Slasher's coffee beans

A couple of things worth noting yesterday, there was news from one of our major holdings, BHP Billiton and that they were looking to get rid of their diamond business. They might be forever, but seemingly they are not core to their shareholders. Makro announced that they were doing a massive overhaul of their distribution centre, which is excellent news. Another airline casualty in the very long list in the US, the parent company of American Airlines, AMR, filed for bankruptcy yesterday. And then we continue to look at the Euro zone debt and liquidity issues that face the Europeans, who thinks what and where.

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. A bit of a mixed bag here yesterday, banks were on the back foot for much of the day, collectively down over two and one quarter of a percent. The overall market sank 0.61 percent, down nearly 193 points to 31636 is where we ended the day. We had no power here for most of the day at work, a monster power failure (City Power, not Eskom) in the area left us confined to lap tops and mobile connections before heading elsewhere to work remotely. Disruptive at best!! Must explain why general retailers were up half a percent on the day, Gold stocks almost enjoyed the same gains. The resource stocks lost exactly the same amount as the broader market.

It turns out that diamonds are not always your best friend. At least this is the case for BHP Billiton. You might have heard us talk about the diamond business that the world’s biggest mining company has, but it has always been a small contributor. You remember just less than one month ago, we wrote in a post titled Anglo American acquiring De Beers stake from Oppenheimer family, about the opposite from their industry peer. In that piece, there was the link to the Anglo presentation in which they compare themselves to some other diamond producers. Both BHP Billiton and Rio Tinto are on that list, although those businesses are no way core to either of those companies.

And as such, BHP Billiton said in the announcement that they were “reviewing its diamonds business, comprising the Group’s interests in the EKATI Diamond Mine and the Chidliak exploration project in Canada.” And the reasons for the review are to “examine whether a continued presence in the diamonds industry is consistent with BHP Billiton’s strategy and evaluate the potential sale of all or part of the diamonds business.”

With the ownership of the two mines not the same, when the review is finished by the end of January (someone is crunching in both the ice and numbers this Christmas), we might well see two separate transactions. The reasons I say that is because one of the two mines in question, Chidliak is 49 percent owned by a business Peregrine Diamonds limited. Peregrine is listed on the Toronto Stock Exchange. Have a look at the beautiful weather at the site of the Chidliak Project.

The other mine, EKATI is actually where all the juice is. As per the BHP Billiton website: “The cornerstone of BHP Billiton’s diamond business is EKATI Diamond Mine in Canada’s Northwest Territories. Annual sales from EKATI (including the 20 per cent minority share) represent around three per cent of current world rough diamond supply by weight and 11 per cent by value.” So what would a mine of this importance be?

EKATI produced 2.5 million carats for the last financial year. Inside of the BHP Billiton numbers, the division that the diamonds divisions and by extension EKATI falls into is “Diamonds and Specialty Products”, with total revenue for the full year to June 2011 just over 1.5 billion Dollars. Out of a total of 71.7 billion Dollars for the group. With underlying EBIT 587 million Dollars for that division, versus 31.9 billion Dollars for the group. So, as you can clearly see, this division is not key. But wait, this division, the specialty products includes a business division that is going to be key! Because it includes the potash division and the Jansen mine that is going to a bigger contributor. From around 2016. From what I can tell from the BHP Billiton Report for the year ended 30 June 2011, on page 14: “Strong demand and a shortage of rough diamonds resulted in higher prices, which increased Underlying EBIT by US$254 million.”

Is that then the answer? What would you be prepared to pay for 250 million plus USD EBIT? What is the corporate tax rate in Canada? Seems like it is quite low, 16.5 percent. And as of next year falls further to 15 percent. And then it seems like there is a provincial or territorial rate too, around 14 percent. So be careful, I suspect that the rate is about the same as it is here. I would think that BHP Billiton would get a fair price, the asset itself is not the best I guess, but if they get in excess of two billion Dollars for EKATI I would think that they have done well. Some suggest for all the assets, 2.7 billion Dollars. In the bigger picture, unlike for Anglo American, this is not big news. A divestment, simply because the business, as shown above, is not core to the group, that is all.

The Makro distribution centre is set for a monster overhaul, space is set to be expanded by 11 thousand square metres at the existing facility to 27 thousand square metres. Camp Nou, the San Siro and Old Trafford are apparently “standard size” football fields around 7140 square metres, so this gives you a little bit of size and scale. So around four football fields, that is going to be the size of the improved facility. The facility is expected to be finished by the middle of next year, check out the Engineering News take -> Investec Property to develop Makro’s distribution centre. I suspect that we are really close to online shopping through Makro like perhaps we have not seen before. The Makro website perhaps needs an upgrade of sorts, the prices have been added, but it still lacks something, not too sure what!

Flexing muscles in Brussels. I have suddenly thought, what would Europe look like when the “Euro is finished”? Would they go back to the cave way of living? How can the Euro even end, is what I thought? Is that even practical? Those thoughts came after reading Could Germany just leave the euro zone? Not easily. Not easily. And a very expensive exercise with huge unintended consequences for even German’s exports. And even more so, the citizens.

The Washington Post story links to the research report from UBS titled Euro break-up – the consequences. Read this carefully and then think for a second whether or not any politician could get their citizens to suck this up:

“The cost of a weak country leaving the Euro is significant. Consequences include sovereign default, corporate default, collapse of the banking system and collapse of international trade. There is little prospect of devaluation offering much assistance. We estimate that a weak Euro country leaving the Euro would incur a cost of around EUR9,500 to EUR11,500 per person in the exiting country during the first year. That cost would then probably amount to EUR3,000 to EUR4,000 per person per year over subsequent years. That equates to a range of 40% to 50% of GDP in the first year.”

If you read further down the report (this one is actually sensible), you see that leaving would inevitably mean defaulting on domestic debt. “Default on sovereign debt – in either example – would generate lasting economic costs as the long-term cost of capital for the government would increase.” Sounds awful. There are even worse longer lasting impacts in leaving the Euro zone, and that relates to the banking systems, and more importantly free trade across the zone. Imagine having to piece that all together.

Our sense all along is that this will be resolved by itself. Tax compliance is improving. Spending is being hauled in. Even severely constrained countries (think Greece) take the bail out money, because the other option is to not pay your civil servants. How is that going to turn out? Anarchy. It is better to take the pain over the next half a decade (or more) than to have to deal with returning to the Drachma. So the way we see it is that muddling through, rather than a grand plan is going to be the order of the day. Germany and France might be working on closer fiscal integration, this whilst the ECB continues to buy sovereign bonds, and Italy will continue to raise money at more expensive rates. Italy strangely has always had a primary surplus, but of course a creaking debt burden.

I quite liked this Economist piece from yesterday, alarmist in parts, possibly because the Polish want the Germans to act more swiftly: Sikorski: “I fear German inactivity”. Perhaps that is the outside view. That the Germans are not doing enough to “save the Euro”. This goes back to the original question, how would the Euro just end? This integration of all Europeans came out of the idea of fighting each other (on the battle field) was becoming tiresome. Economic integration was necessary to tie countries together so much so, that the likelihood of fighting each other again would be greatly diminished. And businesses are starting to mull what the process of an exit from the Euro zone, what that would mean for them, that is the lead in the FT today. Again, we are going to stick our necks out here and say that we do not believe that the Euro will fail.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. It was better at the beginning as a result of a consumer confidence read, which was better than anticipated. A home price indices measure showed a slightly bigger decline than expected. So the housing market in the US is still stodgy. There are multiple monthly numbers that tell me that, over and over again. After all was said and done, blue chips and the broader market managed to keep their noses in front, whilst tech stocks slipped relative to the rest of the market.

The parent company of American airlines, AMR Corp. has decided to file for bankruptcy. As the WSJ points out (via CreditSights), American Airlines labour expense in cents per available seat miles is much more expensive than their competitors. American Airlines are thirty percent more expensive than US Airways and around 60 percent more expensive on the metric than JetBlue. Amazing. As this article titled American Lands in Bankruptcy, points out, this is the sixth bankruptcy of a major American airline in the last decade. Of a major! I found a list of bankrupt and discontinued airlines since 1979 and the number is nearly 190. Six a year. A tough old business airlines, ask Carl Icahn, his purchase of TWA did not end up like he would have liked. Not sure what it means, if anything.

Commodities and currencies corner. Dr. Copper was last at 332 US cents per pound, the gold price is 1706 Dollars per fine ounce, the platinum price is lower, 1515 Dollars per fine ounce. The oil price is last at 99.13 Dollars per barrel. What, nearly 100 bucks again? Robust price don’t you think, considering that the wires are all reporting daily that the Euro is finished. Turns out that even if you do not have a currency to use, you will still need to drive your car around, wondering about the implications of a “finished currency”. The Rand is weaker, 13.06 to the Pound Sterling, 8.40 to the US Dollar and 11.15 to the Euro.

You are going to shout at me. I have not covered South African GDP from yesterday. Which was disappointing. I shall cover it tomorrow. Promise. We have started marginally lower here this morning, but keep bouncing up and down. News that S&P has cut bank ratings leaves me with the same feeling as eating a heavy and oily breakfast. By late this afternoon that feeling would have vanished. Or after some Eno.

Sasha Naryshkine
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Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. It was rally mode all through yesterday, two factors really, one the Europeans are seemingly getting closer to fiscal union (seemingly) and two the American consumer is on their knees managed to set a record for retail sales over the weekend. Black Friday and Thanksgiving included, the spend topped 52 billion Dollars. I am yet to see early estimates for Cyber Monday yet, perhaps we will see that a little later today. Almost every sector benefitted from the Mr. Miyagi risk on trade, the Jozi all share added 2.27 percent, or 705 points on the day to close at 31829 points. About the only major sector (perhaps not so major anymore) not participating were the gold stocks, which were perhaps impacted by a currency that firmed up. You know, lets buy risk assets!

There were results from eight different companies yesterday, not too many that you would know well though. Winhold, Platfields, Goliath, ConvergeNet, Chrometco, Brikor and Alexander Forbes Pref’s reported alongside Pioneer Foods, which we will cover today. Phew, I am pretty sure there are many inside there that you do not know, and some of these companies have squeezed in their results before the end of the month.

And this morning we have results from Naspers, we will immediately jump into those results. These are for the first six months of their financial year. Consolidated revenues increased 17 percent to nearly 18.5 billion Rands, with “core headline earnings” clocking 3.458 billion Rands. Earnings per share for the six months came in at 921 cents, which is a modest improvement on the 860 cents reported this time last year. Someone once described this business and stock as part NAV, part earnings. Before we start on what the right price is for the business, check out the group structure:

We often do the math on this sort of valuation, as per above, and we have done exactly that this morning. First TenCent, which is listed in Hong Kong. It (TenCent) has NOT had a good time of it lately, the share price, not the business. Over the last calendar year the share price of TenCent is down 16 percent. And TenCent trades on an earnings multiple of 22 times. And a very, very modest dividend. 34 percent of the market value of TenCent (that is what Naspers owns) at 1.0745 ZAR to the Hong Kong Dollar of 256 billion HKD, that equates to a little over 93 billion ZAR. The current market capitalisation of Naspers (at last close) is 144 billion ZAR. So the local market is doing two things, one, it does not believe that the stake in TenCent is nearly worth 100 billion Rands as the Hong Kong market values it, or two, the rest of the assets are not worth 50 billion ZAR. Take your pick!

Here is the commentary on the TenCent business from Naspers in the official release: “In China, Tencent achieved solid growth in an increasingly competitive market. Our share of revenues grew by 46% to R4,9bn and trading profits were up 27% to R2,1bn. The QQ IM platforms now manage 145 million peak simultaneous users. QZone services and online games also grew well.” 145 million users all at the same time? My observations about TenCent users and Facebook (see below) are one and the same, how much are you willing to pay for all these users?

So what are the rest of the assets? Pay TV and print, and their other internet businesses, that is the way that I see it. So first, Pay TV grew revenues for the half by 14 percent to 11.6 billion Rands with trading profits of 3.414 billion Rands for the half year. I would not be surprised to see the Pay TV business make just less than 6 billion of profits for the full year. So what would you pay for a business that in a tough year grew profitability nearly ten percent? Ten times earnings? 7 times earnings? At seven times earnings, a very, very modest valuation, that would value the business at around 40 billion ZAR. If you value the business on ten times earnings you get to 60 billion Rands.

But wait, for example, Comcast trades on 15 times earnings, in a developed market. If you apply that valuation to the pay TV business you get to around 90 billion Rands. And more importantly access to an African market that is football hungry, do you remember Paul interviewing my old mate Luyanda Peter, Marketing Manager for Supersport? I kid you not, I played cricket and rugby in junior (and senior) school with him. He could swing the ball both ways and he was tricky to face, quite tall. He should have bowled more.

And then the print business, what people call old media. For the first half that part of the business made (trading profit) 247 million Rands. Which was 31 percent less than the first six months last year, not good, but that is the nature of the business. So what would you pay for these old media businesses? Let us presume that the business makes 500 million for the full year. The New York Times company is making a loss. Gannett (which owns USA today) trades on a whole five times earnings!!!! So I would guess, when making your overall analysis of this business, don’t afford more than that. 2.5 billion ZAR???? Ironically at that valuation the print media assets of Naspers would be more than that of Avusa. In case you missed Byron’s beats on Avusa last week -> Avusa results.

I guess for the purposes of this valuation, ignore the print media assets. Onto the next set of assets, which are tricky to value. In fact, no, let me rephrase, those assets, the other internet assets make a modest profit. Mail.ru for instance for the half, the Naspers stake returned a mere 178 million Rands. Which might not sound like much, but I can bet you that this time next year, the contribution in their stake in Mail.ru will be more than that of the local print business. Phew, there, I said it. Remember that Naspers own around 29 percent of Mail.ru. Mail.ru trades at 30 Dollars per share. Valuing the company on some alternative platform in London at 4.4 billion Pounds, which is around 57 billion Rands. This is important, because their (Naspers) shareholding in Mail.ru at around 12.9 ZAR to the Pound Sterling is valued currently by the market at a little less than 16.5 billion ZAR. But that seems a little expensive, don’t you think? I suspect that is what the local market is telling you.

They are investing heavily in their business, with development costs as percentage of revenue over six percent. Total development costs for the six months is high, 1.125 billion Rands, which is 78 percent more than this time last year. 55 percent of that is in the development of their internet businesses, 35 percent in their Pay TV businesses and the balance (10 percent) in other!! So you know where all their resources are being deployed, definitely not in the old businesses.

There are a whole host of really good internet business in early growth stage, that will become increasingly important over time. Buscape in Brazil seems like a mix of old and new business, The ibibo business (a JV with TenCent) in India could in future replicate the successes of TenCent in China. Do not underestimate the Markafoni business in Turkey, as the Financial results presentation points out, the country has the 12th biggest internet population. Pay TV is growing nicely too, adding loads of new subscribers, not just here in South Africa (thanks Super Diski) but also through the rest of Africa. Also, around one in four PVR users (571 thousand in South Africa alone) have signed up for BoxOffice. Goodbye local DVD store, yip, it is happening already.

OK, that is all very nice, you can add up all those stakes (trying to do a sum of the parts calculation) in the main parts and say, well that is worth a lot more than the market affords Naspers here locally. Why do you think that is? Well, there are many a holding company who trade at a discount to their NAV. So do not fight the collective wisdom of the market and say, well they should know better. The price of the stock is currently 350 ZAR, and has been much higher, in fact it has topped 400 ZAR a share this year. This year the performance has been less than stellar. Pretty weak actually, but that is what is up this year for most of the market!!

The outlook, well, cautious: “Indications are that overall revenue growth should remain fairly robust over the next six months. By contrast, and as previously warned, growth of the profit line will be affected by an acceleration of organic development spend in several of our businesses. We continue to believe that this strategy is sound and will stimulate long-term growth.”

A strange way to end off, but what is Naspers? Or rather, how should you classify this business? I think once who have seen through the haze, you would see that it is an emerging market (Russia, China, Turkey, Brazil, India, South Africa, amongst others) internet business with a solid and growing pay TV business across the African continent! And those markets are set to grow far faster than developed market. Happy to be owners of the stock, there might be some time until there is any “real action”, but we would continue to advise that one remains in accumulate mode!

There were results from Pioneer Foods yesterday. I actually saw Andre Hanekom very briefly in the CNBC studios, he was being interviewed after I had done a “market analysis”, where I tried to give some useful insights into the day’s events. Pioneer Foods was a company that I was asked about, I said that I enjoyed (rephrase, eat everyday) Weetbix, but did not really like the company as an investment. We passed each other, and at the same time he said “keep eating that Weetbix” and I said something like “keep up the good work on the Weetbix”. Fools never differ, I mean great minds think alike. The other major brands that you would associate with the business are the likes of Sasko, Bokomo (the maker of Weetbix), Safari, Moirs (all you bakers), Ceres, Pepsi and Heinz (distribution), Wellington and so on. Check out their Product basket 2011.

That little story aside about the breakfast of err…. champions, what did the numbers look like? You can download the whole presentation, in fact feel free to check them out in detail -> ANNUAL RESULTS FOR THE YEAR 30 SEPTEMBER 2011.

Higher input prices, well that is not helping too much, especially when the competitions authority is looking over your shoulder. Perhaps crimping margins. But you know what, these types of businesses, like Tiger Brands are for the patient and very long term investor. There is nothing transformative about owning a company that manufactures food. No sir. But everybody needs to eat (I need to beat Byron in a weigh in on Friday!!!). I suspect if you want to be owning a food producer there are two better ones that I can think of to own, namely Tiger Brands and AVI.

What is sprouting in Brussels? There were a few key graphs that Scott Barber tweeted yesterday. Scott is the Reuters Financial Graphics Editor, as per his bio, he does some amazing work. Thanks Scott and thanks Reuters. I wanted to look at two graphs that he spoke about specifically yesterday, first one, from a tweet, is this one: Euro zone Bank deposits.

The point that I was trying to make to Paul yesterday was that deposits in Spain’s deposits had increased by over one trillion Euros over the last seven years, and in Italy over the same time period deposits had basically doubled to 1.4 trillion Euros. That is my point. Deposits have been growing not just steadily, but sharply over the last decade, meaning that people and businesses have actually been saving money, putting money away. What I thought was quite interesting in the lack of trust that seems to be shown by the Greeks in their own banks (and Ireland), whilst the Portuguese, the Spanish and Italians seemingly do not lack that trust. Check out Portugal, same problems, different outcomes really from savers and depositors. I found that part quite amazing. If you are feeling a little worried about the issues that Europe faces and you are reading things like, Europe on the brink, then have a look at these deposits.

So why did this graph spark a conversation? It actually came from another graph from the same source (thanks Scott and Reuters), the next one is the Euro zone money supply graph, which coincided with a data release from yesterday. That looks like a muted recovery to me. Let us show the graph and not just the link:

Credit extension is not what it was in those go-go days where folks went hog wild in the housing sector in some of those Mediterranean countries. Spain. Greece. Ireland (not in the Med sadly for them) are all examples. This is good news that credit extension is increasing, perhaps the better news is that it is not returning quickly to those much higher levels.

That leads me to the next “credit event”, a Reuters article that I read this morning suggests that S&P may cut France rating outlook to negative. Poor Sarkozy. But they are not alone, AP reports that Fitch lowers US credit outlook to ‘negative’. {Sarcastic} Thanks guys for you speed in these matters.

Over at the Business Insider the CHART OF THE DAY: Guess Which Country Has The Highest Percentage Of Workers Employed By The Government is kind of telling, too many government employees as a percentage of the overall workforce. According to that Citi report. What is our ratio here? There are over 1.3 million government employees, I am guessing that is if you do not count parastatals, which are probably counted in a Chinese context.

It is the economy silly. This was more than a little interesting. You know how much I love trains, trucks and ships, but I also love planes. This is data from IATA, who monthly release both traffic and Air Freight Continues Decline. It is not altogether good news if you are looking for leading indicators, this is what the October numbers say:

“The International Air Transport Association (IATA) announced global traffic results for October. Cargo demand was 4.7% below the same month in 2010 while passenger traffic showed a 3.6% rise over previous year levels.

“Cargo is the story of the month. Since mid-year the market has shrunk by almost 5% and this is far greater than the 1% fall in world trade. Air freight is among the first sectors to suffer when businesses confidence declines,” said Tony Tyler, IATA’s Director General and CEO. While business confidence has declined considerably in recent months, industrial output has not. But in anticipation of weaker economic activity, there is a shift to cheaper and slower modes of transport.”

And the Updated outlook for the global airline industry is kind of two paced in its nature, the long term outlook. What amazed me in that presentation is the size that the Chinese market is set to grow to over the coming decades. AND the stagnation is Europe. Wow. That was really noticeable. We will see, I have added the IATA monthly data as something to have a look at and comment on!! I eagerly await the current month statistics, although what use will that be when only released after Christmas?

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. Or is this story really New York? I suspect so, that is where the listing will be. Drop everything, because the word on the street is that Facebook (or as a friend of mine calls it, Book of Faces) is mulling an IPO next year. Awesome! For what though? Early stages still, but the suggestion is that the company could be valued at 100 billion Dollars and that the company would look to sell 10 billion Dollars worth of shares. Go Zuck! And who said that American innovation was dead? From zero to 100 billion from a university dorm room in less than 8 and a half years, have I got that right? If of course they are going to list in the first half of next year.

This WSJ article Facebook Targets Huge IPO says that it would eclipse Yahoo!’s revenue at the time of listing. Suggesting that Facebook has revenue of four billion Dollars. OK, does that mean that the company will trade on 25 times revenue? I hear you howling, how can that be possible? Well, if you need to know, LinkedIn trades on 28 times price to sales. But that does not exactly make it “alright”. Google on the same metrics trades on a 6.5 times price to sales. Apple at 3.22 and IBM just shy of two and a quarter times, Microsoft a little over three times. But those are all very different businesses to Facebook and LinkedIn. The only company that I could find amongst the “related companies” on Google finance that looked way more expensive was Baidu.com, the Chinese internet search engine.

The ultimate question is, what would you be willing to pay as an advertiser to people whom you would know more about than any government or security agency in the world? You would know what they like, who their friends are, their exact age, where they live, who they are married too, exactly who their friends are, where they work, which places they visit and what photos they take, the list goes on. Quite possibly the most specific information that an advertiser could ever want, and there are 800 million people with Facebook accounts, 500 million of whom log on each and every single day. And growing, more importantly, many domains that Facebook have managed to crack. That is the ultimate question for me, how valuable do you think that information is? For a whole host of folks, specific advertising based on your status updates. For instance, you say something like, “Feeling tired and deflated, I need a holiday, ” and hey presto, in ten minutes or so, you get an advert for places close to you, based on your profiling. Imagine.

Commodities and currencies corner. Dr. Copper is lower at 334 US cents per pound. The gold price is lower at 1706 Dollars per fine ounce, ditto the platinum price, which last crossed at 1539 Dollars per fine ounce. Crazy that the two prices are so far apart. When the gap starts closing, that is when the real risk on starts! The oil price is last at 98.03 Dollars per barrel. The Rand is last trading at 13.01 to the Pound Sterling (adjust the exchange rate above for the Mail.ru valuation), 8.36 to the US Dollar and 11.14 to the Euro. We were better, but have fallen much lower here. And darn, the power is out at work!! That sucks. Juice is starting to run out sadly.

Sasha Naryshkine
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Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. It was a half day in New York on Friday and that meant two things for us here, a) not much direction and b) not much by way of normal volume. Phew, I am starting to sound like Robin Jackman, as long as I don’t act like him, if you know what I mean. We actually closed near the best point of the day, but the Jozi all share still ended one quarter of a percent in the red (on black Friday), down 77 points to 31123. Banks were down nearly one percent, beverages (SABMiller) was up nearly one percent. Fixed line telecommunications (read Telkom) was up nearly two percent, but over the last year the stock is still down twenty percent. Vodacom has crushed that “performance”, up over 28 percent, MTN has clocked a less modest nearly nine percent gain over that time.

Another Monday, another “deal” in Europe, or more news coming out of Europe, this time with regards to closer fiscal integration. You have heard time and again that you can’t have a single currency without complete fiscal integration. Separate treasuries with their own agendas, with one central banks and a single currency, it seems that idea is not the best. And nothing like a good old fashioned crisis to galvanise everybody’s thought processes. Human beings are strange like that, act only at the last moment in order to save what you hold dear. And I am sure, even though the polls suggests this or that break with the union, most folks have not thought through the practicality of leaving. If you read only one thing today, read this WSJ article titled Europe’s Leaders Pursue New Pact.

Oh dear you say, I have seen this and heard this all before. But wait, some, even the biggest critics of all the previous packages are suggesting that laws that can be enforced, that might mean countries that do not comply and then leave the zone, are the way forward. WSJ research gives their five pointers:

“If, as expected, there is resistance to an EU treaty overhaul, euro nations hope to:
• Form a fiscal pact among euro members
• Make fiscal discipline binding and enforceable
• Encourage the ECB to step up its intervention in bond markets
• Invite willing EU members that don’t use the euro to join the fiscal pact

 

• Amend EU treaties at a later date to create a deeper political union”

I read on Friday another set of suggestions on the blogs section of the WSJ: Four Steps to a New Europe. I could offer my practical reasons why I think the Europeans should have a central parliament and a central treasury, but that ignores possible the most important “things” at the heart of the issue. Politics, national pride, different languages and individual countries over the collective. Perhaps this is a generational thing. Where eventually the children being born today are more in sync with a single Europe.

WHAT KIND OF FISCAL UNION? nails it with the introduction, and this article from early last week, again, if offers a different perspective of what should and can be done: “The euro area’s shortcomings have become abundantly clear. It was set up without powers of strict surveillance over macroeconomic imbalances, crisis management and resolution instruments, or adequate banking supervision and resolution tools. The core reason for these failures is the absence of a fiscal union with corresponding authority over fiscal, structural and banking policies. Attempts to right these wrongs have been ad hoc and have so far fallen short and moral hazard is prevalent. Financial markets are increasingly aware of these inadequacies, and have started to price in the possibility of the break up of the euro area.”

I suspect the issues are going to be tough to solve, but are solvable. At what sort of pain for the individuals you might ask? Perhaps many. As this Business Week (last week) article points out Italy’s Labor Pains are complex. Complicated. Overwhelming even. But not unsolvable. Just painful and change the way of life that people have gotten used to. That is also a problem, most folks I know are resistant to change.

Black Friday. It is the day for the retailers and the shoppers, the day that traditionally the retailers crossed over into profitability for the year, all the rest was meat on the one, the fat, so to speak. That day is traditionally after Thanksgiving. It is also the most active shopping day of the year. Bigger than any other day at any other time in the US. So, as a retail analyst in the US, I guess this is the single most important day. According to Wikipedia: “Black Friday is the name which the Philadelphia Police Department has given to the Friday following Thanksgiving Day. It is not a term of endearment to them. Black Friday officially opens the Christmas shopping season in center city, and it usually brings massive traffic jams and over-crowded sidewalks as the downtown stores are mobbed from opening to closing.”

OK, so it might have been lost in translation, it is the biggest shopping day of the year, that is all that you need to know I guess. Today in fact is Cyber Monday, with online sales topping one billion Dollars last year. OK, all that out of the way, how much did you think that Americans spent on Friday buying all the “stuff” that they so desperately need? Well over the four day weekend (including Thanksgiving) CNNMoney suggests that Black Friday weekend: Record $52.4 billion spent. Huh? A record? But “things” are so bad, so uncertain……. and here we see a 16 percent increase on last year.

The article lays out the facts: “A record 226 million consumers shopped in stores and online between Thursday and Sunday, up from 212 million last year. Individual shoppers spent more too, the NRF said. The average holiday shopper shelled out $398.62, up from $365.34 in 2010.”

If you search down the List of countries by GDP (nominal) per capita, the 398 Dollars is around where Eritrea takes up its place. Poverty? Mozambique (my old “home”), and just to the right of us sits one place above Eritrea at 410 Dollars per person, per annum. Don’t come here with that whole poverty argument, poverty is a set level in the US, and I am sure that there are people having problems in the US (I am going to get into trouble here), but when you read these stories: I braved Black Friday! you would swear that these are rich people problems.

I guess all you need to know is that this is a record. So that tells me that the average American shopper is feeling better than last year. Or more selective on deals. Because this might give you the absolute number in terms of sales, but it does not tell you how the retailers might have been pressed to cut margins to attract several more hundreds of shoppers. Either way if over two out of three Americans went shopping for goods this weekend, that tells me something.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. I came across this piece, the headline of course caught my eye: Are banks good businesses? And was not really that surprised when the findings by Hedgeye suggested that PNC, Wells Fargo and JP Morgan were amongst the best three banks to be buying in the US right now. You do not have to understand all the methods used here to arrive at the conclusion (even though the end of the world for the principal at the business Hedgeye has not arrived), but rather that banks are still under pressure.

Peter Mushangwe then said to me on Twitter: “Banking is straightforward despite the jargon/accounting issues 1/2.” He continued, “And investors/analysts forgetting the principle when can’t/don’t know how to value the bank’s assets, SELL” Good point there, the second one, I think he means that you need to be even more disciplined when owning banking stocks of this nature. Peter ends off by saying: “Otherwise a sector that’s being kicked hard when its down. Hopefully there will be a way to get ROEs>COEs.” Look, I am sure that there will be, personally all the regulation pending will equally be not good for the big banks, you know our view, we want to stick to ABIL.

Stuart Thompson weighed in at the end with something that you have to read, if not only for a good laugh: Why bankers bank. Questions are as relevant as they are today. Everyone needs a bank, but this all boils down to the Goldilocks principle, you want not too hot or not too cold when it comes to all things regulation, leverage, quality of book, principles, governance and we can go on. I suspect that banking nirvana is not of this time, perhaps when computers run the show.

Commodities and currencies corner. Dr. Copper is last at 335 US cents per pound, higher than the last session, so is the gold price (1706 Dollars per fine ounce) and the platinum price (1552 Dollars per fine ounce). The oil price last clocked 98.25 Dollars per barrel. Ayobaness for the folks long Sasol, not so at the pumps. And this is the reason why, the Rand remains weak, 13.10 to the Pound Sterling, 8.45 to the US Dollar and lastly the Euro is not finished just yet, because you will have to fork out 11.22 ZAR to buy a single one. Not finished.

Whatever the Europeans have suggested or actually done, it is working for those long the market. Asian markets are roaring, perhaps even record retail sales in the US over the Thanksgiving weekend are lending a hand. We should start a whole lot stronger. We need it, the whole market is still down just over three percent for the year.

Sasha Naryshkine
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Today’s message is filled with crazy economics analysis. Byron says that he loves notes of this nature, he went crazy nuts when he saw the AT&T slash T-Mobile deal might fall through as a result of too much regulation. Byron has already declared that he is an agent, a capitalist pig, hence the heading. We have a look at a series of lectures from my new favourite economist, Milton Friedman (not everybody’s favourite I tell you) and how we can apply all this locally, if at all. And then there is the ongoing saga in Europe that will make for a great economic section of an online textbook at some stage.

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. The Americans were eating turkey and all the other traditional goodies associated with the holiday. I do not eat turkey, but I know Paul was supposed to have one, but the big bird could not be defrosted in time. I kid you not. I remember one Christmas eve as a kid where we ended up eating the turkey after midnight because the silly thing would not cook. Darn. All the way down here in Jozi, there was a turkey shoot for the hurting bulls, towards the end of the session the same said bulls were feeling so full and taking a nap. So we lost a little at the end of the session, but the Jozi all share index closed at 31201, up 245 points or nearly four fifths of a percent. Banks added over a percent and a half, Sasol tacked on another 1.8 percent whilst broader resources lagged the market and gained just a little less than 0.4 percent.

Merkozy and Monti were meeting yesterday and presenting a united front without suggesting to the market that there was anything but harmony and agreement amongst the two most important European economies. As Paul said this morning, they are cooking something up there in Europe. They keep saying no Euro bonds, but I suspect we are moving in that direction. Fiscal integration. I am in a way very glad that the Germans did not manage to get the full auction away (At a record low yield) and that this was seen as a failure. Let me explain. Because the perception now is that the Euro is unravelling. I am not sure how, but that is the perception. Even the Economist has this as their lead this week, check Is this really the end?

The Germans are being pushed aggressively towards either the ECB or either the central EFSF as the body buying the bonds of Italy and Spain, keeping the yields lower. Becoming the lender or buyer of last resort. Well, they are not doing that today, the yields are spiking and that Italian auction went badly, the yield was high, but it was not a failure then, right? I suggested that the German bond auction was not a failure, the yields offered were just too low. A subtle difference no doubt. But up to now, as Der Spiegel reports: … Merkel Remains Opposed to Euro Bonds and there are the reasons why. Putting the German triple A rating at risk is the core of the issue. And the perceptions of the other Europeans, this is quite funny (for me):

“Germans are tired of forking over cash to prevent heavily indebted euro-zone member states from going bankrupt. With the tabloid press, led by Bild, having spent the last 18 months portraying Greeks as lazy spendthrifts who only want to get their grubby hands on German taxpayer money, the aversion is not surprising.”

The article raises the point that I made yesterday (and today), two percent was too low to attract enough folks to German bonds. And as the article goes onto point, the biggest problem facing Euro bonds is that basically the German constitutional court has said that any further cash injections to a Euro fund is out of the question. So? The Economist view (article above) is dim. I suspect that Paul is right, they are muddling through this. Time is a tick, tick, ticking and bond investors are impatient. Perhaps that is part of the problem, there is no quick fix here. If the fires can continue to be put out of course, the muddling will continue. And this will reveal that the austerity measures implemented put government finances in slightly better light.

I shall leave you with what Paul re-tweeted C. Maoxian yesterday who said: “Borrowing less at higher rates for a shorter term, nothing to see here, move along: http://reut.rs/udjMIO | Euro bank probs.” Now you might well say, what does that link have to do with the Euro crisis. And you might be right. BUT, what Maoxian says is right, nothing to see here, seems like a crisis now. I am standing by for a resolution and not a collapse.

Sure, some members might leave, but as Nicolas Sarkozy points out in this article, there are more people wanting to get in rather than out of the zone: Two-speed Europe, or two Europes?: “You cannot make a single currency without economic convergence and economic integration. It’s impossible. But on the contrary, one cannot plead for federalism and at the same time for the enlargement of Europe. It’s impossible. There’s a contradiction. We are 27. We will obviously have to open up to the Balkans. We will be 32, 33 or 34. I imagine that nobody thinks that federalism-total integration-is possible at 33, 34, 35 countries.”

Byron’s beats deals with an issue of too much regulation. I remember the much loved (publicly) Jack Welch had a whole new list of Obama era regulations which he showed on CNBC! The list was long. Too long. Byron gets personal here:

The big news coming out of the US yesterday from a company front was an update on the AT&T proposed takeover of T-Mobile for a whopping $39b billion. Basically AT&T have set aside $4 billion to cover the potential cost of the deal falling through. And why would this deal fall through? The Federal Communications Commission Chairman (their version of ICASA) said that he would set up a rare trial-like hearing to decide whether the deal would be anti-competitive and very importantly would it cost jobs.

I want to focus on the jobs issue here because in a country like the US, where free markets have been the cornerstone for their success and something they have prided themselves in maintaining, there seems to be some second guessing. What brought my attention to this theme was an article by Bob Mcteer the former president of the Federal Reserve Bank of Dallas and one of my favourite economic bloggers.

In the article he refers to how the agricultural industry went from employing 90% of the US population to employing 3% today. Is this a bad thing? No, because instead of ploughing farms, people have time to invent iPads and go shopping on Black Friday for cool new products that have been invented and manufactured by other people who also don’t need to farm for a living. At the end, our standard of living improves as labour becomes more efficient.

He uses a cool analogy to describe the situation. “We can always support jobs by protecting inefficiencies, such as import protection or prohibiting labor-saving technology. We can create new jobs by replacing heavy construction equipment with shovels and then replacing the shovels with spoons.”

So have the US lost the plot by becoming too protective of precious jobs? With this kind of reasoning such decisions will become counter intuitive. You know my opinion here, yes I am an agent, yes I am a capitalist pig but if you show me a better way then I will listen.

Innovation is the key to our success as a species and innovation is spurred by necessity. Man invented spears, knives and then guns to protect us from wild animals and become the dominant species on the planet. We invented cars to make us move faster, aeroplanes to fly and phones to communicate. All through necessity.

If we fight efficiency we will shoot ourselves in the foot for the long run. Innovation creates efficiency which in turn creates jobs. Unfortunately this does take time. It seems like impatience is becoming our biggest downfall whether it’s investing, making economic policies or creating jobs. Why are we so worried about the future when history has shown time and time again that the resilience of man will prevail? I’m blabbering now on a tangent but get this, through trial and error politicians will make the right decisions and steer us out of this mess. There’s a reason they are known as developed nations, they have done this before.

I love this. No, I loved it. I nearly cried after I had listened to these three little pieces from renowned economist Milton Friedman. Who is Milton Friedman? Well, if you do not know, then read the Wiki piece on him: Milton Friedman. The reason why Friedman is so appealing to me is very simple, he is anti government regulation and loved free market economics. OK, now you know why I like him so much. I had always read his theories, seen the references. But I had never actually seen the old footage. So this was great, via one of my favourites, Prof. Mark J. Perry, who posted this two days ago, receipted by me yesterday: Milton Friedman Responds To OWS Protestors

Now the suggestion is that Friedman was actually there to chat to the Occupy Wall Street protestors, but this is not the case. Of course he died over five years ago. These issues though that he deals with are timeless. As the Perry introduction suggests, all these pieces are as relevant today as they were back then. And have a lot of relevance for South Africa today, and the current business conditions.

“During his lifetime, Milton Friedman was a tireless advocate of individual liberty and the free market. Dr. Friedman’s passionate defense of freedom and markets was a powerful and timeless message that would be just as relevant today if Milton Friedman were alive to address the concerns of the OWS protestors about wealth, inequality, and the poor, as when Friedman delivered these lectures more than 30 years ago”

If you want to watch these separately, here goes, the first one: Milton Friedman – Redistribution of Wealth. This video is titled: “Milton Friedman clears up misconceptions about wealth redistribution, in general, and inheritance tax, in particular.” Awesome listening and watching, I urge you to watch all of these.

Friedman of course is huge on education. This next one titled Milton Friedman Schools Young Idealist (Stanford) looks at the same issues about education that we have here in South Africa. Description of the video: “In this classic footage from a Stanford University lecture, Professor Friedman takes Q&A after his talk “The Role of Government in a Free Society.” In this exchange, a young man describes poverty as a “market failure.” Friedman, in characteristic fashion, shows otherwise. Though this was recorded around 1979, the exchange is timeless.” Friedman is clever enough to wear suits and not wear the clothes of the late 70′s. Crazy fashion. Always wear something neutral. I love the part about poor schools and how that impacts on future prospects. Too close to home.

I liked the answer when asked if he had a poor paying job (or understood the poor), he said of course, he asked if anyone had worked a 12 hour day for 78 cents (US of course). He then said something interesting, does a doctor treating you for cancer need to have had cancer themselves? To understand the problem, that is what he was trying to get across. And that last point in this video, which is still worth making that poor people in America are better off than in most countries around the world.

Last video. The woman talking about rich people and poverty. His leading question to the lady is wildly important, on how rich people invest their money in order to make more money, but employ many people along the way. Nirvana is not for this world, there is no paradise. Economic development has improved the well being of ordinary people he says. He talks about how minimum wage gets in the way of low skilled workers. And those low skilled workers have been disadvantaged by poor levels of schooling. How minimum wages actually mechanize companies, which is good for business, not good for unemployment and upliftment. Now you can see why this argument is timeless, not so?

Last thing OK. Excuse the music in the background, but here goes my last must watch video of the day/weekend: Socialism vs Capitalism: Milton Friedman.. The points about the president appointing whoever he (still no she’s in an American context) wants, because of his political clout is well made. In America often the candidates are quality, even if their political ideology is just a few degrees off of centre.

Let me know what you think of the series that Mark J. Perry presented here. The reason why I nearly cried (on the inside) is because the issues here are so close to home. The issues that I am talking about here impact all South Africans every day. Inequality. Poverty. Rich people. Labour restrictions and minimum wage. Socialism versus capitalism. Push and pull, ideology versus reality. Nice. My simple and overwhelming take of where we are in South Africa is that ideology is trumping common sense.

Commodities and currencies corner. Dr. Copper is trading lower at 326 US cents per pound. The gold price is lower at 1682 Dollars per fine ounce, the platinum price is also lower at 1533 Dollars per fine ounce. The oil price is last at 95.91 Dollars per barrel. The Rand is weaker as Mr. Miyagi says that this is a risk off trade (wave your hand in front of your face), the currency is last at 13.17 to the Pound Sterling, 11.33 to the Euro and 8.52 to the US Dollar. We are lower on equally disappointing volumes, the Dollar is the only winner out there today! We apologize in advance to those who are offended with Byron and I coming here today with our capitalist tendencies. I shall make sure that Byron eats his sushi off a plate this evening, whilst he studies. Oh, and one month to Christmas today. Byron asked if I worked that out on my own.

Sasha Naryshkine and Byron Lotter
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I could almost hear that Billy Joel tune ringing out in the background, we didn’t start the fire. I remember that there was a specific year, where at the end I tried to put the events of the year into the tune. I tried the year after, I think it might have been 2007. Although I have an archive, not all of it is online. I should from time to time stick up the old articles, how it was going on that day. The reason why I mention that song, we didn’t start the fire, is because yesterday the cats were plentiful and the pigeons were the bulls, scattering. The reasons were a few, that HSBC flash PMI number certainly spooked the commodity bulls. That had an impact on our market. The other big event was a “failed” German bond auction, we will have a look at that.

There was a slew of US economic data, some alright, some better than anticipated, some slightly worse. Meanwhile, in Latvia, an aptly named Krajbanka (sounds like crash bank) was seeing long queues reminiscent of those of Northern Rock, from earlier in the week -> Scores of Latvians pulling money out of the bank Krajbanka. See the article titled Latvia Concern on Krajbanka Won’t Spread, Lender Group Says.

Bank stress tests looming in the US, some people are getting anxious by the worst case scenario that the Fed have put forward. I can’t remember anyone having shown the Fed’s best case scenario. We will have a short look at this. Next on the radar screen were the results from Eskom. For their first half. And what might actually happen in the future from a reporting point of view. On the corporate front there was a whiff that the Vodacom sale of their DRC asset might be sooner than you think. Locally, there was a Consumer Price Index – October 2011 which suggests that any slim chance of a rate cut is possibly shelved for the time being. Darn weak Rand. Yip, darn weak Rand.

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. Local not so lekker yesterday, as we said commodity stocks sank nearly two percent, there was a slight Rand cushion, but that was not enough. The lower house in Australia have now passed the Aussie Senate the baton to decide whether or not to proceed with the mining tax -> Australia’s mining tax passes biggest political hurdle. Does the Australian government somehow think that they created the new client in the form of the massive Chinese demand over the last decade? And therefore the companies that were chugging along in the past, somehow they must pay a mining tax that will cover what? The planting of trees? The building of dams? And what about all the jobs created by the mining houses that are tax paying jobs? Yes/No? Am I being unreasonable?

The overall market slipped another 413 points to close the day at 30956, down 1.32 percent. Sasol was a notable outperformer, up just over four fifths of a percent. In case you missed it yesterday -> Sasol trading update. SABMiller (+0.45%) was the other major stock that stood out, ahead of the rest of the market with their defensive attributes, you know, people will always drink beer.

Byron’s beats speaks about the listed entity that owns some really well known South African media brands. But is not doing that well as a business.

Media conglomerate Avusa came out with results for the 6 months ended 30 September 2011. Lots of activity here so it is quite a complicated set of results to evaluate. Let’s just refresh our memories and see what this company, who owns brands such as The Sunday Times, Businessday, The Sowetan, NuMetro and Exclusive Books are up to. For their full list of businesses check out their website here.

Firstly these results include the recently acquired Retail Solutions business which resulted in a 23% growth in revenues. But remember they raised cash for this acquisition by issuing shares which will affect earnings negatively. Then they had an expression of interest to acquire the whole company from a consortium called Capitau. This however fell through with costs. They also had big management reshuffles with former CEO Prakash Desai parting ways along with a nice separation agreement. The board was also reshuffled.

A combination of these factors resulted in the company moving from an interest earning to an interest paying position. Combined this with poor performances from the books and entertainment divisions and we get earnings per share of 25c, down 60% from 61c last year. It gets even uglier, this includes a once off payment they received for the sale of some commercial properties owned by the book division. This means that headline earnings actually came in at 6c, down 90% from last year. Ouch.

Let’s look at the divisions to get a better understanding of the company as well as which economic trends are taking place. We already know that Books and entertainment took a hit. They blame tough trading conditions for this but according to the other retailers, people are spending. Unfortunately it’s pretty obvious who is stealing their lunch. iPads, Kindles, notebooks, home theatre systems, DSTV’s box office, movie streaming, I could carry on for ages and these technological innovations are only going to get better. For the consumer that is, not for Avusa. They are increasing their exposure in digital publications but I fear they may be a little late. Maybe textbooks have some potential in this space.

Media also struggled as advertising slowed due to the economic slowdown. Newspapers and magazines will also face the same competition from new technologies. I haven’t bought a newspaper in years, I consume all my information online on my notebook or through my phone. Twitter has become my own customised newspaper. This trend will continue, it’s just so much easier and mostly free. They do have some online initiatives which I enjoy and use but unfortunately these are small parts of the bigger picture. Retail Solutions actually did quite well and was responsible for most of their profits after picking up some good printing contracts. Again, shifts in the way we consume will put pressure on print.

I think by now you know that I am not very optimistic about this company. Naspers went the online way, they didn’t. Naspers is worth R144bn, Avusa is worth R2.4bn. Maybe they can get their online businesses going but I fear it is too little too late.

Oh, and back to regulation, I do not really like the sound of this: ANC Targeting Export Taxes, Pension Funds in South Africa’s Economic Plan. Sounds like suggesting forced funding to me, not like it has never happened before, someone pointed out to me. Again, if you are exporting something, it means that there is a demand for that product. You didn’t make or create the demand out of thin air, it exists because somebody needs your resources. And the explosion and need for resources was as a result of someone else’s economic expansion policies, not something that you had a hand in. Not good.

And we were talking about unintended consequences yesterday, if you remember I wrote this back in September of 2009 in a note titled -> Labour day yay: “Just this morning I see that Freddie Flintoff is heading to setup shop in Dubai. He wants to become the worlds best exponent of the shortest form of cricket, the one that Ricky Ponting just gave up at international level.

Reasons for living in Dubai for Freddie include huge tax breaks. What, and you don’t want to live back home for the pies Freddie and pay the bigger taxes there? When you can live a foreign life, plus you get more sun for you and your family. And India is closer. Plus England aint that far either. Got that Gordon?”

Gordon (Brown) of course at the time was prime minister of England. We know how that ended. I was interested to come across a piece that Jim Pethokoukis tweeted yesterday titled Why the 50p tax makes “no economic sense whatsoever”. What a surprise, so you mean higher taxes chase investors away? Why didn’t anyone think of that at the time? {Sarcastic} Oh yes, there were elections looming and rich people needed to be taxed out of sight, ah yes, I remember now.

On the opposite end of the spectrum and falling into the yes, this is good column was the news yesterday that the Vodacom Congo sale may be permitted to go through. I was chatting to one of my favourite journalists two days ago and I said to him, I kid you not, if someone wanted to buy the whole asset, then I guess that the minority shareholders that have given Vodacom a headache, well, they might be on board. As the saying goes, everything is for sale, it is just about the price. Who is the buyer? Well, MTN’s name has been bandied around. I suggested to my journalist friend that even the name of Safaricom be thrown into the hat, why not? I suspect that the sale announcement will be relatively soon.

All these worries about the failed German auction yesterday, are they founded, or not? Well, I guess so when you read these headlines: “Disastrous” bond sale shakes confidence in Germany. Notwithstanding all of that, this is the lowest ever yield recorded in a German auction. Below the two percent issue rate. I think that was the point that I was trying to get across here in the office yesterday. The German Treasury might not have been able to get the full issuance away, BUT this is the cheapest debt that they have ever issued in the Euro era. So perhaps bond investors thought, hang on a little, I can get a new French issuance for over three and a half percent. Courtesy Bloomberg, via this link -> German Government Bonds 10 Yr, here is a German Ten year bund yield over the last five years

Or, you can buy the French ten year bond (should they be issuing new bonds) which yields around 3.65 percent. Do you expect the French to default? Or even the Germans? It could happen, it has happened in the past, but that was as a result of wars fought and costly expenses with limited economic progress. Call me crazy, but perhaps this flight to safety just saw the German yields as just not good enough. See back in the middle of 2007, the yield was 4.7 percent. We did not say that it was way too expensive for Germany back then, did we? Anyhow, that is just my take others are viewing it as a complete failure and blame the rest of Europe’s woes, perhaps, here is the WSJ -> German Bond Sale Spurs Worries.

This leads me to my next piece. I can’t bear it anymore! I am talking about the headlines that I read. Close to the cliff. Peering over the edge. Save the Euro! That last one is my favourite. Save the Euro from who? Investors are spooked, ordinary citizens are even more spooked by the headlines that we read. Question, if you are so close to the edge and a strong wind blows if you fall off the edge, you should fall into the sea below. Right? So all these analogies imply that things are completely awful in Europe. We have seen the recent data suggest as much, the third quarter GDP numbers suggested that growth was pretty sluggish. There was a stage yesterday where Paul said that the headlines suggest that Mercedes Benz employees in Stuttgart were laying down tools to walk into the snow because nobody was ever going to buy another motor vehicle ever again. Never. Actually that is not happening, but you would swear that it was.

Just this morning we see German growth numbers. Yes, their economy grew in the third quarter. By half a percent, but that was anticipated actually. Yes, it is a train wreck. No wait, it is not, here is the official English release -> Gross domestic product in 3rd quarter of 2011: upswing continues and I was quite smug about this part: “In a year-on-year comparison, too, the GDP grew strongly, although not as strongly as in the first half of the year: In the third quarter of 2011, the price-adjusted GDP was up 2.5% on a year earlier (calendar-adjusted: +2.6%).”

Yes, things are so bad. Let me get this right, exports clocked an increase of 7.9 percent for the third quarter to 326 billion Euros. The best quarter I can see in the last seven. Perhaps the current quarter is going to be a whole lot worse, most of the indicators are suggesting as much. I really have not got my knickers in a knot, a weakening Euro is good for German exports. Provided the demand side looks OK, right? Again some survey data from the IFO institute this morning has beaten expectations, giving everyone a bit of a lift. And would you believe that Italian business confidence has improved too. What? Have all these people not been reading the same news as me??

Notwithstanding all of that OK, the problems that Europe have are structural. And that Jim (James) Pethokoukis pops up again (I do read his stuff) with the root of the problem: How did Europe get in so much debt trouble? This chart says it all. Quite. But the second part of the problem is solved when GDP growth returns and it will. Rich people in Europe are not about to go back to cave living. It is a bit unfair of Jim to use the 2009 GDP, perhaps a figure from 2013 would give a better figure, but you get the point, right? Too many entitlements as a percentage of GDP. Time to get working again, the past was too cushy. But here goes, in case you did not get a chance (or ignored the link, I do not mind), here is the rather telling picture:

Phew. Thanks for the rather ugly visuals, I would want to revisit this in 3 years time (2014) which would be five years from the initial snapshot in 2009. All the austerity measures taken and all the pro growth (not seen yet) measures that will be implemented by then. That should change things up a little.

Commodities and currencies corner. Dr. Copper is last at 330 US cents per pound. The gold price is higher, last at 1698 Dollars per fine ounce. The platinum price is also better at 1551 Dollars per fine ounce. The oil price is better at 96.79 Dollars per barrel. The Rand is weaker at 13.24 to the Pound Sterling, 8.51 to the US Dollar and 11.40 to the Euro. Which I thought was finished. Today we have started better. Pity that the participation rate will be quite low, the Americans all eat turkey and pumpkin pie. According to Wiki (which I made a donation to this morning): “The feast consisted of fish (cod, eels, and bass) and shellfish (clams, lobster, and mussels), wild fowl (ducks, geese, swans, and turkey), venison, berries and fruit, vegetables (peas, pumpkin, beetroot and possibly, wild or cultivated onion), harvest grains (barley and wheat), and the Three Sisters: beans, dried Indian maize or corn, and squash.”

Why do we not emphasis the fish element more? Because turkey is possibly tastier and easier to get than an eel. Clams and mussels? All this association with turkey and pumpkin, time for more fruit and berries guys.

Sasha Naryshkine and Byron Lotter
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Today we will have a look at a few sets of results, Tiger Brands will be covered by Byron, I will have a look at the CEO statement from Massmart this morning. There was also a trading update from Sasol, which looked positive. I was once told by a TV guy that people who watch the business segment care only about a few indicators, one is the Rand exchange rate to the US Dollar, the other is the oil price and for reasons unknown to me (perhaps historical) the gold price. Those three things matter most to folks who watch the business news. So, we will have a look at one of them, the weakening currency. I will try and explain two things, one, why it has been weakening and two, point out that mostly it has very little to do with us! We will also have a look at what the implications or perceptions are of parliament getting the secrecy bill rolling forward onwards to the president. What will it mean, if anything to investors? We will also have a look at a disappointing Chinese PMI number.

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. Wow. Who would have thought after a rather worse looking second read of Q3 US GDP that we would end so strongly, but in truth it was a weakening currency that helped us out. The heavyweight dual listed stocks helped lift us by about the same percentage as the currency fell. No, let me rephrase that, the dual listed stocks added about the same amount that the currency fell by, lifting the broader market. Or wait, the dual listed industrial stocks and those sensitive to the currency helped the overall market end higher. I am glad that I sorted that out. But the gold miners are most geared to the weakening Rand, and added nearly three percent collectively. The overall market ended 0.82 percent in the green, or 254 points better than where we started to close at 31116. Which is still down two an one third of a percent for the year. Eish.

Massmart have released the CEO’s statement from the AGM. There are some interesting pointers in there, perhaps “stuff” that would surprise you. First and foremost, CEO Grant Pattison points out that “Whilst the South African consumer environment is dominated by headlines of consumers’ over-indebtedness, the reality is that household debt as a percentage of disposable income has improved to 2006 levels. At the same time, national inflation has been low for most of the past few years, and the employed have enjoyed above-inflation salary increases, all of these factors resulting in higher levels of disposable income.” Surprised? At first I guess you could say that this does go against the grain of what we have been reading, but we all know what local company’s have had to shell out in terms of a rising wage bill. So perhaps not so much of a surprise, if you gave it a little more thought.

He continued and said the following: “We have seen a relatively strong sales performance in the Massmart Group. At 20 November, being the first 21 weeks of the 2011 financial year, Massmart’s total sales growth was 15.2% and comparable sales growth was 8.8%, with year-to-date sales inflation running at 0.8%.” Sounds pretty good to me, perhaps not so much to others who are worried about the lofty valuation. As we often point out, the reason why the stock attracts a higher valuation relative to their peers is as a result of the big outside (foreign) shareholder(s).

Here are the sales numbers for the divisions of Massmart:
“Total and comparable sales growth in each Division is:

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. Yech. The French credit rating worries and the US budget super committee failing to meet common ground meant more worries for the short termers. At the same time you had Warren Buffett who was interviewed on CNBC mid morning our time, late in Japan, who was visiting the land of the rising sun for the first time. Yes, I was also amazed that the world’s greatest investor was visiting Japan for the first time at the ripe old age of 81, more than 60 years into his investing career. He was close to Fukushima and basically expressed little concern, even going so far as to say that he lives close to a nuclear power plant himself.

More on that later, back to the local market. It was the resource sector that got crushed, metal prices falling, the same old fears raising their ugly heads again AND, wait for it (drum roll), as this Reuters article reports: Australian govt wins crucial support for mining tax. Sis. Further investment as a result of extra taxation? Wait, let me think about that…… Nope.

Turns out that the Australian government has been busy, yesterday (their time) they approved the new packaging for cigarettes. A simple blue pack, unbranded. Of course Philip Morris and BAT, the two largest companies by market share down under are going to fight the controversial law. Unfortunately for the tobacco producers this means that if the law takes effect, then similar laws may be passed in the UK, and then perhaps Europe. But if the Aussie government lose against big tobacco, then this would be a big battle won by them. But if they lose, well, then that again is part of the reason why we do not want to own tobacco companies.

The new packaging, according to the FT is set to be used for the first time in the last month of 2012. I have seen various pictures of how it might look, a package, but I am not sure where the brand name will appear. The Australian health minister said that this move was designed to take the glamour out of smoking. And if the government is paying for health care, then I guess they should decide who consumes what, in what quantities. Or, as they are doing in America, starting to make smokers pay more for health care, or in Japan where over 40 year olds at their annual checkups get their waists measured. And if not inline (woman or men), then you get put on a diet. A kid you not -> Another Thing Big In Japan: Measuring Waistlines. It turns out that the richer you get, the more you get a nanny type mentality. And do not forget the recent Denmark fat tax.

The Jozi all share index ended the session off at 31116 points, down 696 points or 2.19 percent. Phew. The going is tough. I said to an industry peer the other day, the same thing that you no doubt have heard, the folks who have been most right this year have been those who are basically long and asleep. Every single sector, bar for the a teeny gain in the travel and leisure index. The main stocks in that sector include Tsogo (flat on the day), Sun International (up 0.11%), Famous Brands (down 0.14%) and City Lodge (up 0.1 percent). Yip, thanks Sun International and City Lodge. City Lodge since the beginning of November has seen some serious buying. We are thinking that either there has been an upgrade and some serious buying support, or something is actually happening. The property companies have been busy Paul said, and it has been tried before actually. Remember that the City Lodge board values the properties at more than the current market capitalisation afforded to it by the last price.

France and their precious triple A credit rating. You must have heard this: “What is the difference between the US and Johnson & Johnson?” Answer: “Only one of them has a triple A credit rating.” The news that the French top notch credit rating being in jeopardy spooked all and sundry from Wellington to Mexico City (remember, the furthest apart market in time zones). There is a small(er) credit ratings agency that has already given France the thumbs down. The Egan-Jones ratings company, founded in 1995. Wait for it, they downgraded the US credit rating before the fellows from S&P did. In fact, these fellows, part of a smaller crowd seem to have no hidden agendas when it comes to ratings.

So, if the Egan-Jones ratings company is seemingly ahead of the curve, then perhaps the inevitable will happen, France’s ratings will be downgraded by the major ratings agencies. Germany will be the last sizeable economy in Europe left with a top notch rating. AND YOU KNOW WHAT!!!???? Sorry to shout, but the bond markets are basically telling you that already. Spreads between every other major bond market in Europe (we are presuming here that the poms are not Europeans) and Germany have been widening for weeks now. Poor Sarkozy. Or not, all five PIIGS have shed their governments since the global financial crisis, naturally the others should follow. That is normally the way that it works.

That was one of the “things” that spooked the market. The other was that the Bank of Spain had to inject one billion Euros into a small lender, Banco de Valencia. Vahr-len-thia. And of course the continued rising yields on the ten year bonds in Spain, Italy AND France is getting folks nervous. Time to get real. And another mini chapter in the ongoing socialist versus capitalist debate, the one that we have to address daily.

OK, what did Warren Buffett say this time? He does not speak too often (on my box), but when he does everybody gets excited. Here is the CNBC interview over in Japan -> Some Europe Stocks Attractive: Buffett. We had a chuckle in the office and said that the woman interviewing him was giving him a hard time, that was so unlike the financial media to the sage, the oracle of Omaha. Be nice to the old guy, we said!

He says that the US could basically print their way out of this, there does not seem to be the will to print their way out of the current crisis in Europe. But perhaps the fact that HE says it, the current crisis will end and he thinks some European companies are cheap, that counts for more than you or I could ever convince market participants. I mean, how do you answer the question, so, how do your position yourself today? Well, the same way every day I guess, buying the quality at a price that we think is right. So Buffett is on the hunt in Europe and Japan. Whilst everyone else seemingly is not. And is running scared. Well, he seems to have the golden touch, even if gold is not really “his thing”.

Byron’s beats has a look at education. Education is way important, because everyone deserves the best one that their parents can afford.

This morning Curro announced a R185mil acquisition of Woodhill College and Woodhill property. Now this is a company we have not really spoken about it before but it seems to have quite a lot of potential and definitely falls on our radar. So in my message today I’ll cover this acquisition and have a closer look at the company as a whole. Hopefully I’ll learn as much as you do.

If you are not aware, here is a brief description of the company from their website. “Curro Holdings Limited, the parent company of all Curro Private Schools, is the market leader in the provision of affordable, quality private school education in South Africa. The company’s role is to establish new private schools and to back each school with a solid management team experienced in the field of education. This creates the sustainability needed to ensure an ongoing level of excellence in teaching the leaders of tomorrow.”

I think it is quite obvious at first glance that our country and economy could do with and support a company like this. Their biggest competitors will constitute independent private schools, public sector schools and Advtech who own brands such as Crawford, Varsity College and Vega amongst a whole host of other institutions.

But where is Curro’s niche? Curro are more focused on providing affordable private education whereas the others are all geared towards wealthy folks. That is their niche and it is also where our authorities are desperate for help. Trevor Manuel stated that education was one of, if not the fundamental ingredient to his national development plan. Here are a few stats that show the shortage of education we currently find ourselves in.

Average years of schooling for adults in SA is 6.1 years, that is half the time it takes to get a Matric. 18.5% of total government spend goes to education, one of the highest percentages in the world. Only 57.2% of children of the relevant age end up enrolling at the secondary level and out of those only 15.2% enrol for tertiary education. In 2010 the Matric pass rate was 67.8% with only 23.5% getting a university entrance. Astonishingly there were 18 schools last year who had a zero percent pass rate. Only 2.8% of our education system is private. The demand is there and with a growing middle class there will be more and more people being able to afford their product, remember education is a priority.

So what about the company themselves? The market cap sits at R1.275bn so this acquisition is fairly significant. Another positive is that they are also buying the whole Woodhill college property valued at R100mil so there is a nice property underpin. From the interim results in June this year property plant and equipment was valued at 381 million. After the acquisition we should see property at about 40% of the market cap.

For the 6 months the company actually made a loss. This was because they are on a buying spree going from 5 schools in 2010 to 12 schools this year. Learners increased from 3083 to 5519. Capital expenditures on the properties either already held or acquired increased to R280mil from R128mil last year. Much of this debt has been funded by a capital raising they did in July this year. The business is similar to a hotel which requires significant capital investment and then a large fixed cost with salaries, electricity and water etc. As learners reach a certain critical mass, revenue will increase disproportionately to the corresponding costs. So I guess you have to rely on that fundamental demand for their services that I mentioned earlier.

One last positive for the company is that The PSG Group own 63.1%. I say this because Jannie Mouton has a great track record in finding these kind of companies and building them into industry leaders ala Capitec. We will keep an eye on this one but at face value it looks like a good growth story.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. All fall down. Sis. But it could have been a whole lot worse, the Dow Jones was down nearly 350 points at one stage but managed to grab back one percent by the time all was said and done. The fears above and below were running deep in traders minds. Why would they weigh on investors minds? I can never understand that line, investors did this or that based on the news de jour. Nonsense. But hey, if I think that these stocks are crazy cheap, there is someone who got battle scars in 2008 and 2009 who thinks the world is going to implode. Not going to implode. Greece, less than two percent of the Euro zone economy could leave in the coming months. Is that huge? No. Poland and Turkey want to get into the zone.

Washington. DC. 38^o 53′ 42.4″ N, 77^o 02′ 12.0″ W Oh how very predictable. Darn, and we even thought that this would happen this time last week. This was from the 16th, last week: “I thought about the Italian debt focus and thought that perhaps in less than a weeks’ time we are going to be focusing on the US super committee as their deadline is a 7 days to deliver a plan. Otherwise those cuts start to take effect immediately. I have seen a few people get anxious about it, we chatted in the office yesterday and wondered about the progress. Wondering if both sides were any closer to a deal. And we start to wonder if this would have further implications for the US credit rating. I don’t know the answer to that.”

So we were wrong, it took less than a week. Like Warren Buffett said, he knew how to solve this problem. Set a date, lock the door, and if not solved by that time then their salary goes to zero. Or benefits evaporate. He said something like that. The biggest problem is that often in an American context many politicians are independently wealthy before they start in politics. Because you need money to be elected. Here. Well, I am not sure, I have never even thought about how you would go about politics.

That aside, markets hate the fact that neither party compromised, or perhaps that was never going to happen. I saw a brief interview with Senator Kerry (the guy who lost to Ricky Ponting, I mean George W Bush in the 2004 US elections) and he basically said that the Republicans wanted the Bush tax cuts to stay, blaming them. Of course, cheap politicking. Their fault. We spoke about it in the office and decided that the tactics from both sides were quite simply always to not compromise, neither of them would be seen to be giving in, and display the other side as the villain.

So you know what. No cuts in spend until after the next election. What a snore. What a bore, and some are even suggesting then end of some of the committee members political careers. What a pity. The WSJ has a great take -> Congress’s Deficit ‘Bomb’: Scary or Not? Darn, if there was a week that things might happen, perhaps before the Thanksgiving holidays. Turns out no giving on either side. Wow.

Politico is always a good place to turn when you want to try and understand American politics. This was last evening -> Lawmakers in last-ditch deficit meeting. AND -> Parties brace for ‘super’ fallout. Grrr….. I am guessing that the average Joe deserves a little better. This Reuters piece is completely unflattering. Analysis: Fallout from deficit-reduction panel failure.

Via Josh Brown, who goes by the name of the Reformed Broker, who is also a great aggregator, I came across this link -> Births at 11-Year Low May Prolong Five-Year Housing Slump. It got me thinking too, the richer that broader society becomes, the fewer children that they seem to have. But here it is for economic issues, the fact that folks are delaying having kids.

But you knew that already, that rich people have fewer kids. Here is a fresh UN report (probably worked on it for ten years) -> Population and Poverty: Are Smaller Families a Route to Prosperity? The last line there struck me square between the eyes: “Reproductive health issues, most of them related to pregnancy and childbirth, result in 250 million years of productive life lost each year and reduce the productivity of women by 20 per cent”. Because it does not tell you about the fun of bringing kids up. For some however, and I read once that in Germany, one in three couples are choosing not to have kids. That is not a great outcome for those expecting benefits after the age of 65. Or 67. Or perhaps even 70, or 75. By the time I get there, it will probably be 77.

Commodities and currencies corner. Dr. Copper was last trading at 336 US cents per pound, the gold price has perked up to 1693 Dollars per fine ounce. The platinum price is also higher at 1560 Dollars per fine ounce. The oil price last clocked at 97.75 Dollars per barrel. The Rand continues to weaken, even if it is better on the cricket, 12.96 to the Pound Sterling, 8.27 to the US Dollar, 11.20 to the Euro. We have started better here this morning, US futures are off the very best levels, but hey, we will take what we get.

Sasha Naryshkine and Byron Lotter
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We will have a look at a couple of sets of results this morning, first there is one of our recommended companies, African Bank which have reported full year numbers to September. The beats of Byron will have a look at ABIL. Next there are results from an old non favourite in the form of Telkom, half year results with their mobile division still bleeding. Then a change of government in Spain, with the socialists exiting. We will look at a cynics view of socialism. A Chinese warning to the rest of the world on the economic front needs to be looked at, we will see what we can read from it.

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. Yech. Friday looked like the perfect day to be away from the office. And glued to a seat at an amazing test match, that was a better place to be, just up the road here from our offices at the Wanderers stadium. That is where I was Friday. Sorry. Feeling the heat were the resource stocks, the companies that produce and sell commodities. The platinum stocks sank nearly three percent, the overall resource sector (now only 10 majors) were down just short of two and a half percent. That brought the broader market down a whole 625 points to 31812 points, WHICH, if you must know sees the broader market back in the red for the full year. Yip. Down nearly a percent as we start this morning, and expect that to look worse just after the start.

Byron’s beats takes a look at results from ABIL. And they seem decent enough.

This morning African Bank released full year results ending September 2011. Remember that they released a trading update at the beginning of this month telling us that earnings would increase by between 23% and 25%. Well they came in with an increase of 24% which equated to R2.34bn or 291c per share. A dividend of 185c will be paid for the year yielding a very handsome 5.5% at current levels. The share trades at 3416c giving us a historic PE of 11.7, more on this later. The banking business grew 24% and was responsible for the majority of the earnings, R2.3bn. The retail business grew nicely, 46% in fact but is still only responsible for R190 million worth of earnings.

So why have earnings grown so nicely? African Bank have been implementing a huge drive in increasing access points to their credit. Much of this has been done through their Ellerines stores, new attractive products and larger loans to good clients. In the current year R1.7 billion in loan sales were raised through distributions that did not exist for the bank 12 months ago.

When a drive like this is implemented for a micro lender one has to pay attention to bad and doubtful advances. There is no point increasing your loans if they are not going to be returned. This number inevitably increased substantially by 34% to R3.6bn. Not to worry too much though, overall net advances increased 38% to R35bn so the overall ratio actually decreased from 10.6% to 10.25% bad debt to net advances.

So what does a valuation of 11.7 tell us? Most of the banks are trading on similar to lower valuations. But African bank has the retail element which as we know, industry peers are trading at higher valuations than the banks. And when I mention retail I don’t just mean Ellerines, I am referring to loans made in order to buy that material for a house renovation or paying for those school fees. We know that the consumer is spending.

As you know we like the bank as an investment theme. It is also a case of if you cannot beat them, join them. I am referring to the labour unions here. As wages increase unnaturally through the process of joint negotiations African Bank clients are going to have more disposable income. Management also seem pretty positive about the future even though times are still quite tough. “While it is expected that the subdued economic environment will continue in 2012, the group is confident of its prospects for the next financial year.

The Bank should continue to benefit from the substantially greater distribution base that was achieved this year and the number of new products and initiatives in development. The EHL group similarly, has a number of innovations and product enhancements that are expected to impact positively on growth. Above all, we believe that our continued focus on the development of our people will accelerate the energy and the momentum that manifested this year.” We continue to add at current levels.

Telkom results have hit the screen as promised this morning. These results are for the first six months of their financial year to end September. Operating revenue lower by 3.2 percent when compared to the corresponding period, clocking in at 16,387 billion ZAR. EBITDA down by 16.7 percent to 4,413 billion ZAR. The mobile division recorded an operating loss of 1,158 billion ZAR. HEPS clocked 191.7 cents for the half, you know what, that still makes the stock price look cheap. Basic earnings per share fell over 70 percent to 85.2 cents. I always seem to remember that the numbers from Telkom disappoint, one problem here, or there. And I can say that I am fairly pleased that we have never owned it in the core bunch of stocks. Sometimes it is the ones that you avoid which are just as important as the ones you pick. But let us not be smug about it, there are some core holdings that have underperformed in our portfolios.

I see dead people rather yucky looking numbers. “Stuff” like data revenue decreasing 7.9 percent. WHY? Margins lower, much lower, as a result of rising costs and decreasing revenue. A bad mix. Some of their key old businesses seeing the number of lines decreasing. What made me giggle was that there are still 118 thousand payphones, “tickie boxes” still in operation. When last did you use one of those? A long time ago no doubt, we had them at school, I remember that well. Total traffic in minutes fell 6.9 percent. Whilst total revenue per fixed access line grew by only 1.2 percent to 2402 ZAR, of course there are fewer lines in use. So let me get this right, Telkom are selling fewer lines for less money and people are using these lines less? Does not sound like the kind of business one wants to be in.

Telkom mobile (which is the new business) has reached a total of 2.2 million RICAed subscribers, but for the quarter to end September both the post and pre paid users clocked 1.14 million (1.9 percent market share), telling me that around half of all the people that have tried it, did not use the 8ta service again. Is that a fair assumption? ARPU’s increased, that is the best news, 63.32 ZAR is the blended number, both pre and post paid. Phew, and check this out from the presentation: “Expected EBITDA loss for our mobile segment for FY12 – (approximately R2.2 billion before eliminations and R2.5 billion before eliminations).” Yech. And to add insult to injury, although the mobile offering has been well received, revenue from the mobile division is expected to fall short of their own expectations.

So the losses in Telkom mobile are all to blame. Wrong. Even without the monster losses there, check this out:

This is EBITDA contributors as per the presentation.

BUT, what is refreshing from these results is that Telkom have recognized some of their previous short comings. With commentary like: “the broadband market is dominated by mobile players largely as a result of Telkom’s slow time to install and undifferentiated product offerings.” Yip, many can attest to that. Stay tuned for a more simple service offering. They say that “Telkom is firmly committed to reducing its cost base.” And you can see this in their staff reductions, down 9 percent. Ouch. So, they have identified their mistakes, not just these, but with prior purchases that did not work out the way they wanted.

Mr. Market gets it I think. I have no idea what the Koreans from KT Corp. are thinking. They deserve a discount at this rate. And why does Telkom need the money? To expand into Africa seemingly is the idea. Telkom value their property plant and equipment at 36.5 billion ZAR. Their market cap is 15.5 billion ZAR. Every time that I think Telkom look cheap I am aware of their previous failings, both from a management direction and them having burnt cash previously. And what does the main shareholder, the South African government think about the poor performance at Telkom? Well, ironically it is probably much better than the other State Owned Enterprises and perhaps it is thought that they are doing a good job. No thanks. Declining revenues, increasing costs, losing market share in their core business, leading to lower profitability in one market with increased competition are the headwinds that have faced the company. As you know well, we prefer MTN. Perhaps this is rock bottom for Telkom, perhaps not.

Mariano Rajoy. Check that name out, because he is the new Prime Minister of Spain. Their party won the popular vote and the right to rule Spain. I would probably view this as a positive development. Out with the Socialists! OK, OK, don’t be like that, the voters have chosen and their view was taken on past events. And I guess that you could say that the Socialist government in Spain are another victim of the debt crisis in Europe. Ireland, Greece, Portugal and Italy have all lost their respective leaders. Hey, that means all five little piggies have fallen. And ironically are having problems going to market. And are looking more like having none (roast beef) with all their austerity measures, most of which have been implemented. Ironically the fallout in the financial system in the US from the demise of Lehman Brothers might have in some way exposed a socialist spending spree in Europe. Ironic, not so?

I could not really care (I do a little) what measures the new party is going to implement in Spain. And how they are going to solve the major unemployment problem, that is something that I am interested in, because it is no coincidence that Spain has the highest unemployment rate in Europe as well as the most rigid labour laws. No coincidence whatsoever. This scrutiny of socialism comes at the same time as a scrutiny of capitalism and the failings of the financial system, which could be seen to have pushed boundaries for absolute short term gains. Human nature really. I was sent something Friday which I had read before and was not sure whether or not it is true, or just some capitalists idea of why socialism does not work. Worth a read, here goes, hat tip to my mate Tshepo:

An economics professor at a local college made a statement that he had never failed a single student before, but had recently failed an entire class. That class had insisted that Obama’s socialism worked and that no one would be poor and no one would be rich, a great equalizer.

The professor then said, “OK, we will have an experiment in this class on Obama’s plan”.. All grades will be averaged and everyone will receive the same grade so no one will fail and no one will receive an A…. (substituting grades for dollars – something closer to home and more readily understood by all).

After the first test, the grades were averaged and everyone got a B. The students who studied hard were upset and the students who studied little were happy. As the second test rolled around, the students who studied little had studied even less and the ones who studied hard decided they wanted a free ride too so they studied little.

The second test average was a D! No one was happy. When the 3rd test rolled around, the average was an F.

As the tests proceeded, the scores never increased as bickering, blame and name-calling all resulted in hard feelings and no one would study for the benefit of anyone else.

To their great surprise, ALL FAILED and the professor told them that socialism would also ultimately fail because when the reward is great, the effort to succeed is great, but when government takes all the reward away, no one will try or want to succeed. Could not be any simpler than that.

The problem with this simple explanation of socialism is that it is directed at the current White House administration. For instance how do you say, socialism from an outsiders point of view seems to work well in the Scandinavian countries, is it a coincidence that the populations are relatively small? Perhaps not. And let us face it, there are many well known brands and businesses from that part of the world. Sweden in fact was pretty late to industrialize. Many Swedes moved to the US for 50 odd years before the First World War, because poverty was a way of life. 20 years ago Sweden experienced an awful time of it, economically speaking. Listen to this line, taken from Wiki: “The response of the government was to cut spending and institute a multitude of reforms to improve Sweden’s competitiveness, among them reducing the welfare state and privatising public services and goods.”

My only take away from the politicians who have promised too much and overspent in the good years, without saving for the lean years, is that their demise is an economic effect. Not a social one. Europeans are facing the problems of eating too many cheese burgers, time to get back into shape. And as we all know, that is a tough and winding road. The best part of it all is that the citizens are changing the governments. And expect cuts. And that ultimately means that they are past denial and into dealing with the addiction.

Beijing central. 39^o 54′ 50″ N, 116^o 23′ 30″ E Seemingly the world listens to the Chinese more and more nowadays. In fact we are in the middle of a shift in economic power, something that will take a number of decades. But on a per capita basis, not in our lifetimes. That is the way that I see it, that if often the way that Warren Buffett sees it and who wants to fight with that kind of smarts. Smarts = brains. Check this out: Global economic outlook grim, China tells U.S. trade talks. China and the US trade is now so inter linked, more than ever before, that these “warnings” and meetings are likely to become more frequent. And posturing from both parties. I hear the Chinese warning, but suspect that they will not have the hard landing that everybody was worried about and the threats of inflation have abated. Leaving more flexibility.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. Stocks actually went higher for blue chips by the end, tech stocks sank over half a percent leading the broader market to being slightly off flat for the day. This week is a big week for the Americans, of course one of the biggest holidays is Black Friday Thanksgiving. Turkeys had a bad time this weekend no doubt. But then more importantly as I struck out, Black Friday, the day that traditionally the retailers tick over into the black, in accounting terms for the year. Turn away if you like good news, via my good news blog feed at Carpe Diem: Leading Index Rebounds to Record High in Oct. That is right. A record high. Does not feel so bad you see.

OK, so what is this? Well from the conference boards pdf document, The Conference Board Leading Economic Index (LEI) for the U.S. Increases Sharply: “The composite economic indexes are the key elements in an analytic system designed to signal peaks and troughs in the business cycle. The leading, coincident, and lagging economic indexes are essentially composite averages of several individual leading, coincident, or lagging indicators. They are constructed to summarize and reveal common turning point patterns in economic data in a clearer and more convincing manner than any individual component – primarily because they smooth out some of the volatility of individual components.”

They actually, just below this leading indicators description talk about the ten components of the index, all of which are quite easy to understand:

“Average weekly hours, manufacturing
Average weekly initial claims for unemployment insurance
Manufacturers’ new orders, consumer goods and materials
Index of supplier deliveries – vendor performance
Manufacturers’ new orders, nondefense capital goods
Building permits, new private housing units
Stock prices, 500 common stocks
Money supply, M2
Interest rate spread, 10-year Treasury bonds less federal funds
Index of consumer expectations”

Question? If things are so bad, so awful, then why is this starting to look better? And the best level ever.

Commodities and currencies corner. Dr. Copper is last at 341 US cents per pound. The gold price is lower at 1703 Dollars per fine ounce, the platinum price is 1559 Dollars per fine ounce, also much lower. The oil price is also lower, last at 95.93 Dollars per barrel. The whole commodities complex getting a beating as the Dollar finds more than just a little support. Meaning the Rand is weaker today, 12.99 to the Pound Sterling, 8.28 to the US Dollar and 11.14 to the Euro. And we are much lower here to start with, US futures have dropped off dramatically. Eish.

Sasha Naryshkine and Byron Lotter
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Yesterday we were left to talking about credit spreads, the gap between Germany and the others in Europe, Spain, Italy and even France. Byron turned to me at one stage and said, “Is this what it is going to be about for the next three to six months, Italian debt focus?” And I quite simply said yes, I think so. Poor Italy lost to Uruguay last evening, by a single goal. And us in Harare? I don’t want to talk about it. I thought about the Italian debt focus and thought that perhaps in less than a weeks’ time we are going to be focusing on the US super committee as their deadline is a 7 days to deliver a plan. Otherwise those cuts start to take effect immediately. I have seen a few people get anxious about it, we chatted in the office yesterday and wondered about the progress. Wondering if both sides were any closer to a deal. And we start to wonder if this would have further implications for the US credit rating. I don’t know the answer to that.

We will have a look at the new developments at the Anglo American copper assets in Chile, which represent over forty percent of all of their copper production. Codelco seems to have scored a goal. There were results from Mr. Price yesterday afternoon, and they were good, and justify their share price. And of course we will take a look. There was a voluntary trading statement from Tiger Brands yesterday morning, a quick look is required. And of course those results from WalMart, we will have a look at those too.

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. Whoa! We kind of went against the trend, but the improving US markets towards the end of the day saw us catch a serious bid. Also, the Rand weakened and the stocks that benefit most of course are the dual listed companies. The Rand is now sitting at lows not seen for a while, largely those folks with less tolerance for risk and starting to sell emerging markets. Well, that is what I am led to believe, I do agree with the Oracle of Omaha who just the other day said, if Italy has problems, do you sell a good business? Nope, I believe not, but then others are in the business of short term returns and are measured by their clients on this basis, that is a different argument altogether.

Session end the Jozi all share index had closed up shop just over a percent higher to 32674, up 330 points. The resource stocks added nearly one and two thirds of a percent which mostly drove markets higher. I have seen a whole host of reiterations of price targets for some of the diversified miners, that I guess is good news for holders of the stocks. We of course have big positions in BHP Billiton. Platinum miners also led the charge, up around two and one third of a percent, even as Goldman Sachs had downgraded their price target of Impala Platinum. That hardly had an impact, instead the stock went higher on a weaker currency and an improving platinum price. So much for that! Well, like we said earlier, some people make longer dated calls than others. Impala also said that their Zim operations output were improving.

Anglo American released a statement last evening, this after a Chilean court blocked any further sales by Anglo American of their copper assets in Chile. Anglo American are going to oppose this ruling. From my simple reading of the matter, this is messy at best, and is going to last a long time. Reuters are reporting that Codelco are of the opinion that this could take as much as four years to resolve. In court for four years? That sounds like fighting talk to me. Codelco have outright said that they are going to exercise their right, come January next year, for 49 percent of the Anglo American Sur assets. The next question however, is the important one, if you were Mitsubishi, would you not walk away now? And say, nope, sorry, thanks for what looks like a good deal for you in the short term, but this looks messy. Would you? Because the thinking is that Codelco could only own 24.5 percent now, because Mitsubishi had agreed last week to buy the same amount for 5.4 billion Dollars. A deal is not a deal until the money is in the till right?

And the last people that you want to get ugly with are the government owned copper mining entity in Chile right? So Codelco reckon that they can own a full 49 percent, Mitubishi have agreed to buy 24.5 percent, I smell some sort of agreement that will see Codelco buying not all they want, but not only 24.5 percent. That is the way that I see it. Either way, this is a calculated risk on Anglo American’s part. To read the release -> Anglo American to oppose injunction on sale of further shares in Anglo American Sur. I do not know what to think about this. I guess we will just have to wait and see.

Tiger Brands released a voluntary trading update yesterday morning, now the voluntary part means that it is below the levels of increase, or decrease for them to be required to tell the market. But, in this day and age, shareholders like guidance and comfort blankets. Here goes: “…. it is expected that headline earnings per share (“HEPS”) and earnings per share (“EPS”) will reflect increases of between 10% and 15% and between 15% and 19% respectively, compared to the previous financial year.”

Oh, now it turns out that “an abnormal gain in 2011 arising from the recognition of the company`s equity interest in National Foods Holdings Limited of Zimbabwe, which was not previously accounted for” is the main difference for the difference in EPS and HEPS. What a twist, “things” in Zimbabwe improving? Who would have thought that was the case? Me.

These results will be released next week today, and are for the full year to end September. The stock price added more than one percent to close at 23450. Which is an all time high. Well, I guess the market is pretty close to that all time high, just a mere three or so percent away, so when you have majors close to their all time highs, then that is expected I guess. This is kind of in line with the forecasts that I can see, that means that the stock is trading around 15 and a half times, with a dividend yield (expected) of 3.4 percent. Next year the yield expectation rises to 3.7 percent and the price to less than 14 times. Cheap? Expensive? The analyst community either has a hold or a buy rating on the stock. I suppose we do not have to wait long to see the results.

This is not really related to any story other than itself. The story is a repeat and might actually floor you. Prepare to be floored. A tattooed fellow (hey, that is his choice) from the region is coining it in the Australian outback. Well, in relative terms, because salaries have gone through the roof as a result of the Australian mining boom. Check it out: The $200,000-a-Year Mine Worker 200 thousand Aussie Dollars a year? Now I am pretty sure that this is not the norm, and the exception. As the article points out, this guy does dangerous work, the average salary in the Australian mining industry is around 108 thousand Aussie Dollars. Which translates to 893 thousand Rand per annum. I worked out from the marginal tax rate calculator that you would have to pay around 28 thousand Aussie Dollars worth of tax on that salary. And then be left with just over 80 thousand Dollars. 662 thousand Rands (at 8.27 to the Aussie Dollar) after tax for living and working twelve hours a day in the dusty outback, which is around ten times what a mine worker earns in South Africa. But wait, because of the nature of the resources being mined down under there is very little underground mining, and the margins are very impressive. Still, amazing that the pay in the outback is THAT GOOD!!!

Byron’s beats has a look at results from one of his favourites, Mr. Price. My wife thinks that the place is great, good value for money and they have all the stuff she needs. Me, I am not that much into clothes, I try and keep it neutral. So that when you look back in twenty years at your clothes you sort of fit in. Never, look at your eighties pictures!!! Byron has a look at these current numbers.

Yesterday we had unaudited group results for the 26 week period ending 1 October 2011 from the ever impressive Mr Price. 367 Mr Price stores, 143 Mr Price Home store, 45 Mr Price Sports, 191 Milady’s and 232 Sheet-Streets all ticking away at a good pace. That is 978 stores which includes 20 franchises and 49 stores outside of SA. They employ 18 176 people. Nice.

Retail sales for the group increased 10.7% while same store sales increased 9.6%. The retail sector as a whole reported a 7.5% growth. Remember that this period is compared to what one would consider a high base. Firstly retail sales for this group have been growing constantly over the last few years, secondly the affects of the World Cup. Not because tourists were buying but because school holidays were so long over that period.

Gross margin increased slightly from 41.2% to 41.3% due to good cost management. This resulted in a nice increase in operating margin and along with price increases overall earnings per share increased by 22.2% compared to this period last year, this equated to 187.3c. The share trades at 8000c but don’t get too worried, the second half is where they make their big bucks. Look at the comparisons from last year. In the first half they made 153c but for the full year they made 405c (adjusted to 52 weeks). So for the second half they made 252c, almost 40% more than the first half.

Let’s assume (I’d say based on their track record that this is a fair assumption) that they maintain a 10% growth in retail sales for the second half compared to what they did last year. Let’s then assume that that profits increase 15% on the 252c they made second half last year. That means they’ll make 477c for the full year and trade on a forward PE of 16.8. Pretty standard compared to their peers and in a retail sector that is clearly growing rapidly plus we are dealing with one of the best operators in the industry, I’d say there is still a lot of room for growth in the share price.

Let’s not forget about the dividend. 81.2% of sales are made in cash so their balance sheet is very strong. They maintain a 2 times cover which, if earnings of around 477c are achieved, will put them on a yield of 3% and growing. They like all the others are concerned about international debt concerns. Yet they mention that October sales have already been good which should set them up for a successful festive season. Special mention goes to retiring chairman Alastair MacArthur who has been at the company since 1991 and was CEO from 1997 until 2010.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. Better, then a whole lot worse, and then a whole lot better with a slide at the end. In the last little bit there was a sell off. Perhaps it was the fact that the protestors were removed from their position in the park, no more tents and no more camping said the Mayor. Eish. Can you imagine the conflicts that exist? The mayor owns the company that provides people with the terminals that trade the market, and that is at the core of the issues that the protestors have. So, no more occupy, but you are able to protest. And the reason? Well, it turns out that some folks were breaking by-laws, I think the words mayor Bloomberg used was defecating in the alley ways. Yes. Pooping on the street. Come on guys!!

Still, market closed better than where they ended off, tech stocks did better, thanks to the Warren effect, he also said that he was buying smaller stakes in companies like Intel and DirecTV. Nice. Those must look more like utility companies that are going to spew dividends for the old guy. The Buffett effect amongst tech stocks, you did not think that you would have seen that line anywhere.

Apple. Hey Apple? Remember those clips, they are so old now, YouTube has a captive audience for around three hours to three days. Which is fine. Joe Weisenthal at the Business Insider had this piece yesterday afternoon: You’ll Never Guess The One Thing That Made Retail Sales So Strong. And this was in light of a beat in retail sales expectations. But from that Goldman note that they got their hands on, it turns out that the beat in US retail sales (the single biggest consumer base in the world) could be attributable to the launch of the iPhone 4S. Amazing. Really amazing. More amazing -> Once Wary, Apple Warms Up to Business Market. The applications are endless, not so? Each handset used for business means that you lock someone in. Ask the Crackberry addicts.

WalMart results yesterday, it looked like a miss on earnings, the bottom line and a beat on revenue, the top line. The stock sank nearly two and a half percent, so that tells you what the short termers thought. Well, perhaps that is unfair, but in truth if you are in the company because you believe that the American consumer themselves are going to recover, and WalMart will continue to grow their top line. The company has a market cap of nearly 200 billion. Quarterly sales increased 8.2 percent to 109.5 billion Dollars. Holy cow? That means that annual sales at WalMart are nearly 450 billion Dollars. No wonder the left wingers (not the Spurs champion Gareth Bale) are worried about them coming here to South Africa. Maybe. Yes. No. Check out their release: Walmart announces FY12 Q3 EPS from continuing operations of $0.97; Walmart U.S. and Sam’s Club comp sales exceed guidance.

Notwithstanding the sell off on what I thought were pretty decent number, the analyst community on MarketWatch have the stock on a hold (around half of them) and around the other half either are buyers of the share, or overweight. There is a lone rider out on a sell. One out of 31 analysts surveyed. Expectations are for the company to deliver around 491 US cents for the next fiscal year, that means the stock trades on a forward multiple of 11.7 times with a dividend yield of around two and a half percent. There was a hedge fund woman on Smart Money who said she held it in her fund and was puzzled that the company traded on half the multiple of Costco, who do similar things she said. Except at a much lower scale. I must admit, I think that the stock was overvalued ten years ago (at the same price), I think that it is undervalued today.

Commodities and currencies corner. Dr. Copper is last at 346 US cents per pound, the gold price is weaker at 1770 Dollars per fine ounce, but on the way up, the platinum price is off a bit, last at 1625 Dollars per fine ounce. The Rand is weaker, at a four week low as I understand it, but off the worst position this morning, 12.90 to the Pound Sterling, 8.17 to the US Dollar and 11.04 to the Euro. Which I thought was finished? After having started lower, we are slightly higher.

Sasha Naryshkine and Byron Lotter
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What happened yesterday? Loads on the go, perhaps the most exciting thing was that CNBC in the US were interviewing that legend of the market, the best investor of all time, Warren Buffett. We will have a look at some of what he said, I suspect that it might be stuff that you have heard before, but hey, he makes sense. His company Berkshire Hathaway has added a whopping position, they now own around 5.5 percent of the big blue, and this is the first out and out tech holding. And then there was an Italian bond auction, that unfortunately went in the wrong direction, as far as they are concerned. All this on Mario Monti’s (the new fellow in charge of Italy) first day.

We can have a look at the potential pickle that Anglo American have gotten themselves into with the Chilean government over having stymied Codelco. We can have a look at the Boeing order by Emirates airlines. And then we can preview the GDP numbers from the Europeans today, that is going to definitely be a short term driver of both sentiment and pending auctions.

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. We started a whole lot better than where we left off, I had to try and give some insight into the “days moves” to someone, I said errr…. perhaps Boeing, perhaps Buffett, perhaps Monti’s first day on the job. More buyers than sellers? We started to drift lower along with the rest of the European markets, nerves ahead of that bond auction. Commodity stocks were strong after a very decent read in GDP from the Japanese, rebounding after the poor earthquake and tsunami in March. Q3 was a whole lot better. Excellent, although expected, it was *nice* to see the third largest economy growing albeit at a slow pace. I just know that the firmer Yen will impact in the current quarter.

After the bell sounded for us to close up shop the Jozi all share had gained one quarter of a percent to end the day at 32343, up 82 points on the day. As we said, commodity stocks caught some buying interest, ending nearly 0.4 percent higher. Banks and financials gave up 0.28 percent and 0.36 percent respectively, the news that South African banks (last week late) had been placed on watch by Moody’s. Thanks for nothing. Banks as a collective are down three and two thirds of a percent and have lagged the broader market.

What exactly is up with Anglo American and their recent announcement? And what everyone thinks about it? We wrote about it last Thursday, in case you missed it -> Anglo American, have they stymied Codelco? We heard the news yesterday and you can read on the Telegraph website old boy -> Codelco files injunction to prevent Anglo American Chile deal.

The only “thing” that I like about all of this is that the Chilean court will decide this immediately and the outcome is expected this week. I guess we have to trust that the courts will have to decide what is the best way forward, I would have thought that the government of the country that you are mining in would be the last people that you want to upset or have a fight with. Well, Anglo have to act in the best interests of their shareholders too.

Byron’s beats is full of B’s, because today he talks about BHP Billiton. And that itsy bitsy contentious issue of fracking.

Yesterday BHP Billiton came out with a report labelled the BHP Billiton petroleum Investor Briefing which is very significant to Billiton investors. This is because BHP have focused much of its expansion in this area after investing up to $20bn in gas assets over the last 6 months. In the last fiscal year they made up to 23% of their profits from its energy division. Recently the BlackRock (who are one of BHP’s biggest investors) MD Evy Hambro came out with a swipe at the company for not providing adequate reasoning for the big expansion. Well here is their answer.

Another reason this is important especially to us as South Africans is because this report is very much focused on fracking, a very contentious issue at the moment locally. In fact, Trevor Manuel stated in his 20 year plan that fracking should be further explored and has the potential of being a low carbon solution to our energy needs. I’ve written about this topic extensively and I am not going to get into it again but if you are interested in the debate. I suggest you read -> the BHP report.

So let’s look at the important points mentioned in the report. Firstly, Billiton alone are the 7th largest oil and gas company in the world by total resources. Production in the Gulf of Mexico, one of their strongest areas, is back on track following the BP incident and is now producing record volumes again. That is their oil drilling business. These acquisitions however involve gas and more specifically shale gas.

The report shows that the process of fracking has become way more efficient as technology gets better. In fact production has increased 25% in 4 years just from technological improvements. They also emphasise how quick it is to set up a site and start producing. Up to 3 months to set up can result in decades of production. This explains why up to 35000 wells are fracked per year, incredible. The biggest issue with regards to the Karoo (where BHP are not involved ) is the use of fresh water. Up to 100 000 barrels of fresh water can be used per well. A lot of this is recycled and the land is reusable after the drilling is done. In fact on a per energy basis, shale gas uses significantly less water than is used in extracting coal or producing corn ethanol. The feasibility of using salt water is also being explored.

In terms of long term sustainability BHP feel they are sitting on a game changing asset which will create massive energy security for the US (shale gas could be 50% of natural gas supply in the US by 2020). I’ve read articles that go as far as saying that gas could be the saviour of the US economy. It will create jobs, is low on carbon emissions and allows for attractive landowner mineral rights. There are concerns of course which involve water shortages, environmental concerns and seismic activity. These issues come part of the parcel with mining and are being dealt with by BHP. The technology is only getting better.

As investors in the company we are very excited in these new prospects. This shift from gas to coal looks to be ahead of the curve which may become mandatory for companies in the future as they try and reduce greenhouse gases. We see it happening at Sasol too. BHP have bought good, established assets with the right geology, in a country that has embraced fracking as a potential energy source, has the right technologies available and already has a huge gas market. The demand is on their doorstep and the potential for high returns in a short period of time looks very compelling. To end it off I hacked a little comparison between shale gas and conventional oil and gas production. It paints a good picture as to why $20bn is justified.

There have been a couple of GDP releases from the European giants this morning already. France registered a 0.4 percent gain in the third quarter when measured against the second quarter. And the Germans grew by 0.5 percent when compared to the prior quarter. Sorry? But I thought that “things” were so awful in Europe and I swear all the commentary that I have been reading and all the TV that I had been watching would lead me to believe that the growth aeroplane was plunging towards the ground because we had reached stall speed.

Well, the recent economic data might actually suggest that the current quarter could see lower growth than the prior quarter. I must be honest though, these quarter on quarter reads are useful for some people, all I need to know is that there is growth in the European economy, albeit at a slower pace. The overall read of the Euro zone comes in around midday, the Italian one around 11 in the morning. And that leads nicely into our second piece on Europe the anxiety around yesterday’s Italian bond auction.

The country raised three billion Euros from the open market for five year bonds with a yield of 6.29 percent, a Euro zone record for Italy. I am sure that when their treasury was in the middle of the auction there was more than a cold sweat going on. The long and the short of it all is that confidence needs to be restored and the new man on the job, Mario Monti is going to have his hands full. Interesting to note that Monti seems to be a Brussels appointment, or at least Brussels seem to have exerted some sort of pressure on the Italians. The ten year yield is rising again this morning, after having eased and is the wrong side of six and a half percent and heading towards 7 percent. Eish. Mario has lots to do, and in a way I am fairly glad that Italy has appointed a technocrat, and will appoint a whole bunch of professionals to run the show for the time being. Greece too. Fewer personalities, more brains on the job. Thanks.

BUT, as ever, not everybody agrees with “it”, the new government, one of the fellows, a journalist who has been covering this thing, had this to say on Italy: Silvio Berlusconi may be gone, but there is little unity in Italy. Eish. The yields across all the government debt that is not Germany continues to rise across Europe. And that includes France.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. The Buffett news on IBM, the Buffett news on Wells Fargo and how we is still bullish on America and invested for the long term in quality companies. That helped. But there was also news about Boeing, the aircraft manufacturer gained over a percent and a half in normal trade on the news that Emirates airlines had placed a record order. At the Dubai air show the big airline had decided to buy 50 777 300 ER jets, wide bodied aircraft to build their fleet. And there is an option for another 20. 26 billion Dollars is what the deal is set to be worth. Good news for the Americans. Not great for the Europeans and EADS, the parent company of Airbus.

Just to give you an idea of how big this order is, Boeing’s last financial year revenue was 64 billion Dollars. For the whole company, all divisions. Amazing. And last quarter, Boeing delivered 127 planes (of all types in their commercial division) with revenue of 25 billion Dollars for the nine months rolling. So this order is then nine months worth of revenue in their commercial airplanes divisions. And seemingly better margins than the smaller planes. Now that puts this order into perspective. And if that was not bad enough for the fellows over at Airbus and good for the fellows over at Boeing, then check this out -> Qatar Airways chief spurns Airbus.

That lovable old man was interviewed by Becky Quick (who has just returned from maternity leave) on CNBC yesterday, there is a whole host of videos that you can watch (if you want) to see the whole interview. And there is also the transcript, not the best in the world, but obviously the software is working on it. Check out the summary, where Becky gives a little insight into the interview with the Oracle of Omaha and Buffett’s Bet on Big Blue. The Big Blue being IBM, he revealed the significant size of the purchase on CNBC for the first time yesterday.

There was a point in the interview where I sat up and took notice, he said that the world was always uncertain. Which is true, Donald Rumsfeld tried to articulate that and now we have the English term, the unknown unknown. Here is the Rumsfeld quote -> “But there are also unknown unknowns – the ones we don’t know we don’t know.”. I finally managed to find the bits and pieces on the uncertainty quote from the CNBC videos section, thanks guys:

“The world is always uncertain. The world was uncertain on December 6, 1941. The world was uncertain on October 18th, 1987. We just didn’t know it. The world was uncertain on September 10, 2001, we just didn’t know it. There are always uncertainties. The question is what do you do with your money? If you leave it in your pocket, it will become worth less, not worthless, but worth less over time. That’s almost certain.”

This uncertainty bit is amazing, and so true, business TV and business media, and all the collective participants are always anxious about the next “thing”, and you just never know what is going to happen tomorrow. So do not be anxious about the unknown, rather just own the quality. He continued about what you can do with your money:

“Can you put it in bonds and then you get a certain 2% for ten years and that’s almost certain to be less than the decline in the purchasing power? You can put it in farms and the farms will probably keep growing corn and soy beans and they’ll grow it whether Italy has trouble tomorrow or not. It’s very interesting to me. If you own a farm and somebody said, you know, Italy’s got problems, do you sell your farm tomorrow? If you own a good business in Omaha and they say Italy has problems tomorrow. Do you sell your business? Do you sell your apartment… house? No, but people think if they own wonderfully businesses they have to make a decision every five minutes.”

Got it. Serious problems come and go, quality investments remain quality investments. So whether Italy has issues or not, he is still looking at quality companies to buy. And talking of a quality company, here is the bit where he reveals that Berkshire has been buying IBM. And what struck me was that he (Buffett) had been reading the IBM annual report, cover to cover, for 50 years. 50 years people. And suddenly he had a light bulb moment. It took the man fifty years of reading about the same company before he eventually decided to buy over ten billion Dollars worth, and he said he was five years late on it. Incredible. Here is the video where Buffett reveals that Berkshire bought a whole lot more IBM.

He talks about getting the IBM annual report:

“I have probably — I’ve had two interesting incidents in my life. This year the report came in on a Saturday. I read it. And I got a different slant on it. But I — I just — I run it through a different lens.”

He looked at it differently. And now he is happy that he bought a whole lot of stock, well obviously, he goes through the rationale of the light bulb moment:

“And incidentally, the company laid it out extremely well. I don’t think there is any company that’s — that I can think of, big company that has a better job of going out where they’re going to go and then having gone there. They laid out a road map. I should have paid more attention to it five years ago when they go in the five years ending in 2010. Now they laid out another road map for 2015. They have an incredible job.”

My take away is that the greatest investor of all time has gotten used to the nature of the company, compares them more to a utility company. That is my sense of the investment. Plus, IBM is a great company. An amazing company. SO, I think that he will reward both himself and his fund holders. We checked and saw that the Berkshire market cap was 188 billion Dollars. So roughly this investment in IBM is about 5 percent of the Berkshire market cap. And around the same amount in IBM. Are you amazed that IBM and Berkshire have similar sized market capitalizations? I am.

I like the patience theme that he oozes. I like the fact that he acknowledges all these crises, but at the same time knows that the issues often (almost always) are resolved in a better fashion than people thought at the time. I would rather listen to him than the people who he describes who look at the stock price every five minutes. Investing is not about that. Thanks Buffy. This blog post ties really nicely into the whole argument of people who have short term bias, often it depends from what era they are from, check it out -> Investor anthropology and the hegemony of technical analysis.

Commodities and currencies corner. Dr. Copper is last at 347 US cents per pound. The gold price is lower, last at 1763 Dollars per fine ounce, the platinum price is also lower at 1627 Dollars per fine ounce. The oil price, like the rest of the commodities complex is lower at 97.74 Dollars per barrel. Slightly lower on the session, but who cares, up a lot since the century began. Huh? Check out this 150 year graph, of inflation adjusted and 2010 pegged oil prices. Via WTRG Economics. Check this out:

Yeah, who cares what it does in the short term, right? The Rand is weaker today, 8.07 to the US Dollar, 12.80 to the Pound Sterling and 10.94 to the Euro. Markets are oscillating between the green and black today, WalMart has results out later, that ought to be fun!!

Sasha Naryshkine and Byron Lotter
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