades now) is not that great for a company with a market cap of 4.35 billion ZAR (as at close last evening). Compare this liquidity to much smaller operator Taste holdings, which has a market cap of 249 million ZAR. The stock trades around 77 thousand shares a day. OK, still small, but there seems to be liquidity.

Of course Taste recently announced a potential acquisition of The Fish & Chips company which has over 160 outlets (in their own words) “targeting the lower LSM consumer.” Check out the menu -> The Fish and Chips company menu. Cheap!! Good luck and well done to that team at Taste, many gave them a rev, I remember it well. Like the sector, I like Taste and Famous Brands, we do like MacDonald’s a lot in New York, and to a lesser extent Yum Brands.

New York, New York. Most of the major financial companies on Wall Street having reported numbers, and it is clear that this is the worst quarter for the champions of the street since the great financial crisis of 2008. Investment banking and trading revenues have all been heading in the wrong direction. Thanks to a rather iffy looking outlook in the developed world really. The debt ceiling impasse in Washington DC and the Europeans seeming reluctance to wrestle the sovereign debt crocodile has seen confidence amongst companies fall. And so, when we are unsure we have the usual reaction, which is to do nothing. This does change, it really does, a lot of this year we have spoken about a crisis of confidence in the developed world. There has been a void of leadership, only now are politicians starting to step up to the plate. To get a little more insight into how tough it has been for Wall Street banks, check out the Bloomberg story -> Wall Street Has Worst Quarter Since Crisis.

This is Paul’s (current) pet hate, when folks use the term stall speed. Do a quick Yahoo Google search for the term stall speed and then you will see all these financial articles pop up with the term. There will also be a definition on the community moderated dictionary Wikipedia. Which has the stall speed definition you can then find here, a little more complicated than you may think -> Stall (flight). What happens after an aircraft stalls, that is the part that I am interested in, that is the part that makes us mad, when market types use this term to describe the current economy environment. Because the next step, post an aircraft stalling is not good. I get the sense that if you were a rookie with your instructor and you stalled, the outcome would be a newspaper headline that starts, “instructor and pilot…” you know the rest.

I am actually referring though to a story that one of the most visible fixed income guys, Mohamed El-Erian one of PIMCO’s brightest stars, who wrote an article titled (you guessed it): America at Stall Speed? Now for his part El-Erian does a wonderful job to explain that a sudden loss of altitude could happen, if the Europeans do not do more to solve their current woes. So I think he uses the terminology correctly. But still, I think they have got it wrong, a double dip recession would indicate that we re-enter a couple of quarters of negative economic output, when compared to the corresponding quarter a year back. A loss of altitude would indicate that you lose significant height, as much as 10000 feet. Which is around one third shaved off in minutes. So no, I do not think that the plane is going to fall out of the sky. For stall, next time guys, use a motor vehicle. The worst thing that can happen when you stall at the traffic light is that the person behind you hoots.

Coca-Cola results were released the day before yesterday, before the market opened. Check it out: The Coca-Cola Company Reports Third Quarter and Year-to-Date 2011 Results. Atlanta, passed through the airport there once, and visited the Coca-Cola store, I was tired and I do not remember much.

Coke net income rose to 2.2 billion US Dollars for the quarter, Q3 EPS clocked 95 cents whilst the rolling year to date number is 297 US cents per year. Volumes around many parts of the world grew strongly, they might not be drinking beer in India, but they certainly are liking their soft drinks -> “worldwide brand Coca-Cola volume growth of 3% in the quarter driven by a number of markets around the world, including 17% in India, 11% in Argentina, 7% in China, 6% in Mexico and 5% each in France, Germany and Great Britain.” Huh? Germany, France and Great Britain consuming five percent more Coke than last year. Yip, Europe is finished. Funnily I spoke to someone who came back from the UK, I asked him if he saw any soup kitchens and lines outside of these soup kitchens and the answer was no and no.

We like Coca-Cola, it falls into the theme “aspirational consumerism”, where middle and lower class developing market folks consume more of their products. It might not be a luxury to folks reading this news letter, but it is exactly that to low income people. Who now have a little bit of cash, more than they had before. We continue to accumulate.

Johnson & Johnson results, these were quite tricky to look at, remember that there are three distinct parts to this business, the consumer division, which is the lowest margin of all their businesses. But has all the well known brands. But so does the MDD division (Medical devices and diagnostics) and perhaps even more so, Prescription products, where all the high margin stuff comes from. And amazingly some old eerr…. drugs, are still huge sellers.

Here is the official release -> Johnson & Johnson Reports 2011 Third-Quarter Results. The guidance part was a little higher than most suspected, they bumped it up around two percent for the year. The stock certainly on that basis looks cheap at less than 13 times forward earnings. If you could pay that for almost any global business, and let us face it, they are defensive too, with a yield of 3.5 percent, I would say that you should just jump at that! The expectations for the year after that is for five percent earnings growth. I can tell you that Mr. Market did not really like the earnings, the stock went lower by nearly three percent yesterday. I like it, you get everything you would want in this healthcare segment, which will grow as people get richer and also grow older and need to spend more on their health upkeep.

Commodities and currencies corner. Prices are taking a bit of a hit here today, Dr. Copper is taking a spanking, down over three percent in London. Dr. Copper is last at 313 US cents per pound. Goodbye the hard earned yards over the last two weeks. The oil price is last at 86.21 Dollars per barrel. The platinum price is lower at 1489 Dollars, the gold price is also lower at 1621 Dollars per fine ounce. The Rand is weaker, 12.77 to the Pound Sterling, 11.16 to the Euro and 8.09 to the US Dollar. We are lower and I guess the weekly jobless claims are going to be some sort of catalyst, methinks. Byron is back.

Sasha Naryshkine
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In today’s edition of the newsletter we are going to have a look at results from some blue chip stalwarts, including Intel, Johnson & Johnson, Apple, Goldman Sachs, Bank of America and Coca-Cola. We are going to take a closer look at the rumours doing the round about the expansion (explosion?) of the EFSF, that really send markets in the US rallying into the close, someone tweeted that the machines should stop at once. More ratings downgrades across the world, for banks and countries, and also the data from the poms, the highest ever CPI inflation read, looks a bit like their food, all boiled for the time being. And hey, if that is not enough for you, somehow, then we have the BHP Billiton production report released this morning. Yip, it is all happening folks. AND, SABMiller are out with a sales update this morning, as well as a deal to swap some of their assets for an equity stake in a Turkish business, the Anadolu Group.

I just thought to myself, the other day, that I have been writing this newsletter for now over eight years, I think, but still do not have a name for it. No name. So please wont y’all email your suggestions for a name for this blog, and then we can put it to a vote, how does that sound? The “run down” (or “up”), the “brief case” or “the wrap”, whatever you please, send a suggestion. And we can decide collectively, I am a fan of democracy, on a name.

Jozi, Jozi. Righto, it was like watching Jamie Oliver finely slicing some herbs, a bit choppy to say the least in the trading session here in the city founded on a whole pile of gold. Industrials were strong, resources were not, general retailers roared ahead adding nearly one and two thirds of a percent. Whoa. Demanding this or other multiple compared to WalMart, blah-blah, I am guessing that when a fund manager from North America lands here to check out their favourite new emerging market retailer (to use as a springboard to the continent) they are not comparing the local stocks to WalMart. And are rather comparing the local retailers to developing market retailers, where the growth is going to be a whole lot better than back home. So do not compare the retailers in South Africa to the ones of old. There are more middle class people in South African than there was to the period that you are comparing retailers. I am not for a moment saying that retailers are cheap, someone else is making that judgement call.

Session end the Jozi all share index closed at 31054, down 41 points or 0.13 percent, that was the second successive session of a small loss for the index. I am going to call it consolidation, because seemingly you have to call the market moves on a daily basis. Via Paul Kedrosky’s Infectious Greed blog I stumbled (well he posted it) something that I really liked, check out another markets reporter who is having the same problems as me, trying to explain why the markets go up or down, and why it tends to be a complete mugs game, but it is something that everyone wants to see so badly -> Memoirs of a Markets Reporter. I loved that piece, I know how he feels that side.

There was chatter in the late market in New York that the size of the fund could be increased significantly, some starting talking about a bazooka style 2 trillion Euros. Which I guess might actually buy a country in Africa, if you want to use that expression. This all comes as France are scrambling as Moody’s threatens to retract their triple A rating. So, no more putting out fires, time to flood the plains. And just this morning, if there was any more urgency needed or required for the purposes of this weekends meeting (and a subsequent solution), Spain finds their credit rating cut by Moody’s and they have put them on negative watch. Eeuuuwww. Not new news, the other big two ratings agencies acted earlier this month already. So, hence this rumour was going around that there was going to be a shock and awe number from a meeting that was not really supposed to change anything. Again, if you are confused, refer to the link in the paragraph above, about trying to explain market movements. Here is the “rumour” -> Stocks Through the Roof on Report of 2 Trillion Euro EFSF.

Let us jump into the commodities pool now and have a look at the BHP Billiton production report. If you want to download the report, and I suggest as a shareholder that you do just that, do so here -> BHP BILLITON PRODUCTION REPORT FOR THE QUARTER ENDED 30 SEPTEMBER 2011. Sorry about the capitals, I know it is shouting, but that is from their report, not me shouting. I do that with a !

First up, iron ore production, (annualised) clocked a record high. Their petroleum business is firing on all cylinders with the new acquisition, as they say: “Petroleum production increased 19% in the period, reflecting the successful acquisition of the Fayetteville and Petrohawk Onshore US shale businesses on top of strong operating performance from existing assets.” If you forgot about those recent acquisitions then read our pieces that we wrote at the time -> BHP buy Petrohawk from the middle of July and BHP Billiton acquires Chesapeake Energy shale gas assets, that was towards the back end of February. The back end? Sounds like a sport term, I think it is. The back end of an innings is when you see Rusty and Wayne……(you know the rest).

If the company kept up this quarterly pace, the annual number for petroleum production will clock over 200 million barrels of oil equivalent for the first time. To put that number into perspective, it is basically enough to supply the world from Monday in the wee hours of the morning, all the way through to Wednesday afternoon. This is enough oil equivalent to provide the US with enough from that same time Monday to when the sun is setting next Thursday. And China for nearly 23 days, so that kind of puts it into context, where BHP Billiton are in terms of their oil production. South Africa roughly uses 580 thousand barrels of oil a day, so BHP could supply us for nearly a whole year, 355 days. Now there is size and scale for you!!

The aluminium division production was flat. Did you notice that Rio was looking to sell some of their aluminium assets? See here -> Rio Tinto retreats from aluminium, $8 bln of assets on block. Some suggested that it was “kicking the Alcan down the road”. Ha-ha! Copper production was way lower, this as a result of “Lower ore grades and industrial action at Escondida (Chile), planned maintenance activity at Pampa Norte (Chile) and planned smelter and refinery outages at Olympic Dam (Australia) (which) all impacted copper production in the period. Record material mined and milling rates were, however, achieved at Antamina and coincided with operations progressing through a copper rich ore zone.” Copper production was 19 percent lower when compared to last quarter and 24 percent lower than last year. Yowsers!

And then the big one, Iron Ore – “Western Australia Iron Ore (WAIO) shipments rose to a record annualised rate of 173 million tonnes per annum in the quarter (100% basis). WAIO continued to benefit from the dual tracking of the company’s rail infrastructure, increasing overall system capability.”

Met coal increased when measured against last quarter, up 17 percent was lower by 10 percent when measured against last the last end to September period. Energy coal increased single digits when compared to both last quarter (1%) and the corresponding quarter last year (8%). In closing the highlights were natural gas and iron ore production and the lowlights were base metals and met coal. As ever, the litmus test is how Mr. Market is responding? BHP Billiton ended flat on the day in Sydney. I see.

This other release at the same time sometimes makes for more interesting read, because the production report is the past, this is the future: BHP BILLITON EXPLORATION AND DEVELOPMENT REPORT FOR THE QUARTER ENDED 30 SEPTEMBER 2011. First off, it is clear to see that the iron ore ramp up is soaking up a lot of the funds allocated to the group expansion. That, and obviously the natural gas acquisitions have been much of the focus. For next year, petroleum exploration expenditure (excluding Onshore US exploration) will be 1 billion Dollars. Big number, bearing in mind that drilling hit rate does not always reveal the desired effect, but that is the nature of the business.

This gives you a good idea of what is going on in terms of mineral exploration, the future post the gas and iron ore ramp ups (which are here): “Greenfield exploration continued on copper targets in South America, Mongolia and Zambia; nickel and copper targets in Australia; and diamond targets in Canada. Exploration for iron ore, potash and uranium was undertaken in a number of regions including Australia, Africa and the Americas.” Still keen on most of their core businesses, which is pleasing to see.

SABMiller released that sales update we talked about earlier, for the six months to end September. It seems that there is an expected miss in terms of the volumes, 3 percent was the number for the larger volumes for the period, expectations were around half a percent or so higher than that. Or so the telly tells me, this is a big company, but it is not a sector that we like a lot! Latin America continues to grow strongly, larger volumes improved by 8 percent in that part of the world, Peru particularly strong clocking 11 percent growth as SABMiller managed to wrestle market share away from their competitors. Ecuador experienced a much better second quarter, when compared to their first quarter. South America is their single biggest division (by EBITDA contribution), so this is for me the closest one to watch. Africa and South Africa too are important.

Larger volumes in Europe were flat when measured against last year. Flat I tell you. Reasons given: “…the continuing fragile economic environment which further reduced consumer confidence and expenditure during the period.” Well then I guess flat sales in that part of the world are fine then? I laughed when I read this line: “In Romania, a difficult economic environment and government austerity measures continued to impact consumer demand…..” Since when did austerity measures mean people drank less beer, I thought that the product was at the defensive end of the market?

“Things” in North America are still not settled and beer volumes in their MillerCoors JV continue to decline, with “domestic sales to retailers (STRs) … down by 2.3% in a market which continued to be impacted by high unemployment and subdued consumer spending.” Struggling here. European and North American shares of global consumption are falling as both Asia and South America continue to gain more of the global pie. To get a quite good idea of the trends, check out the SABMiller website -> Global beer market trends.

OK, what about Africa and Asia? And South Africa? First, Africa, where beer volumes increased by a whopping 20 percent, we sure do like our beer on this continent it seems. In Zambia and Tanzania volumes grew by more than the whole continent, Zimbabwean volumes grew a whopping 30 percent as the Dollars being used can actually buy something. Sis. Sorry. But wait for it, the country that is seeing high teen economic growth, Ghana grew beer volumes by an astonishing 54 percent. OK, get back on your chair after having slipped off. Asia was perhaps not as good as you might have imagined, with only four percent volume growth across all their brands. “In China, lager volumes grew 5%, with double digit first quarter growth followed by a slight decline in the second quarter as a result of prolonged heavy rains in the Central region which limited consumer demand.”

Rain is bad for beer consumption. Got that. In India beer volumes are actually declining. From their release: “In India, volumes declined by 7% with robust growth in September, following the lifting of trading restrictions in Andhra Pradesh, partially offsetting the impact of excise increases implemented across a number of key states at the beginning of the half year.” WHAT? Excise duties having an impact on sales. Well, I never. One of the reasons we do not like the business.

There is already strong talk in South Africa about raising the legal age, more control by government, greater taxes. That sort of thing (OK, I am being very general, but we will save that for another day). Talking South Africa, larger volumes were flat. Soft drink volumes were lower, as the weather was colder (err….climate change) and consumer demand was subdued. Mr. Market has decided to mark the stock down a bit in Jozi this morning, but that could just be as a result of a firmer currency. In fact, I checked it out and in London the stock was up around a third. So there. Running out of time, check the “strategic alliance” from their website -> Anadolu Efes and SABMiller Strategic Alliance.

New York, New York. Wow. There was a whole host of results that were thrown our way, Goldman Sachs reported their second ever loss since they went public back in 1999. There were immediately thoughts that the mark down in their private equity assets and subsequent loss were perhaps linked to “showing” the protestors at Occupy Wall Street (or just OWS as it is known now) that it is not all plain sailing for these guys. I secretly wonder how things are going for Lloyd Blankfein, and whether or not there is a movement inside to oust him. As far as I can understand it from that crazy large book “Too big to fail” there are always these kinds of internal struggles for control.

For a detailed look at these results check here -> Goldman Sachs Reports Third Quarter Loss Per Common Share of $0.84. It is a difficult business to understand after poring over those numbers I am equally of the mind to avoid, EVEN IF the stock looks so cheap. Michelle Steele, a Bloomberg sports journalist (lucky gal…I guess) tweeted what I thought was quite interesting -> “Goldman Sachs sets aside 44% of revenue for employee salaries, NBA owners last proposed 47% to players” Now I ask you with tears in my eyes, who utilizes and sweats their talents more? What do YOU think? You know my answer.

Bank of America appeared the blow the socks off the estimates, but then some extra digging suggested that the beat was a low quality one, excluding exceptional items it would have been a miss. But don’t tell Mr. Market who appeared to agree with the second half of the session participants, as BAC’s share price rose over ten percent. Morgan Stanley over nine percent better, heck, even Goldman Sachs was 5.5 percent higher (can’t fool us). For a more detailed look (if you want) -> Bank of America Reports Third-Quarter 2011 Net Income of $6.2 Billion, or $0.56 Per Diluted Share. If Brian Moniyan is good enough for Warren Buffett (as Craig Chirinda tells me on twitter) then he is good enough for me! I guess he gets to stay a little while longer.

Intel had a really good earnings beat post the market, the stock is up comfortably after hours, nearly four percent better. The thought that sales of tablets might be taking away from their core business was kind of rubbished. Laptop demand continues to grow, as folks continue to get more mobile. Next stop, do away with office hours. You can do your work as and when you please. Everyone is upgrading again, can’t you see? Check out the Bloomberg take this morning -> Intel Gains After Forecast Tops Estimates on Laptop Demand.

Apple missed their lofty market forecasts for the first time in 40 quarters as far as I can understand it, from the twittersphere. The first earnings miss in 40 quarters? That is like, wait, ten years? The analysts have been wrong all along, and it turns out that they are wrong this time too, because they missed and did not blow the street away, as they usually do. Predictably the stock is lower in the pre market and in Germany where it is listed too. As is Intel, GE and a whole host of other tech stocks we know. I waited and waited afterhours, but just before 10:30 last evening I decided to call it a night and rest my head. I had read a couple more chapters of “This time it is different” and learned again that serial defaulters have to move to the next level in order to break the cycle. For instance, as I believe it, France last defaulted in 1788. So the book tells me (or my reading of it is like that).

OK, off the topic, we are dealing with the Apple earnings miss. I suggests that as an Apple shareholder you read the following press release on their website -> All-Time Record Mac and iPad Sales – Highest September Quarter Revenue and Earnings Ever. It is missing one rather important note there, that the iPhone sales were dampened by the looming announcement of a new phone (turns out that it was the iPhone 4S) and as such that was where most of the disappointment was. Some important “stuff”, gross margins where a lot better and sales outside of the US are now 63 percent of group revenue. Their war chest, just the cash part has inflated to 81.6 billion Dollars. As some guys pointed out, that has grown 50 billion in the last two years.

This company captures the imagination so much that there is a website that is committed to analyzing the company (in fact many more than just this one), but this is worth a read. From the AppleInsider -> Apple Q4 2011 earnings disappointment attributed to iPhone transition ‘hiccup’. We pretty much share the same view around here, normally the leak of a new product does not take place so long before the October 4 announcement, and that could have seen people delay their purchase of iPhones in anticipation of a newer model. This tells me exactly what I need to know, what this one closely!!

A couple of other views, one from the WSJ -> Apple Loses Some of Its Shine and the other from Bloomberg -> China Becomes Apple’s Second-Largest Market, Cook Says. I like that part, and it plays directly into a theme that we follow really closely, aspirational consumerism. We continue to buy the stock and will take advantage of the fall off in price, believing that this is indeed a hiccup. Sales of other products, the iPad and the Mac, as you can see from this piece -> About That Apple Quarter…. iPad sales are still flying. And Mac is no longer a computer for graphic designers.

Sadly we have run into time constraints today, but I promise to do Coca-Cola and Johnson & Johnson results tomorrow, I had a solid look at both yesterday, and was pleased. Expect more then. Sorry …..

Commodities and currencies corner. Dr. Copper is last at 333 US cents per pound, the oil price is higher at 88.58 Dollars per barrel. The gold price is last at 1649 Dollars per fine ounce, the platinum price is a touch firmer at 1531 Dollars per fine ounce. The Rand is firmer, as Mr. Market decides that the risk on trade is in order. It is last quoted at 7.95 to the US Dollar, 12.57 to the Pound Sterling and 11.03 to the Euro. We have started a touch better here, tentative signs that this recent rally is sticking. That is good.

Sasha Naryshkine
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Jozi, Jozi. Watch the cold water coming from the Germans, look out everybody. Too late. Stocks sold off as the Germans said that a week was just not quite enough time to solve the debt problems in Europe and to come up with a plan. Gee I tell you, it feels like we are all like little kids waiting for direction from Spuds parents. You know, Spud, the John van de Ruit book, that was made into a movie starring the legendary John Cleese. In fact it seems that the market participants are waiting for direction from the character aptly named “the Guv”. The FT had a great article titled “Mixed messages from Berlin confuse markets”. See what I mean about Spud, his gang of eight and the Guv, a dog with no tail and no sense of direction. So the Germans said that the problems of Europe are not going to be solved when we wake up next Monday, so what. You get the sense that this market fickle reaction is starting to get me down, regardless of whether it is up, or down. That sort of short term thinking should be falling quite nicely for those folks who are committed to adding quality stocks when they can.

We closed at the lows of the day, after having been up around a percent for much of the morning, stocks slid with the German uncertainty and comments that a week is too short, I can’t help but agree with the Germans. A mere two weeks ago we were told that we would get a solution by the end of the month and we were OK with that. Just because the G20 tells Europe to get a move on, does not mean that they are in their own particular European bureaucratic way. Remember that there is a EU summit this weekend, that is why the G20 were telling the Europeans to get a wriggle on. After talking tough on the weekend, both Finance Minister Wolfgang (I want that name) Schauble (excuse the umlaut omission, HTML is not kind to that sort of formatting) and spokesperson for Angela Merkel downplayed an early solution to the debt woes of Europe. So I guess the short termers interpreted this as a no show for a solution this weekend. Ah well, such is life.

The Jozi all share index closed down a mere 28 points to end at 31095, banks were off over half a percent, resource stocks were down one third of a percent whilst retailers sank just over two thirds of a percent. There was a huge spot of green amongst the gold stocks, those soared nearly three and a quarter of a percent. Platinum stocks added nearly a percent as the currency weakened during the afternoon and precious metal prices stood up well, creating the perfect mini storm for these producers. For all its heroics on Friday, Telkom are now back to the same position that they were pre the announcement of KT Corp. taking a stake, something that has been met largely by the investment community as a head scratching and then shoulder shrugging exercise. And asking the question, but why do they (Telkom) need the money?

There was a Bloomberg story yesterday that suggested that MTN could be bidding for Vodacom’s DRC business, you know, the one that they (Vodacom) have been squabbling with their minority shareholder. Check out the story -> MTN Said to Be Considering Acquisition of Vodacom Mobile Venture in Congo. Can you see why the DRC would potentially be a good place to do business, big population, lots of resources (even that evil Leopold II saw that) and the kind of dynamics that Mark Mobius would like. Balance that against all the stereotypes that you know well about the DRC and it is still a tricky (very) place to do business. This is perhaps a country that could solve many issues here in Africa, power generation for one (the Congo river according to Wiki could account for 13 percent of global hydropower potential), but a young population could herald a completely different era. Yes, wait, maybe, no, we will see.

I was waiting for it. I said to Paul yesterday as I made out a list of things that was potentially seeing the sell off through the week as being one of a few things. Earnings misses from the big US corporation, so far we have been pretty happy, so not yet, or no, not that. Second, the reason that scuppered the rally mode yesterday was what I wrote down and handed to Paul: “Market reverses as European solution fades”. Well, almost nailed it, but I stuck on at the end ……errr….profit taking? As far as I understand it the fellows over at Bloomberg are not allowed to use that. At all, in the same way that the Occupy Wall Street protests have been covered on a far greater scale on rival channel CNBC. I guess New York mayor, as someone pointed out yesterday, is stuck with a thorny issue here. If he were to intervene with the police and get heavy handed, that might be interpreted as protecting the users of his terminals, and thereby protecting his interests. Can you see the spot he finds himself in?

OK, off the point, because were actually talking about the shock horror miss in expectations for the growth of Chinese GDP. Yes folks. Shock. Horror, the Chinese economy ONLY grew at 9.1 percent in the last quarter, missing growth estimates of 9.3 percent that was put forward by the economists polled. On all the other metrics from retail sales to investments in fixed assets grew more than anticipated. But of course the headline number is the one that everyone focuses on, which is almost always the case. Do me a favour, read the official release, from the National Bureau of Statistics of China and tell me that you come away feeling that a hard landing of a big slowing in China is going to take place. Read here -> National Economy Maintained Steady and Fast Development in the First Three Quarters of 2011.

“That growth number has investors punishing stocks across all of Asia” is what a market anchor said this morning. Hey, give me 9.1 percent any day and punish stocks. Because the base is growing all the time. In 1999 Chinese GDP for the full year was 1.083 trillion Dollars. In 2009 the number clocked 4.985 trillion Dollars. From that release above, in the first paragraph: “According to the preliminary estimation, the gross domestic product (GDP) of China was 32,069.2 billion Yuan for the first three quarters of this year, a year-on-year increase of 9.4 percent at comparable prices.”

32 trillion Yuan for 9 months. A Google search tells me that 1 Chinese Yuan = 0.156986 U.S. dollars. So for nine months 32 trillion Yuan translates to 5.02 trillion Dollars. OK, take a step back, nine months this year to the end of September is more than the whole of 2009. Yes, slowing, so poor. For us here the internal consumption story is more important than almost anything else, over the coming decades. Because they cannot continue to be a huge export economy for ever, even though my contention is that there are going to be more middle class people keen for Chinese goods. Retail sales grew 17 percent, or as the release says “a real growth of 11.3 percent after deducting price factors”. Sounds just fine to me really. I am going to use the Alfred E. Neuman line, what me worry?

Don’t take my word for it, we here have a view that does not flop from quarter to quarter. Check these economists view in the WSJ -> Economists React: China GDP Growth Slows. Some OK with where China are, some still expected 9 percent plus growth for a while, and the Chinese authorities seem to have tamed the inflation dragon. Which is what they wanted.

New York, New York. Yesterday was only the ten year anniversary of the demise of Enron, would you believe. Jeff Skilling still trying to get off, spare a thought for Arthur Andersen employees, I had a varsity friend who worked for that accounting firm. Big five certainly sounds better than big four, which we currently have, that would indicate that a buffalo has slipped off the list. At least Mr. Market celebrated the demise of the world’s biggest trading company with an energy trading deal by a related party, Kinder Morgan plans to acquire El Paso. Not chocolates and tacos, but rather a major deal, here is the WSJ -> Kinder Morgan-El Paso Tie-Up Puts Another Mega-Deal In The Pipeline.

Markets in NY sank fast and accelerated the losses into the last part of the session, erasing some hard earned gains from last week. There was an earnings meet from the fellows over at Wells Fargo, but they missed on the top line and the market caned them. Whoa, the stock lost 8.44 percent in normal market hours, it was pretty awful going, but year to date the stock is down 21 percent. Yech. Over the last ten years though, the stock is up nearly 19 percent. Which you might say is not great over ten years, but that has crushed Citi (down 93 percent), thrashed Bank of America (down 77 percent) and beaten JP Morgan, down 5.6 percent. The massive divergence comes in late 2008, when the geared to the mortgage cycle banks fall on their heads.

Citi themselves beat on both the top and bottom line, but market participants who were initially impressed lost that lovin’ feelin’ (not Elvis but actually the Righteous Brothers) and sold the stock off a little less than the overall market. Basic materials (resources) got crushed, so did conglomerates, utilities (read defensive) were the only stocks that caught a bid, ending the day up a touch.

Commodities and currencies corner. How is the commodities complex doing on that slower than anticipated growth from the Chinese engine? The oil price is last quoted at 85.96 Dollars per barrel, that seems down about half a percent on this session, it did get crushed last evening. The copper price is down quite a bit, the price last at 3.29 Dollars per pound, down over two and a half percent. The gold price is off a touch, 1660 Dollars per fine ounce, the platinum price is also lower at 1523 Dollars per fine ounce. The Rand is weaker as the risk off trade starts from around midday yesterday, 8.04 to the US Dollar, 12.68 to the Pound Sterling and 11.02 to the Euro.

Apple results expected afterhours today, here is a sneak preview -> Apple earnings expected to soar – again. Coca-Cola are expected to record results of 1.02 Dollars a share for the last quarter, Bank of America is expected to have made 20 cents a share, Johnson & Johnson are expected to earn 1.21 Dollars whilst Intel, another big one are expected to have made 61 cents per share worth of earnings. Juniper Networks are expected to make 20 cents a share, a busy day at the office no doubt for the analysts, but that is the way that is goes. United Health (1.12 Dollars) and Yahoo! (17 cents) are possibly the other two interesting ones to look out for. But I can promise you that the Apple fellows will attract most of the attention.

I know this sounds cheeky, but in an attempt to continue to improve productivity and to continue to oil the cogs of the global economy I have decided to start a new movement, Occupy My Seat. Or on Twitter you can hashtag it #occupymyseat. This is an attempt, not to give the global protestors the bird, because I get it, but rather the only way to make their situation better is to be smarter, work harder and in that way, it will translate to real opportunities for more who are feeling pretty despondent. No more freebies (not that we get any), no more goofing off during work time (not that we do and that includes doing things non work related during paid time) and lastly trying to get folks to work. Do your bit by joining #occupymyseat. Well, perhaps it should be #occupyyourseat. Not cheeky, just an idea I think.

Sasha Naryshkine
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Jozi, Jozi. Another day of gains for the Jozi markets as the global cheer continues as folks start to worry less about what they have been worrying about. China and the hard landing, Greece default, and a Euro breakup, these problems seem to be getting solved, or seemingly that is what market participants think. Commodity prices continued to climb and that sent the resource stocks, the materials sector if you want, up 2.17 percent on Friday, which brought the broader Jozi all share index to close at 31123, up 289 points or 0.94 percent on the day. Kumba Iron Ore was a strong mover north, adding 5 and one third of a percent after the dust had settled. Still, I am reminded by the scoreboard that the overall market is down 3.1 percent for the year, this measure of course without dividends. Which is why fund managers love to benchmark against the ALSI (or ALSI 40) sans the dividends, it makes it so much easier. Those are gobbled up for fees you know!

Telkom gained 2.18 percent after folks had a closer look at the announcement Friday, if you missed it, here is our write up -> Telkom in talks with an unlikely partner. The stock traded 80 million Rand which is two and two thirds time the normal amount traded on any given day. I see that COSATU is against the deal, so says the New Age -> Cosatu red flags Telkom Korean deal. Perhaps someone should just tell KT Corporation what the track record has been like. No really, that is not nice, but I stand by that view.

I was waiting for the last part of the puzzle on Friday, well the ones that I normally use. Sadly I do not have the rails data yet, I shall push harder to make sure that there is more coordination soon. And the puzzle is called the ports (Transnet), roads (Mooi River Index)and cement demand index.

Let us start with the Mooi River Index. What is this? Well, this is a measure of all the five axle (or more) trucks that pass through the Mooi River Toll plaza on the N3 on their trips between the biggest port, Durban and the biggest financial centre, Gauteng. And the other way too, Joburg and the surrounds to Durban and out the port. So basically this road is the bloodline of trade in our country. A shipping and logistics expert by the name of Adam Kethro thought this up as we stared at the highway from his spot (Greenfields Farm) that looks at the N3 back in the winter of 2008, if I remember right. And we have been watching it since then, one of Adam’s employees now compiles the data every month and sends it off to a bigger growing list of people, who get excited about the data monthly. Monthly passes of big trucks that carry goods backwards and forwards, as simple as that. In a way what we are trying to measure is whether or not trade is picking up strongly, a different and unconventional economic measure of sorts.

And the data for this last month hit the screens on Friday. August was a record month, with the number of passes through the toll gate numbering 164,801, September has fallen a little, but I am thinking that might have to do with the number of working days. September is traditionally a slightly worse month than August, but the month has come in at 162,621 passes. Here goes, a five year view, 2011 is the gray (grey?) bar, see how we are setting new records recently.

So how come everyone is feeling down in the dumps about the economy? Are there other clues as to how we are doing? I think the biggest insight might be if we knew what the Durban to Jozi (and back again) railroad traffic was, on the freight side. Because if this roads traffic is just increasing because the rail traffic is decreasing, then one is offsetting the other. That part is vital to knowing all of this. I am working on that.

OK, the second part of the puzzle is also an interesting key economic piece of data, the local cement sales, as compiled by the Cement and Concrete Institute of South Africa. These are always fascinating, because the dataset goes back two years and there is a key number in there that is not altogether that easy to understand. The Moving Annual Total or the MAT, which is a measure of the last twelve months versus the previous twelve months. Simple enough I guess, take 24 months worth of data and compare the last 12 to the first 12.

Now August 2011 was for the first time a read of over 1 million tons worth of monthly sales had been recorded since March this year, and in fact only two months in 2010, March and November recorded a number over one million tons of cement sold. So I am guessing that immediately a year with three such instances, and a record month for September, 1,104,877 tons of cement sales recorded, should be telling us something. Something indeed, perhaps the bottom has passed (I am calling it) and demand is starting to improve. In fact September is a record sales month for the whole of this year, last year and the year before. Is that enough of a sign that “things” are indeed starting to get better? Let’s call it.

Here are two graphs courtesy of the Cement Institute, first the daily cement sales, which measures the overall volume for the month divided by the number of days. The average daily sales number has grown to 50,222 tons of cement. Only two months since the beginning of 2009 beat that, May 2009 and August 2009, this is the best daily cement sales report in over two years.

The next graph is a more simple one, the monthly number. See that blue line just peek out above all the others there? The record.

OK, we have called this as a sign that “things” are improving, perhaps the private sector is starting to come back stronger than most people think.

And then the last wheel in the present cog, the ports data that is sent to me by a very pleasant person over at Transnet, the national ports authority. I am going to give the verbal version here, no graphs just as of yet. This data seems to be quite tricky, because the data from port to port seems to differ, the smaller ones especially. Let us take the overall number, Total cargo handled, which is the number of metric tons moved through each port. The overall number for September 2011 came in showing an 11 percent plus increase over September 2010. So I am guessing that is excellent news. It seems that there has been quite a big change in exports, the actual volume and most of that is immediately noticeable with a marked increase at Saldanha Bay (I am guessing a ramp up in Iron Ore) whilst Richards Bay exports (Coal) are lower. Durban harbour saw overall traffic increase by 32.9 percent, perhaps that is more key, although remember that the expansion at Durban is ongoing. I am going to have to get 24 months worth of spreadsheets and start plugging all the numbers. All I can get from this is an improvement in the trend, so perhaps all of the data starting to point in the right direction. That train freight data…….

There was a meeting of the G20 Finance ministers over the weekend, not out and out politicians (OK, maybe), over the weekend, and their conclusion was pretty simple, time to get serious about this European Debt issue. And you know what, WE, as the collective G20 folks want this solved by this weekend. Quite simply, confidence must be restored, there must be a growth plan put forward and the banks must be recapitalised, as simple as that sports lovers. And you know that there was lots to love on the weekend! Even you Arsenal fans! Surprise, surprise I cannot find anything on the G20 website, perhaps I am just looking in the wrong place.

Would you believe, not even at one of my favourite bloggers (who got snapped up by the “mainstream”) Felix Salmon has anything at his spot on the web. So, the information that I have is from the two most respected financial publications globally, the FT and the WSJ, nice simply named quality journalism. For which you must pay if you think that it is worth it of course. So basically the problems ranging from Greece, where bondholders are expected to take a larger than anticipated 21 percent haircut to bank recapitalisations are expected to be solved by next Sunday. Or at least there is expected to be a plan on the table. Those with most to do will be the French and the Germans. But I like this, timelines, and pressure from the outside to act, where there has been little action.

All the while Nicolas Sarkozy is expected to announce his candidacy for his party to run against the Socialist candidate, Francois Hollande, who was picked this weekend. I recognised the name, I could not remember from where, but then a short Wiki search (no trip to the library) revealed that he was the domestic partner of Segolene Royal, who lost to Sarkozy in the last election. WAS, because after 27 years and four kids together, they parted ways after the Royale lost the last election, Hollande reckons he can go one better this time. Does this not tell you all that you need to know about politics, next thing you will hear that one of Berlusconi’s squeezes will be filling a cabinet post. No wait….that already happened.

New York, New York. Most might have thought it was a choppy week for stocks, on the contrary, stocks surged, the CNN Money twitter account suggested the following: “Dow gains 4.8%, Nasdaq jumps 7.5% and S&P climbs 6%”. Sounds like an amazing week to me, Friday was no difference of course, stocks surging in the second half of trade, which is the reason why most markets around the world are called much higher this morning. Driving Friday’s move was in part a spectacular showing from Google, that stock added 5.85 percent on the day. The stock is still nearly 50 bucks away from their 52 week high though, lots of “moving” still to do. There was a better than expected read on retail sales, yeah, America is finished, but it turns out that retail sales were much better than anticipated. Even ex transportation and energy. If you want to see the whole release, follow this link -> … advance estimates of U.S. retail and food services sales for September. What a twist.

I am sure that I have covered this before. Yes, I have. I remember comparing Lloyd Blankfein and Portuguese and Real Madrid FC superstar, check it out back in 2009 in a post titled -> Street upbeat – 18/09/2009. And I said the following back then, I still feel the same now:

“I am thinking that excessive pay in sport should be tackled front and centre. To think that some of these sportsman and woman get paid to do that for much more than financial types who are equally talented. I know what is going to happen here. People are going to move from financial institutions governed by these laws to somewhere else, more accommodating. Watch.

I personally think that folks getting crazy pay packages is simply out of whack. Incentive based packages whereby the employees interests are aligned with that of shareholders, that is the right way. I agree with Lloyd Blankfein, top management must be locked in. Oh, and just in case that you think Blankfein was handed his job, nope, his dad worked for the postal service in Manhattan. So he worked hard for his money.

Blankfein was first hired in the commodities space, working for the Goldman Sachs commodity arm, and he excelled. He was so good that he progressed over a quarter of a decade to the top vampire squid, through all the channels. So, arguably Blankfein is chief of the worlds best investment bank. And in 2006 his overall package was 54 million Dollars. Around there.

 


How different is that to someone like Cristiano Ronaldo, who as an eighteen year old was signed for over 12 million Dollars by Sir Alex, to join Man U. Recently Real Madrid snapped him up for 132 million US Dollars. He is 24 years old and extremely talented. Blankfein is 54 and extremely talented too. And arguably works a lot harder. Just a thought.”

Someone else over the weekend picked up along that line of thinking too, in a Mark J. Perry (what tells you that I like him?) post titled Yankees’ Salaries vs. Everyone Else’s. Where’s The Outrage? How About An “Occupy Yankee Stadium”? AND, say what you want, sports jocks and sports players have a talent, so do investment bankers and leaders of corporations. One is for fun, the other is for job creation. Although sports creates an enormous amount of jobs too.

Food for thought not so, time to request that that athletes get paid less. I have an idea, let us setup a race of sorts, that involves both brain and athletic ability. Give the top dogs 6 months to brush up their skills. And then Blankfein can race Ronaldo, and then the two can enter into a deal making program, see who wins that. Just saying you know…..

Commodities and currencies corner. Dr. Copper last traded at 340 US cents per pound, that sounds a whole lot higher than two weeks ago. The oil price is last at 87.50 Dollars per barrel, much higher than oh, two weeks. The gold price is slightly higher at 1682 Dollars per fine ounce, the platinum price is slightly lower at 1546 Dollars per fine ounce. The Rand is firming up this morning, as the risk on trade take place, 7.80 to the US Dollar, 12.33 to the Pound Sterling and 10.82 to the Euro. We have started on a much firmer note this morning, buoyed by markets across the globe. Good for the bulls.

Sasha Naryshkine
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Jozi, Jozi. I said to Paul yesterday, what would I say if someone asked about the market action today? Now Paul who sits just an underarm lob (of an apple) away from me, in fact closer than that, check this picture out that I tweeted the other day, which was “my view, the front anyhow”. And there you can see Paul, and two TV’s. I know, pretty boring view from the front, behind it is awesome, you should pay us a visit here. My question was more that I was not too sure one way or another sure about the market movements at particular points during the day, there was confirmation that the Slovakians would vote yes (and subsequently have) on the EFSF expansion, there was I guess a neutral read on weekly jobless claims. I was looking for a number below 400 thousand, we nearly got there.

Perhaps the biggest talking point yesterday was that the Chinese exports had shrunk for a second consecutive month indicating that demand for their manufactured goods globally is slowing. Or so that is how the news was presented, what few might have failed to add was this “slowing” meant that exports had only increased just over 17 percent year on year. Slowing my you-know-what! So if that is what people are worried about then be my guest. De-coupling is perhaps not likely until there is less reliance on the developed world as consumers of goods, and greater internal consumption, we are moving slowly in that direction. Slowly. Commodity prices eased on this news, understandably so, if not just a sympathy sell off. Chinese inflation this morning came in showing a 6.1 percent increase over the same basket of good this time last year. A fourth straight month of 6 percent plus on the inflation read, but perhaps showing early signs of having peaked and stabilizing.

There was talk about a bigger than anticipated haircut for Greek bond holders, perhaps now that the stinky linen has been aired that is not altogether a bad idea -> International estimates of Greek debt cut growing. The technical definition of a default is “…when a debtor has not met his or her legal obligations according to the debt contract” I am pretty sure that when Greek bond holders bought Greek debt they did not expect to be returned half of their money.

Our market closed down nearly a percent, or 295 points to be exact to close up shop at 30834 points on the Jozi all share index. Banks held up pretty well, relative to the rest of the market, closing down just over one tenth of a percent. Construction stocks actually caught a bid, and moved three quarters of a percent higher on the day, perhaps some more insight into that a little later on in the show. I mean letter. Industrials sold off around one third of a percent, it was the resource stocks that dragged us lower ultimately, the overall Resource ten index was one and three quarters of a percent lower on the day. Anglo American came in for a hard time, perhaps the prospects of having to sell half of their prized South American copper assets weighing, the stock closed down two and one third of a percent. Mind you, BHP Billiton hardly fared better, down a little more than that, not much, so perhaps this (selling) could all be put down to the general commodity sell off.

Interesting news from the people over at Telkom this morning, in which they have entered into talks with Korean company, who most boringly are name KT Corporation. I can’t think of a more boring name, perhaps I am not thinking hard enough. What are they talking about, well here goes a copy paste from the announcement this morning that the two companies have…..

“have entered into discussions regarding a potential strategic venture (“Potential Strategic Venture”) that would, if implemented, result in KT Corporation acquiring a strategic equity shareholding of 20% in the post-issue ordinary share capital of Telkom (excluding treasury shares reserved for Telkom employees share schemes) (“Potential Equity Investment”) and the Companies entering into long-term agreements to formalise the relationship and identified areas of mutual strategic and business cooperation. Should the Potential Strategic Venture be agreed, Telkom and KT Corporation will implement the Potential Equity Investment by way of a specific issue of new Telkom ordinary shares for cash at an issue price of ZAR36.06 per new Telkom ordinary share.”

New shares for cash resulting in a twenty percent ownership and a dilution for everybody else, ja no thanks Telkom, keep on trying to touch tomorrow. Does anyone else share my not so excited about this? And tell me, KT Corporation, do they know who Telkom are? Kidding, of course they know. And tell me, what do Telkom want more cash for? To burn up again? Getting ready for Guy Fawkes day? Ouch, this criticism is stinging that is for sure, but I think warranted, I cannot think of anything that Telkom has touched that has turned to gold. Recently. The stock is up as at early this morning, perhaps some shorts just getting the hell out, shooting first and asking questions later. Early days. The track record keeps me from thinking that this is anywhere near a great company. No thanks.

New York, New York. A high profile insider trading case finally came to the conclusion yesterday, Raj Rajaratnam was sentenced to 11 years in the slammer for his role in a complex network of informants in helping the fund manager benefit (in a monetary sense) with material market information. Suddenly the guy is ill. What a hoot. Check this out -> Rajaratnam May Join Madoff, Blind Sheikh. Cool. And Occupy Wall Street continues to gain momentum, I am guessing that until the first real cold weather comes those folks are there to stay. Protesting just the kind of thing that Rajaratnam was getting up to. I saw a piece from one of my favourite, almost mainstream publications, the Business Insider had to say, it is rather long, but makes sense: Here’s What The Wall Street Protesters Are So Angry About…

And true to form, Matt Taibbi has an axe to grind, this is no doubt personal, he suggests as much: My Advice to the Occupy Wall Street Protesters. I am thinking that perhaps Matt was turned down on a mortgage application for his dream home once upon a time and since then hates all financial institutions. Probably not, but he seems to have made this a personal campaign. All I can say is that it seems to be working in his favour, the perceptions are rooted in the mainstream that the folks to “blame” are the evil bankers. And of course not the law makers, or god forbid the people who lied about their incomes to crooked mortgage officers, hell no, those people are not to blame. Mark j. Perry had a good piece about this very thing, you MUST read it -> Reckless Government Policies, Not Private Greed Caused the Housing Bubble and Financial Crisis. Yeah, but how likely is it that politicians ever apportion blame to themselves? Not often, unless they have been caught with their uuu-ummmmm, pants down? Ho-hum.

JP Morgan released results that looked decent at face value, it was not just me that thought that, I saw a couple of analyst notes that the business itself was solid, with sound fundamentals and it was just the very average outlook that dented the stock. And the market predictorbots are expecting the company to make in the region of 5 Dollars worth of earnings next year and around 10 percent more the year after that. Huh? The stock trades currently 31.60, that was down 4.82 percent yesterday in the session. That tells you what those types thought, thanks but no thanks.

It is the second largest bank in the US, so I am guessing that its role in the economy is bigger than most regional blocks around the world. The biggest hits that earnings took (and perhaps this is where all the focus was), was in the trading and investment banking arena. I see. The old business, the retail portion fared a whole lot better, with credit card revenue up 7 percent (I see, so people are spending) and their mortgage business doing really well. Cheap refinancing and lower rates no doubt finally starting to knock around, leading to higher division profitability and contribution. Although the backlog in housing needs a serious clearing still. Still, these are the kind of businesses that we struggle to come to grips with, we like the good old fashioned side, but not the parts where bank employees are basically having a go with shareholder capital. That does not sit well with us. If you are however looking for a well run outfit, this might just be your vehicle. I like Jamie Dimon. Never met him though and perhaps unlikely ever to do so.

The folks over at RIM said sorry in a video to their loyal Blackberry users, I feel the pain, and so on, you know the story. If you are looking for the official release, check it out -> BlackBerry Service Update [Oct. 13, 2011]. Nobody has said to me whether or not they think that they would be put off the handset as a result of the outage. I am guessing then the loyalists will be just that, loyal.

Google reported numbers post the market close and seemingly the aftermarket is telling you that they have been well received. Currently in the extended trade part of the market, Google are up 6.37 percent to 594.6 Dollars a share. Year to date they are lower by 5.89 percent, this gain in the aftermarket would put them slightly higher on the year. Yip, it has been a tough old year. Although Google+ is up to 40 million users (I am one) how many people actually use the service actively yet? Does not matter for now, it will come, I remember the same sort of start up phase with Facebook. Sales climbed 33 percent when measured against the corresponding quarter last year, up to 9.72 billion Dollars. Revenue from outside of the US climbed to 55 percent of the groups total revenue, pleasing the company no doubt!!

AdSense was more than a quarter of all revenues, but the bulk of revenues ceomes from the owned sites still: “Google-owned sites generated revenues of $6.74 billion, or 69% of total revenues, in the third quarter of 2011. This represents a 39% increase over third quarter 2010 revenues of $4.83 billion.” Oh, that is from the official release, well one of the sources that I found anyhow: Google Announces Third Quarter 2011 Financial Results. Nice, serve your stuff off your platform.

Non-GAAP EPS, the number everyone was after clocked 9.72 Dollars, I guess the annual run rate would be closer to 40 Dollars. So I guess a price of around 600 Dollars is not that expensive for a company that is slowly (perhaps not so slowly) changing the landscape of the internet, 15 times forward earnings. Sounds cheap(ish). Listen (Read I mean) to this though -> “Cash – As of September 30, 2011, cash, cash equivalents, and short-term marketable securities were $42.6 billion.” My daughter would skew her face up and say, “Huh”? Quite right folks, if the share price opens at the higher indicated price of above 590 Dollars a share, roughly 22.2 percent of that will be all cash. Or, nearly 132 Dollars a share worth of cash (and equivalents). So, minus the cash and the earnings forward are just below 12 times forward. Wow. Seems even cheaper now, even after the price popped. Cheaper than almost ever before.

Commodities and currencies corner. Dr. Copper is last trading at 340 US cents per pound. The oil price is better (not for the consumer) at 85.20 Dollars a barrel, this is for NYMEX quoted Light sweet crude WTI, the November contract. Yip. The platinum price is also higher, last at 1543 Dollars per fine ounce, ditto the gold price, which is last at 1677 Dollars per fine ounce. The Rand is firmer as the risk on trade is back in full swing, last at 7.85 to the US Dollar, 12.38 to the Pound Sterling and 10.82 to the Euro. Stocks are better at the start here this morning as markets kind of suggest that there is nothing to worry about the fact that Spain has had their credit rating cut a notch to AA- by the folks over at Standard & Poors. Err….thanks. The Spanish bond yields have blown out are steady, indicating that this is not new news.

Sasha Naryshkine
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