Slasher's coffee beans

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. OK, was it really those slippery Greeks again? Slippery Greece. Or was it now the Portuguese who are starting to attract attention, as ten year bond yields surged beyond 15 percent (17 percent this morning). Hello junk. Suddenly the doubts have come back. We had a chuckle in the office as the obscenely rich delegates at Davos urged Europe to sort their debt problems out. Yeah, rich people problems and then middle class and politicians problems. The issues that the Greeks have is that Germany seemingly is attacking their very sovereignty, it is just a matter of time before the old, you stole my gold story emerges again. This was the single worst day in six weeks for European equities, we kind of got used to the relative ease, and now we are back to the unease of widening spreads and periphery yields blowing out. All on the day that Euro zone leaders meet.

Our markets sank 265 points to 33629, the resource stocks were the biggest losers, 1.3 percent, the banks were off just a little more than two thirds of a percent. Gold stocks rallied over half a percent. Platinum stocks were hardest hit, there was another twist in the Impala Platinum strike. Something from left field. The stock sank two and three quarters of a percent to 17427. This was also against the backdrop of Eskom continuing to tell us how tight supply is. We are running on fumes here. So, for those of you who can afford it, be gone old light bulbs, time to save electricity. And fast. Should we have a repeat of 2008 then you can imagine that the platinum price will spike. I am still amazed that with all the problems from the majors that the price has not spiked yet.

Here is the announcement, titled “Work Stoppage at Impala Rustenburg”, tell me what you make of it: “Implats wishes to advise that the majority of the mining workforce at its Impala Rustenburg operation have failed to report for duty today, Monday 30 January 2012. This follows on a work stoppage by the operation’s rock drill operators (RDO’s), who participated in an illegal work stoppage last week.” Oops. The majority of the workforce? That is, how can you say, not good.

And the reason why? Well, this is the interesting part, for me at least: “The failure of the workforce to report for work this morning is due to an alternative union, known as the Association of Mineworkers and Construction Union (AMCU), who have, despite no formal process in place, attempted to gain recognition at the Rustenburg operation.” I found that AMCU were a registered trade union. And one of 198 unions registered in this country. Wow! I found AMCU on the page titled Registered Trade Unions in South Africa. Labour guide.

Now Implats is threatening the whole workforce it seems with dismissal: “The Company has applied and been granted a further Court interdict today declaring the strike illegal. The mining workforce will be given a deadline of 1 February 2012 to return to work or face dismissal.” Again, this is not good. Ounces are being lost, I do not for one see the grievances communicated properly and a serious tussle with your work force of this nature does not seem like a good outcome. Not good. David McKay wrote a good story last evening which explains the agreement with NUM but not AMCU -> Intimidation wracks Impala’s Rustenburg mine. Not good.

What is good for Impala Platinum though is the announcement of a replacement for Dave Brown, a well know figure in South African mining. And there was truth in the rumour, it is Terence Goodlace. 1 July 2012 will be his first day on the job. Check out the Implats announcement this morning: “Terence brings with him extensive mining experience having worked in the mining industry since the late 1970′s when he started his working career as a learner miner. He worked his way up to General Manager at Kinross and Evander Gold Mines obtaining his Mine Managers Certificate of Competency (Metallipherous Mining) in 1988. He also holds a Bachelor of Commerce degree from the University of South Africa and a Masters in Business Administration from the University of Wales.” That is very nice, but does Terrence speak Zanu-PF? Good to have a guy with that sort of experience.

We saw a trading update from PPC yesterday just after midday. Nothing really new in the statement, we report on cement sales each and every month, so we would have known that those are looking up. You heard us suggest that the cycle had turned and that “things” are looking better off a low base. The Western Cape continues to lag all the other provinces, come on guys, get building! Zimbabwe sales look better, Botswana is on the decline due to a general construction slowdown. What about the mining industry in Botswana? Lime sales have improved, thanks to an improving local steel industry. Which indicates obviously that steel is increasing, possibly not fast enough for our liking, but that is a better place to be than the alternative.

An improvement at De Hoek will be finished around Easter time this year, the Riebeeck factory environmental report for an upgrade has been handed in to the powers that be. For what is probably the best news that we have heard for a while from anyone in the industry, this must be like music to long suffering shareholders ears: “Although the global economic turmoil continues, we remain cautiously optimistic regarding the outlook for cement demand in South Africa and Zimbabwe. Current trends in cement demand and prices should result in improved results during the first half of our 2012 financial year.” The stock traded at its highest point for the day in the morning and towards the end of the day on around one third more volume than usual. Which is not bad after a down day.

Byron’s beats takes a look at another company in the industry who seem to be facing bigger problems.

This morning we had two big announcements from Murray and Roberts. One was a business update giving us an indication on how things are going around the world and then there was an announcement informing us of a R2 billion rights offer. This was expected by the market last year but in November they managed to restructure their debt facilities so this may come as a bit of a surprise. Let’s cover the business update first then look at the rights issue.

Now remember, these guys have been through a tough time having to write-down receivables from at least three really big projects. This includes the Gautrain where settlement is now only expected in 2014. The Gauteng Province has received an extension until March 2012 to submit its defence. Unfortunately Murray and Roberts have obligations to meet and these extensions are one of the reasons a rights issue has become necessary. Provincial finances have been all over the news of late and let’s be honest, things do not look good. The Dubai International Airport claims process has also met some delays and it is not expected that settlement will happen this financial year. This is the kind of thing that happens when a sector with a lot of players hits a slow down. Participants become ruthless and disputes arise.

On a positive note the order book looks strong and trading conditions have improved. Especially in the mining sector where they continue to secure significant contracts with big mining houses as demand for commodities remains strong. Very interestingly they mention a slowdown in the South African platinum sector due to a low platinum price. I can name a few other reasons, just look at what’s happening at Impala at the moment with the wage disputes.

Locally construction remains muted but in the long term things are more positive. “In the medium to longer term, the outlook for Construction Africa remains positive, given the major – and growing – infrastructural backlog in South Africa. However, in the near term the construction industry in South Africa is expected to remain muted.” The Middle East also has some exciting prospects with the World Cup coming up in Qatar in 2022.

The Australian market has been positive thanks to their massive commodity drive. Unfortunately you can see a trend with their international operations having a more positive outlook than the local stuff. Hopefully this will change.

So what of this capital raising? It’s big. Murray’s has a market cap of R8.6bn so we are looking at 23% of its entire market cap. That is why the share has been sold down 4.9% today. No one likes to be diluted. But it seems crucial for the future of the company. Just until these disputes are settled and that order book can bring the company back into profits. Here is the rationale from the company themselves.

“Subsequent to the October 2008 global financial crisis, and in particular since early 2010, Murray & Roberts’ business environment has been impacted by the weakening of the global economy and the slowdown in South African public spending on infrastructure. These factors, together with the challenges experienced on three of the Group’s projects namely, Dubai International Airport, Gautrain Rapid Rail Link and the Gorgon Pioneer Materials Offloading Facility, which resulted in unresolved claims, caused Murray & Roberts to end the 2011 financial year in a weakened financial position. The Board is of the view that the Rights Offer represents the best opportunity for the Group to retain strategic flexibility and to preserve and grow long-term Shareholder value.”

This whole situation reminds me why we do not invest in construction companies directly but prefer the broader based PPC. Project risk in this case has blindsided Murray’s on three occasions. I do believe the sector will pick up and I do believe Murray’s will get out of this mess. Shareholders will have to be patient though.

I had absolutely no idea what to make of the staggered SENS announcements from Harmony Gold, Pan African Resources and Wits Gold. Regarding Evander Gold Mines Limited, Harmony is the seller and the other two are buyers. For a whopping 1.7 billion ZAR in cash, payable over time, with the bulk (1.4 bn) upfront and 25 million X 4 over the next four quarters after the deal is closed. And then 100 million ZAR 19 months after the deal, subject to an average Rand gold price of 410k ZAR per kg. The balance of 100 million ZAR is payable 31 months after the transaction takes place, also subject to a certain Rand gold price.

I read cash first, but then this line: “The First Tranche and the Second Tranche are payable in cash or through the issue of Pan African and Wits Gold shares, in equal rand value proportions, or a combination of cash and shares, at the election of the Consortium” Why on earth would Harmony want Wits Gold shares? Why on earth would anyone want to buy Evander Gold mine? Excuse me for asking that question, but you will not think it untoward when you read the following from the Harmony website: The Evander operation.

Lower ore tons milled on lower grades equals less gold produced. There is one good spot however, further reengineering of shaft 8 would yield much higher grades. And that is what I think holds the key to what looks like an operation in wind down mode, as per the Harmony piece: “In our last annual report, we estimated that this project would yield 245kg (7 876oz) from 29 000tpm at an average grade of 8.56g/t per month.” So, perhaps the fellows at Pan African think that they can do a better job than Harmony. Perhaps Harmony are only too happy to pass it over to a smaller and more nimble operator, but why the Wits Gold connection? Seems that Harmony are already a share holder at Wits Gold. The only company that I like amongst these three is Pan African. But this seems a rather large “meal”, even for them.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. Stocks made a big comeback from the worst start in a while, there were personal income and spend numbers that looked OK, income beat but spend was light. That indicates that the average Jo(e) is still cautious. Which is fine, I suspect that confidence that was shaken so hard is being repaired alongside personal balance sheets. Session end tech stocks as a whole were higher, but the nerds of NASDAQ was lower by 0.16 percent, the broader market S&P 500 lost one quarter of a percent, financials lost over a percent, basic materials were down by three quarters of a percent whilst conglomerates were off by 0.8 percent, all leading the broader market lower. Blue chips nearly squeaked into the green, thanks to strong moves by IBM and Microsoft.

Fellow Dow constituent J&J announced that their troubled OTC business has a new team. McNeil, the business unit in question has fallen on tough times, recalls of some of their key products which are flu, hay fever and pain medication. Sales at this McNeil division have more than halved. Sis. Internal appointments taking over from some solid journeymen (women).

With Facebook set to file for an IPO tomorrow. The number that folks are expected is somewhere between 80 to 100 billion Dollars. At 100 billion Dollars that means the Zuck on paper is worth 20 billion big ones. That is right, he will be worth that much on paper. I am not too sure how much he will physically take out of the business, or just whether the company will raise 10 billion Dollars. Why is this important? Well, for starters it will dwarf (err…vertically disadvantage) the Google IPO, which valued the tech giant at a little over 23 billion Dollars. The market cap is now 187 billion, great tear since 2004. And it works, Google searches for small and big businesses are priceless. I agree that Facebook has changed our lives. I agree that 800 million people who you know more about than any government must be a valuable advertising audience. Some folks are already toying with share tickers, LIKE and FRND are not taken yet. Paul suggested that FB was going to be the ticker code, that was not taken yet!

Facebook revenue reportedly doubled in 2011 from 2010 to around 4.2 billion Dollars, with their bottom line around one billion Dollars. So, at 100 billion, there is no guessing what sort of multiple you would be paying. I am guessing that there will be excitement around this company, and folks will get a first chance to see their financials. Awesome. I look forward to it, I must be honest. The brave new world, is it an overpriced share? I have seen this all before though? I can tell you that there are many sceptics. When that balance is eroded and everyone talks about it, well, that is a rather scarier scenario. So, we are not at that point.

We have started much better here today, in part the catch up of having missed the rally from the bottom of the US market, where we closed off. There is only one reason to be grateful for winter and that is the fact that we get an extra hour trade at the end of the day.

Sasha Naryshkine and Byron Lotter

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Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. Resource and the food & drug sector (that small one we hated about last week) pulled equity markets lower on Friday. There was a US GDP number that fell short of expectations, we will have a little look at that further down, I am guessing that had an impact of warming the bears up a little. Session end the Jozi all share index closed off half a percent or 170 points in the red to 33895 points. There were a few spots of green on the screen, banks were up half a percent, construction stocks were up over three quarters of a percent. Thanks to Murrays, who added nearly three percent on the day, after an upgrade from Citi on the stock, who named it one of their top picks.

Did you know that in the construction sector now, PPC is the largest stock by market cap, at over 16.5 billion ZAR? Now you do. Next is Aveng at just a little past 14 billion ZAR, whilst Murray & Roberts are third at 9.26 billion ZAR. Fourth place belongs to Wilson Bayly at 7.18 billion ZAR. PPC is basically flat (ex the handsome dividends) over three years, Murrays is off 35 and a half percent. Over five years Murrays is down 41.6 percent whilst PPC is off 32.6 percent. The going has been incredibly tough.

In October of 2007 Murrays was sailing at around 110 ZAR, PPC was a “lowly” 47 and a bit stock. Now, Murrays is pushing 28 ZAR with this news, PPC is just above 28 ZAR a share. In that time since October of ’08, PPC have paid around 570 cents of dividends. Would you believe that Murrays have paid 519 cents in dividends. But none since October of 2010. I guess what I am trying to show is that volatility dents confidence, but equally reliability (or as close as you can get in this case, PPC over Murrays) of earnings is more important than you think. Investor confidence and the stock rating over a period of time, as result of steady earnings could mean one stock grabs a higher rating than another who sees rollercoaster earnings.

Bidvest. This is a company that I feel very close to. No wait, that is because their back stairwell is around 10 metres from where I sit daily, no wonder I feel close to this company. The company released a trading update this morning for the six months to end December. “… headline earnings per share are expected to be between 35% and 40% higher than the results of the comparative period (December 31 2010: 539.8 cents per share) after accounting for the profit on the partial sale of the investment in Mumbai International Airport Private Limited, as announced on Sens on October 19 2011.”

Back then the company announced that they expected to gain around 400 million Rand from the part sale. Headline earnings for the six months to end December 2010 were 1.723 billion ZAR. So, back of the matchbox (sies, can you use that anymore) calculations suggest that excluding once off items earnings are going to be around 14 percent higher than the comparable period in 2010. Those are my calcs. That seems very good, over the last five years annual turnover has grown by 5.7 percent with the bottom line having grown by 7.9 percent. It is always a struggle for me to include the period of great pity, or what Reinhardt and Rogoff refer to as the second great contraction. Because great suggests abnormal.

The company itself holds the attraction (and negative) that it is hugely diversified, and has their fingers in many different pies. The suggestion that I have heard from some quarters (quarters of a shield emblem?) is that a geographical split of the various business divisions could be a-coming. Although that notion has been pooh-poohed by management in the past, and also this notion that Brian Joffe will step aside soon has also been rubbished. Results are expected to be published at the end of February, we will take a much closer look.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. Although there was a GDP read pre the market open, which I guess was a miss in expectations, stocks kind of took it in their stride. Tech stocks ended higher, the broader market S&P 500 sank 0.16 percent after all was said and done. Blue chips in the form of the Dow Industrials (all thirty of them) sank 0.58 percent, no thanks to a lopsided move from Chevron which fell nearly two and a half percent. Reason given were simple, an earnings miss of quite some margin, mostly as a result of their downstream business. I know that folks will always make the comment when that business segment loses money, but you can see the reasons why investors would want smoother earnings. But when your upstream business production, oil production, was lower than the corresponding quarter, then I guess you can ask, why am I in the business?

The next question, a much harder one to answer without doing hours and hours of work, why are these stocks so cheap? Total trades on an earnings multiple of 7.5 times, Royal Dutch Shell less than seven times, Exxon Mobil 10.3 times, ConocoPhillips 7.73 times, Eni less than 10 times. Why all so cheap? No really. Replacement of reserves is most definitely one of the issues, remember that all the easy oil has been found. In other words, the barrel that is pumped today is more costly to extract than the one yesterday. And expect that trend to continue. Because oil is not going to be replaced any time soon, for one, I do not see any dinosaurs and jungles dying soon. As per the description on Wikipedia: “Fossil fuels are fuels formed by natural processes such as anaerobic decomposition of buried dead organisms. The age of the organisms and their resulting fossil fuels is typically millions of years, and sometimes exceeds 650 million years.” See that? Replacement takes a loooooong time. And as such, not only will costs rise for the producers of oil, but expect the end product to the consumer to become more expensive.

Byron’s beats looks at Starbucks. I love coffee.

One of the companies that falls nicely within our aspirational consumer theme reported quarterly earnings on Friday. You know, picking up a big coffee and muffin from Starbucks before work is very cool and very New York, well for many of us in the developing world at least. And this is why first quarter earnings rose 10% to bring in record sales from their traditional operations in the US along with robust growth from the smaller Asian operations.

In terms of the numbers the company made 50c a share for the quarter which was 2c above expectations. This was driven by better than expected same store sales (9%) which are always a good sign of organic, sustainable growth. In the US traffic was up 8% for the quarter with the best holiday season in the company’s history. The company had also changed its strategy slightly last year getting involved in the consumer products business. They recently bought an upscale juice maker as well as coffee packets and single serving brewing machines. This segment is only responsible for 12% of revenues but grew 62% in the last period. It remains to be seen whether this tactic will pay off but seeing how popular these Nespresso machines are locally I’m positive about the prospects.

Valuations look fairly expensive. Earnings for the year are expected to come in around $1.85. The share trades at $47.85 and a forward PE of 25. The company is on a big growth initiative with sales growing 20% in the Asia pacific area. Their penetration is still in its early stages so there is a lot of room for growth. Geographically the America’s were responsible for 75% of revenues, still the lions share. 9% came from Europe, the Middle East and Africa while only 5% came from the Asia Pacific (the rest came from the consumer business as mentioned above). See why shareholders are excited? The brand is very established globally and even if you don’t have a Starbucks in your region you know what it is. It almost makes it more exclusive.

The biggest headwind comes from rising input costs with soft commodities including coffee facing huge inflationary pressures. Management say they are on top of this with price increases and internal cost cuts. It’s a worry but something which, like we have seen with McDonalds, is manageable. We like the model and the business. Because of the valuations I wouldn’t be flying into the stock but I certainly wouldn’t be selling.

Gross Domestic Product, 4th quarter and Annual 2011 (advance estimate) was released on Friday before the market opened in New York. I am guessing that the GDP measure in a place like the US is more efficient than most places around the world. Trading Economics had these useful insights: “Real personal consumption expenditures increased 2.0 percent in the fourth quarter, compared with an increase of 1.7 percent in the third. Durable goods increased 14.8 percent, compared with an increase of 5.7 percent. Nondurable goods increased 1.7 percent, in contrast to a decrease of 0.5 percent. Services increased 0.2 percent, compared with an increase of 1.9 percent.” Savings lower and spending higher, that is a good trend for the short term picture in the US.

Courtesy of the same people, Tradingeconomics.com had this chart. Which I want to show you, from 2007 through to the last quarter.

Err… remember when everyone was talking about a double dip recession last year. The last period of economic contraction was 11 quarters ago. Remember the year before when everyone was worried and anxious about inflation. There is always something to be anxious about, and we should be grateful for that. The main reason is simple, why we should be lucky enough that stock prices remain lower for longer. If you are living off the yields, then fear not, those are improving. If you are continually buying shares, and you are in acquisitive mode, then the longer that stocks remain at a discounted price, the better for the buyer! Hah!

I think that the long and the short of it is that whilst I agree that higher GDP is required for replacing all the jobs loss during the period of great pity. Those jobs that went away, perhaps those will never come back. How do you compete against Asian countries? This question was answered by Steve Jobs at the White House, using an example which has now become legendary. From this NY Times article titled How the U.S. Lost Out on iPhone Work:

“Apple had redesigned the iPhone’s screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight.

 

A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.”

The article suggests that this sort of productivity could not be replicated in the US, that was Steve Jobs’ point to Barrack Obama. I would venture to say that the few countries that could actually compete against the likes of China are all found close, i.e. in Asia. Vietnam comes to mind. The simple definition of workforce productivity is the amount of goods and services that a worker produces in a given amount of time. So if hours are limited, then productivity is lower. We are not going to be able to compete with the Asians until their wages are much higher than they are now. Not at a manufacturing level anyhow. But just because you work hard does not mean that you “work smart”. That is another whole argument.

Commodities and currencies corner. Dr. Copper is last at 380 US cents per pound. Lower than Friday. The gold price is lower too, 1726 Dollars per fine ounce, the platinum price is also lower at 1602 Dollars per fine ounce. The oil price has lost around half a Dollar on the session to be at 99.07 Dollars per barrel, that is the WTI quote on NYMEX. The Rand is weaker as markets have sold off, 7.82 to the US Dollar, 12.26 to the Pound Sterling and 10.33 to the Euro. We are off over half a percent this morning at the start. The Greek restructuring of their debt is nearing a conclusion. The Germans are getting as tough as they can. The bond holders are close I guess to getting something. I don’t call it a haircut, how about an overnight balding! This week US earnings continue, the nonfarm payrolls number is Friday and the European leaders meet for another pow-wow in Brussels today. Do I care? I suppose I should.

Sasha Naryshkine and Byron Lotter

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Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. I wondered why I was feeling chilly at times, it was largely due to the snowy pictures coming from Davos I think. Plus, we have not really seen full sun here in Jozi this week, load of clouds. Markets were hot though, cheering the cheap-money-forever Fed announcement, resources had an absolute ripper of a day, adding 2.65 percent. The overall market, the Jozi all share index crossed through 34 thousand points for the first time, I rung my little bell. The closing all time high was last evenings print, 34065. One amazing run, and again the bears have been either hibernating, or two, licking their wounds in their caves. I have no doubt that their time will come. In fact when it does, if you can give me one Satrix 40 for each and every market commentator that uses the following phrases, I will be most grateful:

“Ja, the market has run hard, I am not surprised that we are taking a breather”. Or “People are just taking some off the table, we have had a fantastic run” To both of those, you can add the phrase: “as of late” and “over the last little while”. I love my industry, we all claim to have short term insight, but in truth there are all sorts of events that we have no way of knowing what will transpire. I often use the example of, “well, what was the nonfarm payrolls number six, or even three months ago?” Who cares, we own companies here. We do not own index levels and short term moves. Benjamin Graham (listen to me) said that in the short term the market is a voting machine, in the long term it is a weighing machine. And in market weighing, you want to always be owning the heaviest item, that is getting heavier. Slowly.

Impala Platinum gave us an update about what is happening with the rock drillers illegal stoppage. The ones that failed to report to work were dismissed. As of yesterday afternoon, only 15 percent of those involved (5000 in total) had reported for work. All the others were and have been given an opportunity until the end of today to reapply for their positions. As the company quite rightly says, the grievances of the employees must be dealt with through the correct platforms. And as such, Impala have been engaging with the National Union of Mineworkers. I hope that all the workers return. And I hope whatever their grievances are, they are sorted out swiftly. Because the very last thing that we need here in South Africa is unemployed people.

What? Quite a strange announcement from Spur Corporation yesterday, at least that is what I thought. The company announced that they had settled with the managing director of a subsidiary (Mr Kapsimalis), John Dory’s, and his family trust. Obviously more than just something had been cooking in the Kitchen. Kapsimalis and his family trust are no longer 35 percent shareholders in John Dory’s, that has now been bought by Spur Corp for 12.25 million ZAR. And at the same time, Spur and Kapsimalis were paid a dividend by John Dory’s, totalling 5 million ZAR. Kapsimalis and his family walks away with 14 million. No dispute with any shareholder is ever nice, to air it takes more than just courage, because it always looks dirty. But I guess for shareholders of Spur Corp, they now know that they own the whole lot. And that is a good thing.

This one was even weirder, perhaps I am the only one here, but perhaps by the end you would understand my rationale. Steinhoff wants to take control of JD Group. They currently own 32.7 percent of the JD Group business. Now Steinhoff also own some KAP shares, it used to be only 34 percent up until last year. It is going to get complicated, so pay attention. Steinhoff swapped their PG Bison, Unitrans and Steinhoff raw materials business in return for “1 912.8 million (new) KAP shares at R2.50 per share”, that announcement was on the 18th of October. “And …. KAP credit(ed) a loan account in favour of Steinhoff in an amount of approximately R4 139 million”

So that is the background to the KAP stake. The shares in issue of KAP, post this transaction went up 451 percent. Steinhoff now owned 88 percent of KAP. So surely the minorities of KAP should have got 2.50 ZAR per share? That is what is supposed to happen. But wait, at a General Meeting on the 18th of January, a fairly innocuous announcement which read as follows: “all the proposed ordinary and special resolutions tabled at the general meeting of KAP held today, 18 January 2012, were unanimously approved by the requisite majority of KAP shareholders” would not have raised any eyebrows. Unless of course that you knew, from the October KAP/Steinhoff announcement that Steinhoff had asked the KAP minorities to waive the mandatory offer. So guess what, the KAP minorities voted basically to stay listed, that was last week.

Why is the KAP connection important? Well, Steinhoff plan to pay for the control premium in JD Group using KAP shares, 16 in return for every one JD Group share you have. Steinhoff want to end up with 50.1 percent of JD Group, and to reduce their shareholding of KAP to 62 percent, from the current 88 percent. Well done to whoever (looks like the clever folks from PSG) along with Steinhoff for having dreamt this up. Quite simply, Steinhoff swaps various business stakes for an enormous stake in KAP last year, and then uses those shares to buy control of JD Group. Which they have already sunk some of their existing businesses into JD Group. Question is, why would you want to swap JD Group shares for KAP shares? Not for me to answer, that is for the JD shareholders to decide.

While we are on the subject of furniture, let us have a look at the trading update from the folks over at Lewis Group, released this morning. This is for the nine months to end December. Copy and paste time: “Merchandise sales for the quarter ended 31 December 2011 increased by 5.5% off a high comparative base of 13% last year. Revenue for the quarter increased by 7.7% and for the nine months ended 31 December 2011 Revenue grew by 7.1%. The improving trend in collections experienced in the latter stages of the second quarter continued into the third quarter to December 2011.”

Excellent, does not sound like folks in the middle class are having too bad a time of it. This stock is strangely cheap for the General retailers sector, they have steadily increased turnover by just over 8 percent per annum for the last five. And the bottom line has increased by 5.1 percent per annum over the same time period. Last years HEPS was 781 cents per share, 363 cents worth of dividends per share. Not exactly under the radar screen, but perhaps too small to be everyone’s cup of tea.

And then possibly the most important company news of yesterday, on the local front that is, the Anglo American fourth quarter production report. This is for the quarter that ended December 31, and that wraps up their full year. Iron ore sparkled (it can’t really sparkle, but the business division can), with Q4 2011 better by 5 percent when measured against Q4 2010. And two percent better than the prior quarter. Total output of 12,427 million tons for the quarter, mostly driven by the South African export market, which was up 7 percent. What is also pleasing is that the South American iron ore export market also increased significantly, up ten percent. The South African domestic market used to be bigger than South America, but there was a dramatic fall off in iron ore domestic market, that was down 28 percent. Byron is taking a detailed look at the big daddy of their Iron Ore assets, Kumba Iron ore, who released a trading update yesterday morning.

Copper production was shunted much higher both on the corresponding quarter, up ten percent and versus last quarter, up 22 percent to 170,000 tons. Thanks to the Los Bronces expansion (an extra 19,000 tons) and higher grades at some of their key mines.

Platinum was one of the sore spots, quarterly production falling 19 percent to 710 thousand ounces, “mainly due to a greater number of safety stoppages resulting in lower mine production and increased processing of lower grade surface stockpiles. Equivalent refined platinum production declined by 9% to 583,200 ounces, due to a higher number of safety stoppages.” Not good. And in our opinion these issues are not going away and are going to get worse and not better.

Diamond production was even worse, would you believe. Perhaps that is the reason why the purchase of De Beers seemed like a pretty good deal at the time, see early November piece -> Anglo American acquiring De Beers stake from Oppenheimer family. I would have thought that both the sellers and the buyers would have been well aware of the fact that “Diamond production decreased by 24% to 6.5 million carats. This reduction mainly reflects De Beers’ deliberate focus on increasing waste stripping, as well as scheduled maintenance at the Debswana and DBCM operations in recognition of short-term global macro-economic volatility” Not our favourite business over here, diamond mining, but we like the luxury goods story and the two are linked.

Thermal coal production fell 10 percent on the year and 16 percent on the quarter. Export metallurgical coal sales increased by 4 percent. Average prices increased for all their coal products. On balance an expected report, perhaps the diamond and platinum production numbers did disappoint, but base metals and ferrous metals did well. That is I guess what attracts investors in the first place, the diversity of the business and the smoother earnings over time. We will review the results again when they hit the screens, results as per the calendar on their website is expected to be 17 February. How exciting!

Byron’s beats as promised looks at Kumba Iron Ore, the major shareholder (over 65 percent), is the aforementioned Anglo American. This is a fine asset, but it was not all that way. Often what politicians forget is that a brand new customer on the black wants your resources. And let me just state for the record, our and your resources are only more sought after now because China embarked on a massive urbanisation trend. It was nothing that we did. OK, got that off my chest.

Yesterday we had a production and sales report for the quarter ended 31 December 2011 from Kumba Iron Ore. Total production increased by 4% thanks to the Kolomela mine being commissioned five months ahead of schedule with shipments starting in December 2011. There was actually a decline in production from the Sishen mine due to feedstock constraints in the separation process.

How’s this for a sign of the times. Of the 11.2Mt produced in the quarter 9.6Mt were exported, increasing 7% from last year. That is 86% of all Iron ore mined sent overseas. 1.2Mt was sold locally which is down 28% from last year thanks to all the production problems at ArcelorMittal. Thanks to the Chinese for saving us yet again. The inefficiencies at ArcelorMittal are unacceptable in my opinion and really not good for our economy.

The Kolomela mine was a bigger contributor to the overall mix than I originally thought. Construction on the mine which is also situated in the Northern Cape started in 2008 and huge credit to the guys for getting production up so quickly. In fact it still says on their website that production is only expected in the first half of 2012. For this quarter Kolomela produced a very impressive 1.167 million tonnes, 10.5% of total production. At full capacity the mine is expected to produce 9 million tonnes per annum by 2013 (2.25Mt per quarter). At current levels that will increase Kumbas production by 25% so good prospects for the future. The mine is expected to produce between 4Mt and 5Mt this year.

We already know via a trading update that Kumba are looking to make between R16.5Bn and R17.9Bn for the year. According to this production update that is on the back of 37.1Mt of sales. To be honest I believe any shortfalls in local demand will be absorbed by international requirements. The biggest factor for Kumba is maintaining internal efficiencies, ramping up production and transport within South Africa. It seems like Transnet are getting their act together (I hope I don’t eat my words there) and Kumba have a great history in terms of production. All is boding well for the future of this Iron ore miner. We are definitely happy to add at current valuations of less than 10 and a dividend yield of 8%.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. And breathe! After a cracking start again, largely because of earnings I will have you know, stocks slid lower in the second half of the session, with all the major indices pointing lower. Nobody seems to care anymore with some sort of inevitability of default from the Greeks. Who cares. Greece has defaulted multiple times over the last 180 odd years, what has changed this time? Bond investors are still amazed, I guess the developed market default cycle has been quiet for around 60 years, the expectation is always that it should be a dodgy emerging market that defaults.

Caterpillar results were released before the bell, and it was quite a big beat, when compared to what the predictor bots had lined up. For the quarter the company earned 2.32 Dollars per share off of record revenues of 17.2 billion Dollars. Both top and bottom line was a beat. And a record, oh, we said that already. In a dire year you know, where Europe….blah, blah and so on. Caterpillar actually make an internal prediction on how they see global growth, and their estimates are for the global economic expansion to clock 3.3 percent. That is quite amusing that people who make mining and earth moving equipment making economic forecasts, but I guess they have a great sense from their order book on what the world looks like. Rather than academic types two feet deep in the snow in a little Swiss hamlet who tells us it is all finished. Because as we stumble our way through all of this (Developed world debt levels), we are seeing an improvement already.

In fact Caterpillar indicated that the US housing market is improving, at least orders for their goods are. Spend has increased nearly six percent last year from about March onwards, but in truth spend was at its lowest levels in over a decade. Amazingly, Caterpillar have a backlog of nearly half of last years revenue. For the full year revenues were 41 percent higher than the previous financial year, at just over 60 billion Dollars. Net income was just shy of 5 billion Dollars, clocking 4.928 billion Dollars. That was a massive 83 percent higher. On a per share basis, earnings were 7.40 Dollars. This crushes the 2008 record year, which was 5.66 a share. By as much as 30 percent.

Their business is a nicely spread one, with roughly one third of revenues in their construction industries business (the ones that you would be most familiar with), one third in Power Systems (diesel and natural gas generators and engines), and around one quarter in Resource Industries. I quite liked this graphic from their 2010 annual report, on what is exactly driving their business. A picture tells, you know, three paragraphs worth.

Quite simply, more people urbanising equals a greater demand for raw materials, plus greater equipment usage and also greater energy consumption. In a time of a resource boom the old saying goes, it is the folks that make the picks and shovels that make most of the money! Not too sure about that, ExxonMobil and BHP Billiton do not seem to be struggling at the moment!

What does the outlook segment say? Here goes: “The outlook for 2012 sales and revenues has increased and is expected to be in a range of $68 to $72 billion. Profit per share is expected to be about $9.25 at the middle of the sales and revenues range. The outlook includes full-year results for the two large acquisitions that we completed in 2011—Bucyrus and MWM.” Revenue could increase by as much as 20 percent, with profits more than that. The stock closed at 111.31 Dollars a share yesterday, up 2 percent.

The 52 week high is 116.55, we are not too far from that. The current yield is hardly handsome, but not nothing, a quarterly dividend of 46 cents translates to a yield of 1.65 percent. Hey, at least they pay something. The earnings multiple is 15 times historic and I guess if you take their guidance, 12 times forward. We continue to buy the stock, even at these elevated levels, the stock price does not look expensive, and the business is well positioned.

Commodities and currencies corner. Dr. Copper is steady at 385 US cents per pound, the gold price is also flat at 1717 Dollars per fine ounce. The platinum price is flat at 1605 Dollars per fine ounce. The oil price is lower at 99.65 Dollars per barrel. The Rand is slightly weaker 7.82 to the US Dollar, 12.26 to the Pound Sterling and 10.28 to the Euro. We have started lower here, you know, profit taking. No, risk aversion. No that is not it, more sellers than buyers. Don’t know. What I do know is that a first look at US GDP. For the fourth quarter.

Sasha Naryshkine and Byron Lotter

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Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. Never a dull moment in our job, never a dull moment in our workplace, we saw a day which was dominated by a weakening currency, some mixed data out of ye olde worlde and Davos popped up onto our screen. I must be honest, I do sort of see the point, but have people never heard of Google plus? You can invite friends. And chat to them via a webcam that is part of everyday lives now, installed in all phones. Well smart phones that take themselves seriously. Nokia released this and that, folks shrug, Apple did this and my dog wants to know about it.

Davos is genius on the part of Klaus Schwab, a German economist, who founded the WEF all of 41 years ago now. The journalists and the TV we watch do exactly enough to tell you how good it is to be there, and how important it is. I see the same anchors interviewing the same people, except that they are sitting in front of a screen of white. Loads of snow. In the end it is a meeting of loads of smart, connected, rich, influential (and self important) people who get to hang out in the Swiss Alps for a few days and discuss the problems of the world. It would not quite work if the venue changed each year and went from outdoor slum to outdoor slum. Methinks less attendees.

My bias aside (if I got an invite why wouldn’t I go?) the Jozi markets closed down 96 points or 0.29 percent to end at 33637. Not quite at 34 thousand yet, we were close at the beginning of the week. Some of the majors, the dual listed stocks were helped out by a weakening currency. Barloworld moved strongly northwards in the last two hours of trade, ending the day up 6.7 percent to 85.90 ZAR, a hefty move. And, on three and a half times the normal volume! The stock has actually been on a tear since it bottomed (52 week bottom) just above 58 ZAR a share in late August and then again in early October. I did not attend the AGM, but I saw that the company had said that their order book had grown quite nicely in the December quarter, this is what the trading update said: “The firm order book at December has increased from the R5.2bn reported at September to over R6bn.”

The strong order book was as a result of improving mining activity, so read into that strong Caterpillar equipment sales locally. They did mention that they were looking at acquiring the Bucyrus distribution rights. Remember that Caterpillar bought Bucyrus and CAT indicated that they were looking to follow this strategy with their existing distribution network. Good for Barlows. The Siberian Caterpillar dealership is doing alright, driven by strong mining order. Giant and technophobe (as well as possible presidential candidate) Mikhail Prokhorov must have been buying some equipment for his mines! Prokhorov was registered officially yesterday to run in the presidential elections. He also is the major shareholder in Onexim group. {Best Russian accent} He be having lots of opulence. {end of accent}

Nice announcement from the folks at Barloworld, the stock took a while to actually digest all of this and then the stock soared. On an out and out valuations basis the stock is not cheap. Not what you would expect, but the predictor bots suggest that earnings could grow by 30 percent this year (off a low base) and then by nearly the same amount next year. And the year after that by around 20 percent. With the benefit of hindsight, when the interest rate cycle started to turn last time, that would have been “the time” to get out of the stock. Because they are quite simply in some parts of their business very geared to interest rates. It looks a little full at these prices is my sense.

JD Group released a trading update this morning, for a four month period to end 31 December. “The Furniture Retail division grew cash sales by 9.8%, when compared to the previous corresponding period, with overall sales increasing by 3.6%. New applications for credit grew by 8% over the period, however, the acceptance rate declined from 73.3% to 68.4% due to the over-indebtedness of the consumer.” That last part is quite interesting. The general consensus is (was) that the South African consumer was deleveraging and in fact look better. And not worse.

However, notwithstanding the lower acceptance rates (the applications that are approved), the quality of the book is getting better. Which is always a good thing. “The Financial Services division continues to make good progress, achieving excellent collection rates and a decline in arrears. Bad debts written off declined by 17% over the four months, when compared to the previous corresponding period.”

The stock this morning is trading lower, bucking the trend of the rest of the market, which is trading higher. Yes, no maybe. We own African Bank, which of course has the Ellerines business, and prefer that management team. We regard them very highly. I know that they are two different businesses, but as we have often said, we prefer to be in the consumer finance trade this way.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. Whoa! Look out, the day was starting to resemble an Apple against all the rest of the stocks out there, when kaboom, the Fed decided that rates should stay at next to zero all the way through to 2014. Late 2014 too. Now this was a first of its kind announcement, as per the intro (which you can find here -> Press Release January 25, 2012): “Following careful deliberations at its recent meetings, the Federal Open Market Committee (FOMC) has reached broad agreement on the following principles regarding its longer-run goals and monetary policy strategy. The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January.”

More than just a comfy blankey, but a tuck into bed each and every night too. The actual paragraph contained in the release of the FOMC statement that got markets rallying and tongues wagging was:

“To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”

You see, the Fed is planning ahead. And they will continue operation twist. The only dissenter interestingly was Jeff Lacker, he indicated that the Fed should not have given a time. So, they should not have said through to 2014.

Immediately after the announcement the equities market rallied hard, the Dow Jones between worst and best point of the day was nearly a 170 points swing. There was many a stock that got whacked at the beginning and then closed higher, giving folks some great intraday opportunities. One stock that gave nobody an opportunity was Apple inc, that was the biggest company by market cap until ExxonMobil (XOM) made their come back with the rest of the market. Apple gained six and one quarter percent, the all time high was at the start, 454.45 Dollars a share. XOM is a mere 2 billion Dollars bigger than Apple in market cap, as of last evenings close. To put that quarter of earnings into perspective, it was the second best ever quarterly profit from an American corporate. Amazing.

Byron’s beats is going deep into the future. Which in this case has arrived in the form of Netflix, which reported numbers after hours.

Wow it’s been a wild ride for Netflix of late. Since they peaked in July at $295 to where it is now at $95 it has been an absolute rollercoaster. The behaviour of US equities can be fascinating. They take no prisoners but when a company performs, shareholders are rewarded. Once a company hits the spotlight, the volatility becomes almost unmanageable and when the market loses confidence, the company has to really work hard to earn that confidence back.

After hours Netflix reported quarterly results which beat expectations causing the market to bid the price up a whopping 16%. If you are unaware of the history behind this company, here’s a brief summary. Basically the company went from DVD deliveries to offering a streaming service that made movie watchers lives so much easier. Investors picked up on this genius move and started punting the stock. It became the darling of the market but cracks started to appear. Management made some badly timed share buybacks whilst a decision to change services and increase prices was really badly received. The stock plunged with backers and naysayers having constant persuasive battles online and on the box. And here we find ourselves.

So how did these numbers look? Earnings came in at 73c compared to consensus of 54c. A huge beat but down from the 87c made last year. The company trades on a PE of 21 which is a lot more realistic than the 40+ multiple it used to have. A correction was due. For this company it is all about the subscribers however and that is why the market liked the numbers so much. The company has 26.3mn subscribers compared to consensus of 26.1mn after adding 610 000 in the quarter. That is after losing 1 million customers in the third quarter following the dramatic changes to its services. The company still managed to add 1.7 million streaming customers last year.

I really do like the company. People love movies and as they get better with better quality home theatre systems consumption will just grow more and more. Netflix pioneered movie streaming which is such a clever and easy concept. What a waste of time to go and pick up a scratched DVD. They face tough competition however from the likes of Amazon and now with smart TV’s coming into the mix, who knows who the next competitor will be. Dare I say Apple. The stock is volatile and if you are willing to ride the wave it does offer some value at these levels. Personally I would prefer to stick with the big guns.

Commodities and currencies corner. Dr. Copper last traded at 383 US cents per pound, getting some support from the Fed keeping rates lower for longer. The platinum price is off a little this morning, last at 1578 Dollars per fine ounce. The gold price has rallied, but has also pulled back a little, the last quoted price is 1705 Dollars per fine ounce. The oil price is slightly higher at 99.76 Dollars per barrel. The Rand is stronger as you can appreciate, the ebbs and flows of the currency is determined how folks feel about this or that, I must be honest, I am never sure what it actually means! Last at 7.85 to the US Dollar, 12.33 to the Pound Sterling and 10.31 to the Euro. We have started better here, benefitting from the great finish on Wall Street overnight.

Sasha Naryshkine and Byron Lotter

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Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. Some respite finally for the bears, who have been very quiet. Understandably so I guess, we are still lumped with the same old problems with European debt woes, Greece is possibly in default. Well, they are seeking to restructure and have hit another speed bump. I heard something amazing. MF Global, if they were still in business would have made an absolute packet on their European debt. Yes, John Corzine was right, he just could not stay solvent long enough. What is the moral of the story? The market remains irrational longer than you remain solvent. So, whilst MF Global was a victim of the European debt, the leverage and timing killed them and not the actual trade itself. Mind you, timing in life is almost everything, not so?

Session end here in Jozi the all share index closed at 33733, down 207 points or 0.6 percent on the day. Banks fell by a little over a percent and a quarter. Resources sank by nearly nine tenths of a percent. Gold miners added 0.4 percent, the underlying bullion price and weakening currency helped out. Definitely. Oh, and I was completely wrong about Impala workers, it turns out that at midday yesterday the company released an announcement indicating that the 5000 rock drillers had not reported for work, and as such the company was starting to dismiss these workers. What do you think NUM was advising these 5000 odd presumably all members? Seems to be fiddling with bombs trying to disarm under a neon light, and very strange to me. Paul seems to indicate that looking at NUM comments, specifically from Lesiba Seshoka, that the miners in question were doing “their own thing”. Strange but true.

An interesting announcement from Reinet investments this morning, titled “Reinet proposes revision to the terms of its prospectus.” The change is simple, the amendment is as follows: “to permit equity participations in any one investment to exceed the 30 per cent guideline until such time Reinet Fund may gradually diversify its portfolio, taking into account prevailing market conditions.”

OK, you know what we are talking about here. “Specifically, Reinet Fund holds some 84 million shares in British American Tobacco p.l.c. (‘BAT’), representing 4.3 per cent of that company’s capital. At 31 December 2011, the BAT interest represented 86.6 per cent of the Company’s net asset value.” And that stake in BAT has done amazingly well, Reinet points out that in Sterling terms the stock is up 70 percent. All credit must be given to the company and their management for being crazy overweight one particular holding. But here is the buzz see, “The listing prospectus indicated that it was intended to reduce the significant shareholding in BAT to less than 30 per cent of the total assets of Reinet over a four year time period, which will expire in October 2012. This was in line with guidance provided by the Luxembourg regulator in terms of risk diversification.”

Reinet are going to ask shareholders for more flexibility. More time to sell the BAT stake when they feel it is right. The company suggests waiting for stable markets, in order to dispose of part or all of the BAT stake. As they indicate however, they are in the mean time using the cigarette stake “as security for a prudent level of borrowing to finance other investment opportunities.” So, use the existing cash flows from BAT (nice dividend), leverage up using the stock as security and make the stake less important over time. I like the fact that they do not feel as if they are rushed into making any decision. I do however wonder what the Luxembourg authorities are going to think though. Still, we do not like BAT, so by extension, we do not like Reinet. Plus the fee structure looks very similar to a hedge fund. Some more Rupert magic.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. It was huge. It was everything that it was supposed to be from an earnings point of view, nearly five percent of the entire S&P 500 reported yesterday. The ones that we will pay specific attention to today are three of our core stocks, Apple inc, J&J and McDonald’s. The market in New York was mixed at the end, blue chips lower by around one quarter of a percent, the broader market S&P 500 down around one tenth of a percent. The nerds of NASDAQ gained about the same amount that the broader market lost.

Let us crunch the Apple inc. quarterly numbers, which were released after the bell. I am trying to care less and less about what the expectations are, because that is not what we do here, we DO NOT want to contract quarteritis. Quarteritis is not a disease, but rather an affliction of sorts, where you measure the performance of a company on a quarter to quarter basis. It is the wrong way to go about investing! Having said that, hah-hah, let us have a look at these quarterlies. Record quarterly revenues and records sales across their iPhones and iPads, and their Macs too, iPods are so last decade. Check it out:

“The Company sold 37.04 million iPhones in the quarter, representing 128 percent unit growth over the year-ago quarter. Apple sold 15.43 million iPads during the quarter, a 111 percent unit increase over the year-ago quarter. The Company sold 5.2 million Macs during the quarter, a 26 percent unit increase over the year-ago quarter. Apple sold 15.4 million iPods, a 21 percent unit decline from the year-ago quarter.”

This translated into sales of 46.33 billion Dollars for the quarter (58 percent of sales outside of the USA), record profits of 13.06 billion Dollars. And 13.87 Dollars per share. Wow. And gross margins widened to 44.7 percent, when compared to 38.5 percent in the corresponding quarter. Now that is one of the metrics that in our world (and most, to be fair) is very important. Growing revenues and margins at the same time.

The iPhone segment recorded revenues of 24.417 billion Dollars, the iPad 9.153 Dollars, with the Mac 6.598 billion Dollars. It is unbelievable to think that the iPhone sales are three and a half times Mac sales. What people forget is that the iPhone was only released on the 29th of June 2009. That was less than 1000 days ago. 941 to be exact. That is only 134 weeks. Or almost 31 months. That is right, the iPhone, a product that sold over 37 million units last quarter, was released less than three years ago. Amazing, and to think that we are currently on version five, the iPhone 4S, I have seen them, Byron has one as has my wife. Neither of them have let go of them long enough to let me have a look, that tells you all you need to know. But think about it. You hear folks say, ah well they have not released a new phone for a while. Nonsense, at this run rate there is a release of a new iPhone every 200 days or so. Even that is not enough to satisfy our credit card hyperactive consumer society. That is a point worth making.

The iPad, that turns two years old on Friday. That is right, that is when we first saw it. And we asked questions like, well it is not a phone, it is not a computer, seemingly it was not for me. Wrong! The release date in 2010 in the US was 3 April, the international release date was 28 May 2010. 94 weeks ago we saw the iPad “in the flesh” for the first time.

Amazing. Products that everybody wants, packaged absolutely beautifully, this is not an out and out tech stock. There is an element of luxury in the company, their products are not cheap. There are long queues associated with the release of a new product, even if it does not wow initially, the consumer is stilled amazed. It is still perhaps the most wow mainstream consumer electronic device(s) that I have ever seen. The critical question for us however is, are there long queues that still remain for the stock of the company? Is the stock cheap, even if the products are not? Are folks wow for the stock?

The short answer is yes. The stock in the post market of these blow out numbers bid the stock up heavily. After hours the stock is trading at 451 Dollars a share, an increase of over seven percent. Which means that the company should be the most valuable, by market capitalisation in America. When the market opens, don’t jump the gun. So clearly all the market participants think that this is the case. The one criticism that I did hear is that their cash management is just poor. I have taken their balance sheet from the release to emphasise the point that some folks are making. The company has 97.601 billion Dollars worth of cash. Did you hear that line or did you faint? It is not all cash, but rather made up as follows:

Shouldn’t shareholders be entitled to this money? The main problem is that because the company earns a lot of money outside of the US, that cash does not return to the US, because of the high corporate tax rates. But also, because loop holes exists in which US domiciled corporations are able to get away with very low rates. Think GE for example. This needs to change. And must, fast. Because as you can imagine, companies will eventually find more favourable places to operate. Just back to that cash quickly, 97.6 billion Dollars. That is 104.81 Dollars per share of cash. At the suggested opening price of 451 Dollars a share that is 23.2 percent cash. So I am guessing, even with the guidance of around 8.50 Dollars of earnings per share for the current quarter, the company looks real cheap. Real cheap. There will come a time when Samsung perhaps has a wow product, but for the time being everyone wants an Apple product. So watch it, stay in the stock, even buy the stock on these cheap valuations. But watch it a whole lot closer than you would anything else.

McDonald’s reported before the bell. These were also exceptional numbers, and luckily for us, they were also the full year numbers. Why I say luckily is that we can get simple valuations without wondering about what they might or might not make for the next two quarters. If you want to download the .pdf for the full year numbers, go to their investor relations segment of their website and you will see it staring at you. Here are some of the highlights:

“Consolidated revenues up 12% (8% in constant currencies) to a record-high of $27 billion. Combined operating margin increase of 60 basis points to 31.6%. Diluted earnings per share of $5.27, up 15% (11% in constant currencies). Returned $6.0 billion to shareholders through share repurchases and dividends.”

Nice. Just for the record, McDonald’s as a company has increased their annual dividend every year since they started paying one back in 1976. Amazing, so this year will be the 36th consecutive year. In fact it goes further than this, the company roughly has a three percent dividend yield, and continues to buy back around two percent of outstanding shares in issue, hereby enhancing future returns to you, the shareholder. And by no means is the growth story overdone, the company continues to expand their geographical presence across the globe, the US business was encouragingly better than anticipated. And as some commentary points out too, Europe is just fine, GDP contractions pending notwithstanding, people continue to dine at their restaurants. Same store sales accelerated at the fastest rate since 2004. Good value for money, even though it is not everyone’s cup of tea, what-what! Obviously the well documented food inflation is a risk to their business, but that is something that every person (other than subsistence farmers) has to deal with on a daily basis.

Sometimes you have to pay up for the quality of the company, McDonalds is one of those companies that looks expensive, but for a reason. They continue to deliver. If you want to buy some more of the stock, or you simply want to own it, do so quickly, yesterday the stock sold off. Down two and a bit percent to 98.75 Dollars a share in normal trade yesterday. At current levels the stock trades on 19.35 times historical earnings. After hours some folks must have seen the analyst notes, because the stock is up around half a percent. The annual dividend at the new quarterly div rate is around 2.80. Expectations are for double digit earnings growth. A quality company, the stock has rewarded shareholders, and should continue to do so. We continue to buy the stock.

Byron’s beats is about the third major that we own that reported yesterday, JNJ!

Yesterday we had loads of exciting companies releasing their quarterly earnings. One of those was Johnson & Johnson who reported adjusted earnings which beat forecasts. I say adjusted because they had big legal settlements and product liability costs. Unfortunately that is one of the risks when investing in a big pharmaceutical business.

So let’s delve into the numbers straight away and then we can look at the whole mix. EPS for the quarter came in at $1.13, above consensus of $1.10. This was from revenue of $16.3 bn. Margins have been cramped somewhat due to increases in R&D but still a very profitable business with operating margins of 20.3% and gross margins of 67.2%. Guidance from management expect earnings for 2012 to come in between $5.05-$5.15. The stock trades at $65 so we looking at a forward PE of around 12.75. Not cheap but certainly not expensive for a company that yields 3.5%.

So how did sales go per segment? This info is for the year where the group had sales of $65bn. 40% of JNJ sales comes from Medical devices and diagnostics. This includes medical equipment which falls under three business groups. Global Surgery Group, Global Medical Solutions Group and Global Orthopaedics Group. These all experienced good growth in the BRIC nations where they are applying much of their focus. They are the number one supplier in this field and have lots of innovative new products in the pipeline. This business is responsible for 44% of profits.

23% of JNJ’s sales came from Consumer products. We are all very aware of these products such as Vaseline and endless skin and baby products. Sales for the year were pretty flat in this segment. Again much focus was put into expanding into the developed markets as well as maintaining their iconic brands. The margins in this business are not nearly as good as the other businesses so the sector is only responsible for 11.5% of profits.

Pharmaceuticals were responsible for 37% of sales and 44% of profits. Sales grew by 6.2% in this division. Here is how they see their mix by 2015.



Check how important new products are going to be. This is why an increased in R&D spend is so significant. It is an extremely competitive world out there, just like the tech stocks and one needs to be innovating all the time. Great for the consumer.

All in all a good mix. They need to maintain their reputation and stay away from legal suits which have hampered them this quarter. The analyst community seem very excited about their pharma division with new products bringing in a lot of potential. We like the sector, populations in the developed world are aging and populations in the developing world are able to afford more healthcare as they get wealthier. Johnson & Johnson are one the best in the sector and at current levels offer good value.

Commodities and currencies corner. Dr. Copper last crossed the wires at 379 US cents per pound, the oil price is lower at 98.89 Dollars per barrel. The gold price is slightly higher 1666 Dollars per fine ounce, the platinum price is also better at 1552 Dollars per fine ounce. The Rand is steady at 7.92 to the US Dollar, 12.35 to the Pound Sterling and 10.36 to the Euro. We have started moderately better here today, but have drifted towards the thin red line. That is flat of course.

I want to leave you with something amazing that I found via Carpe Diem. These are simple statistics on YouTube. Here goes. Don’t faint this time either.

Uploads to YouTube: One hour of video every second.
9 months every two hours.
A decade every day.
A century every 10 days.

YouTube Views per day:
4 billion.

And to think that many a company (and country) firewall stops people from learning more about their own world each and every day. If I am looking to explain stuff to my kids I use YouTube often. I have no doubt that their learning experiences will be very different from any of ours. Happy YouTube watching folks!

Sasha Naryshkine and Byron Lotter

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Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. Keep going you good thing. The Jozi all share index closed up shop at another record high, 237 points better to 33940, up 0.7 percent. There was quite a lot on the go yesterday, the EU decided to impose an oil embargo on the Iranians, of course we saw the oil price go higher after that. Resource stocks rose 0.82 percent collectively, platinum stocks were slightly lower courtesy of Impala Platinum who are dealing with what looks like an illegal strike. And losing in production around 3000 ounces a day, not a big deal, but it all adds up, and you cannot say what it does for sentiment. Gold stocks rallied over one and one quarter of a percent. SABMiller had a great day, up over three percent and is closing in on 300 Rand a share, closing one cent off their all time high, which is 295 ZAR.

That Implats strike should end today, or that is how I read the SENS release yesterday: “Implats wishes to advise that a work stoppage involving rock drill operators (RDO’s) numbering approximately 5 000 employees began on Friday, 20 January 2012 and continues today at the Company’s Rustenburg operations. The work stoppage is related to salary grievances. A court order has declared the strike illegal and the Company will follow due legal process with all employees who do not report for duty on Tuesday, 24 January 2012.” So I guess, as we speak, there are workers reporting for duty, I would think that the unions are advising their members on this score. Another reason why we are not recommending platinum miners, labour issues is impacting on production. And rising costs. We don’t see either of those two core issues dissipating any time soon. I am still amazed that the platinum price is so “low”, I think that it should be much higher than where it is now. But that is just me, perhaps, as Byron points out, if it is a cold winter and Eskom creaks at the fringes, it will turn out to be a similar situation this winter as it was in that “wet” summer at the beginning of 2008.

If that strike action was not enough for you, then you should also take note of the workers on strike at Ngezi, a Zimplats mine in, you guessed it, Zimbabwe. Impala owns 87 percent of Zimplats, but that will probably be diluted once settled on a number for local Zimbabwean ownership. Reuters reports that half of the work force is on strike, they want the company to pay their personal electricity bills. I am sure shareholders are thrilled about that, having to pay for employees electricity bills and higher local energy costs too. Zimplats are also not on the best of terms with the Zimbabwean tax authorities, who have ordered the companies bank to pay over 28.3 million USD (around 225 million ZAR), and remember that platinum royalties have been raised to ten percent. Still, the Zimbabwean platinum assets are nothing short of too good to pass.

Byron’s beats takes a look at Famous Brands. We like Famous Brands as you well know, they released a trading update yesterday morning.

Yesterday we had a voluntary sales update from Famous Brands. Maybe they were feeling left out because all the other retailers were throwing all sorts of numbers in our direction. At the face, it looked fairly good, not brilliant, but good. The company managed to grow turnover by 10% for the three months leading up to the end of December while same store sales increased by 6.8%.

The CEO Kevin Hedderwick was happy with this result. “This is a very pleasing performance given the prevailing subdued trading conditions, and bearing in mind that many of Famous Brands’ well-established mainstream brands have immense restaurant networks, so growth is off a high base – for example, Wimpy comprises 521 restaurants (excluding the UK), Steers: 532 restaurants, Debonairs Pizza: 370 restaurants, Mugg & Bean: 128 restaurants and FishAways: 123 restaurants.”

Wow I often forget how many restaurants these guys have under their franchise umbrella. 2042 to be exact. Their distribution business must be massive and extremely efficient with capacity to expand at the same rate as their restaurants. During the 3 month period a whopping 60 new restaurants were opened. One of those is a Mugg and Bean just up the road from where I live at the Total on Oxford. It’s fantastic and a great formula. Think about it, we do not really have a walk to work culture in South Africa and that is probably why Starbucks has not taken off. But we definitely drive to work and where better to get your morning coffee and a muffin than at an easily accessible petrol station. Great idea and they are rolling these out at a fast pace.

The Debonairs brand has also been growing fast as pizza has become more and more popular amongst black consumers. The African expansion initiative is making good progress with 18 restaurants being opened north of our borders. The update said that particularly strong growth was experienced in Mauritius, Zambia and Nigeria.

They make some interesting comments about trading conditions over the December period. “The traditional exodus of holidaymakers from inland to coastal resorts took place much later than normal, and to a much lesser degree,” explains Hedderwick. “Whilst our restaurants on transient routes and at airports traditionally deliver extremely robust growth at this time, we noticed that this was slightly more subdued than previously, however, the performance of the Group’s restaurants in inland shopping malls was stronger than traditionally expected.” Most retailers have confirmed this stating that money was spent on consumption rather than travel. An interesting pattern.

Sasha sent me some astonishing figures for the Famous Brands group. Over the last 5 years they have managed to grow turnover by 21.7% annually, earnings by 21.1% annually and dividends by 34.7% annually. Phenomenal. Can they maintain this? Maybe not as robust, especially coming off such a high base but I’m still very confident in their growth potential and happy to add at these levels. More valuation analysis will come when the results are released.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. After a great start markets softened all through to lunch time and then rallied in the afternoon to basically close flat on the day. Blue chips were lower, tech stocks were marginally higher whilst the broader market S&P 500 just squeezed into the green. We are now about in the middle of earnings season, my favourite season. And on balance, other than the Google miss, not too bad to be honest, more on a big day of earnings a little later. What has vanished from our screens has been the old volatility, perhaps folks are changing their minds slowly and feeling a little more secure about the future. I saw an interview with famous hedge fund manager Barton Biggs who said that perhaps he was not as nimble as he once was, and that he was terrified. Terrified either that he was not long enough (around 65 percent long) and is going to miss a huge rally, or terrified that he was wrong and that the Europeans problems were going to get worse. For the record EU finance ministers meet today and some sort of decision about Greek bond holders.

Today is huge. We have earnings after the bell from perhaps the most watched stock in the world arguably. In fact on Jim Cramers Mad Money last evening (get the app and watch it when you wake up) he said in his 31 years of “doing this” he has never seen so much fascination on a single company. He basically said there are two earnings seasons, 499 stocks report and then there is Apple. Possibly true. Jim says it is trading forward on 12 times earnings, but is growing at 18 percent per annum, trading more like a cyclical than a secular growth story, that it is! We like the company and agree with Jim, the iPhone 4S is amazing and really has trashed Research in Motion. The new RIM chief is not exactly a personality. In fact when he talks about excitement I can’t believe it, he is plain boring. I tweeted that “Thorsten Heins makes Steve Ballmer seem like Keith Richards.” Thorsten is the new RIM CEO, Steve is the Microsoft CEO and Keith Richards is a freak of nature. Almost like a Toyota pickup, bash it, push it to the limit, it comes back. We look forward to Apple results.

But also today are numbers from Johnson & Johnson and also McDonald’s, those are before the bell. These two are going to be key to where markets trade today, all three stocks are going to most of the focus on our TV’s. Which is an enormous relief really, I am pretty tired of the Republican primaries, the candidates are almost comical. Romney has a whole lot of the qualities that one wants to see, but he is almost too rich. Buffett had a go at him last evening, not him specifically, but the tax laws: Buffett Blames Congress for Romney’s 15% U.S. Tax Rate.

Just this morning: Romney’s Tax Return Set to Inflame Debate Over Investment Rate. Why? Because his effective tax rate is 13.9 percent. Yikes! He does not make the rules though, as Buffett points out. I suspect that there will be some middle ground reached, inch by inch. I don’t think that taxing people more is a good thing, unless you cut wasteful government at the same time. Expect this Romney tax rate to be a huge talking point today.

Sometimes you come across themes that you really like, but struggle to find a proper investment in that space. Because there are choices available, but nothing compelling. Think the solar guys, who were going great guns, but then suddenly bam, the great second contraction saw two things. The overleveraged solar companies scrambling and two, more importantly subsidies ending in some fast growing housing markets in Europe. Boom, collapse. Ironically you need mainstream energy prices to be so much higher that the alternatives become viable and then great advances in alternatives will see the prices lower. But that does not always hold true, check out the natural gas price. It has plunged. It is like Amaranth all over again, that hedge fund implosion that was trading natural gas futures.

Natural gas prices have plunged since the end of November as the winter pans out warmer than anticipated. The price last year at the end of September for natural gas was nearly 40 percent more than it is now. As we said, this is not the best of news for the natural gas producers. But it is good news for some. And one such a company is Westport Innovations. But you see, the company made a loss last year, how do you even begin to believe that you should be looking at a company like this? Well, their technology is interesting, as per their Google finance profile, they are “a provider of engine and fuel system technologies utilizing gaseous fuels” Nat gas you see in the tanks of vehicles. Which makes sense. Americans can develop their own internal industry with little reliance on external oil imports. That would do two important things, one is to reduce the trade deficit and the other (which goes with it) would be to reduce their military spend. Because you would not have to police some faraway place that produced oil. And lastly, the Americans would create a whole new industry.

It is perhaps way too early for a company like this, Westport. Notwithstanding that, the speculators (investors) have driven the share price up nearly 130 percent over the last year. Perhaps the fracking support industry, Halliburton, Schlumberger and the like are better investments (they make the grade) right now. In our own backyard we have Sasol. But we know that they take a long time, for want of a better explanation. On the flip side of that, the lower natural gas price is not good for some of BHP Billiton’s recent acquisitions. Not good at all. We will watch this theme and space, but know that if you own either two (probably both) of these companies, BHP Billiton and Sasol you are already in the natural gas industry knee deep.

Commodities and currencies corner. Dr. Copper is last at 379 Dollars per pound, higher than yesterday, but lower than the “close”. Ditto most of the commodity prices, the gold price is last at 1672 Dollars per fine ounce, the platinum price last clocked 1557 Dollars per fine ounce. The oil price is 100.14 Dollars per barrel. I saw some German PMI numbers out this morning, both looked decent to me. Both Services and Manufacturing PMI comfortably above 50, and both beating expectations, which I guess is important for short term sentiment. The Rand is trading weaker this morning, along with lower markets too, 7.96 to the US Dollar, 12.39 to the Pound Sterling and 10.38 to the Euro. We are lower to start with, those earnings I am guessing will be key. As will the EU finance ministers. But as you know, we are company guys, politicians do what they do, try and get re-elected.

Sasha Naryshkine and Byron Lotter

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Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. Have you ever seen the uber cheesy music video, “it’s Friday?” Perhaps you have, you are not missing anything if you have not, but another end to the trading week in Jozi yielded a fourth consecutive day of record highs for the overall market. Financials and to a lesser extent industrials dragged the market to 33703 points, up 117 points on the day or 0.35 percent. And amazingly 5.37 percent better for the year so far! In the YTD column banks are up just over eight percent, whilst resources are beating that by one half of a percent. The food and drug retailers are the laggards this year (so far, only 49 odd weeks to go!) after having consistently crushed the market since 2006. Whoa!

That little group of companies includes Spar, Clicks, Pick ‘n Pay and the real winner, Shoprite. Shoprite represents around 57 percent of the whole index, the market values Shoprite at over 70 billion Rands, bigger in Dollar terms than Family Dollar Stores, share ticker NYSE:FDO. Spar is a little under 15 percent smaller in market capitalisation than Pick ‘n Pay now, amazing hey? Shoprite’s price is up over 400 percent in the last five years. 400 Percent! But the analysts amongst us (whisper: I see them) rate the stock a sell. I am thinking that the company will have to do BIG things to convince investors otherwise.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. As promised we will look at results of both IBM and Microsoft, two stocks that surged Friday and once again reminded one that the Dow Jones Industrials only has 30 constituents. And the index is price weighted, basically meaning that the stocks with the bigger share prices hold more sway over the others. Two of the aforementioned stocks, one with a very big share price in the form of IBM propelled blue chips much higher than the rest of the market. IBM added over 4.4 percent to end at 188.52 Dollars a share. There are only three other companies in the Dow Jones with share prices of over 100 USD, and they are Caterpillar (105.64), Chevron (106.89) and McDonald’s (101.74). Safe to say that those four and not Bank of America (the only single digit share price amongst the 30 at 7.07 Dollars) will dictate the movements of the index.

One of the smaller share prices in the Dow Jones and a widely owned stock, General Electric reported numbers on Friday pre the market opening. I love earnings season. After the dust had settled, GE actually closed flat at 19.15. The presentation can be found here -> GE 2011 fourth quarter performance.

The overview section at the beginning of the presentation tells you about all that you need to know, Europe is struggling, the US appliance market is also struggling. But the line that I like the most is the following “Leading indicators encouraging … strongest orders results in history” In their whole history? Wow. But the real estate business continues to be a drag “4Q earnings (were) better by $256MM, embedded loss in equity business declined by $2.5B in 2011 to $2.6B” Still not good! But I guess that was the result of diversification, the GE Money and real estate businesses seemed like excellent ones at the time.

The Industrial segment of the business grew revenues by 10 percent in the quarter, but reported profits of only two percent more than the same quarter last year. GE Capital saw revenue contract 9 percent for the quarter, but profits were 58 percent higher. Overall earnings were 16 percent lower, on a per share basis it translated to 35 cents, 17 percent worse than this time last year. The quarterly dividend has been increased to 17 cents, comfortably better than in 2010.

For the full year the company made 1.23 cents EPS and paid 61 cents of dividends, the simple valuation metrics sees the stock trade on 15.6 times earnings with a forward dividend yield (17 cents per quarter) of 3.55 percent. Not a very demanding multiple from a historic point of view, and a handsome yield, in a world that is searching hard. Full year revenues were 2 percent less than last year, clocking 147.3 billion Dollars. Costs decreased 6 percent, I guess that is pleasing as stockholders. The lower costs were mostly as a result of lower cost of goods and smaller provisions on receivables.

On a segmental basis the two biggest divisions from a revenue contribution in 2011 are Energy Infrastructure at 29.66 percent, with GE Capital piping it at 31.05 percent. Aviation contributes 12.80 percent to overall revenues and the last division in double digits is Healthcare at 12.28 percent. From a profits point of view, it is a pretty good mix, the aviation business has the best margins at over 18 and a half percent. Most of the other major businesses are around 15 percent. The most profitable two business are Energy Infrastructure at 32.33 percent and GE Capital 31.84 percent. So it is fair to say that it matters what happens to those main two segments in the short term. The fastest growing parts of Energy Infrastructure of course is the oil and gas business, but of course there was a sizeable acquisition there last year.

That is all very nice, but why would you want to own this business? Energy networks of all sorts rolling out faster, infrastructural development still a global theme, healthcare improving for all middle class folks, flying is far cheaper nowadays than it has ever been in the past. So they are certainly in the sweet spot. The future as ever is unknown, but this business has been around for 120 years. The financial services segment is where the issues are for current (or reluctant) investors. But we suspect, like you are seeing now, that business segment is improving. We continue to buy and recommend the stock as a core part of most portfolios.

And then next, one of the more recent Warren Buffett additions to his portfolio, IBM, which reported numbers on Thursday evening last week. Which, in trader speak, is a lifetime ago. It depends whether you watched that funny movie last evening, four dream levels deep, as long term investors we are stuck in the deepest dream level. Big Blue, as IBM is known, celebrated 100 years of existence last year, ironic that the Oracle of Omaha took that year to finally make an investment. After having read the annual report and following the company for 50 years, only then was he happy. Wow. This business offers their clients full end to end solutions, from the hardware and software through to their services businesses. And everything in between of course. Straight into the performance, diluted EPS up 11 percent to 4.62 Dollars per share for Q4. For the full year the company managed to earn 13.06 Dollars per share, as they point out up double digit for the ninth consecutive year. Now for the full year, revenues up 7 percent to 106.9 billion Dollars, net income up 7 percent to 15.9 billion Dollars. Dividends of 75 US cents per share for the quarter, that translates to 3.00 for the year.

Check out revenue contribution by geography:

As you can see the developing markets are the big contributors, BRIC countries increased a whopping 19 percent, that is big. But that is all very nice, the stock currently is hardly expensive, it trades on 14.41 times earnings and yields 1.59 percent historically. OK, that is not a great yield, but the stock seems cheap enough. I think the commentary that I have heard obviously resonated with the Oracle of Omaha, and I saw in a presentation, quite an interesting graphic of how all the IT companies have positioned themselves. What is most interesting from this presentation (watch it if you have a spare few minutes -> Business Perspective, September 2011) is that IBM has a five year plan. That was the part Buffy liked. Buffy the stock slayer, not the other one.

So IBM obviously sees themselves in the high value and large enterprise segment. It is not actually a surprise that the two that find themselves in the bottom left quadrant are HP and Dell. I must admit, I admire the company, I think the valuations are really cheap and suspect that you could comfortably own the stock. You cannot own everything, but if you are searching for another tech stock outside of our core, Cisco, Apple, Google and Visa (payment systems), do not look any further than IBM.

Byron’s beats has a look at Intel earnings in brief and then the big news today, the resignation of the RIM chaps. We could make all sorts of rude tasteless remarks about it, but the truth is, RIM missed it. Whether or not they will get back their mojo, time will tell.

We had lots of earnings being thrown at us last week from the US which meant that a few slipped through the gaps. One of those is Intel, the chipmaker and a very important player in the notebook and desktop market. Not only is Intel a very solid business but it is important to analyse their numbers because they are a big bellwether to the market and it will tell us important info about their competitors such as Apple.

The company managed to beat earnings expectations bringing in 68c per share for the quarter compared to expectations of 61 cents. Revenue came in at $13.89bil with an astonishing gross margin of 65.5%. This was the fourth quarter so we can see how the company did for the year. These numbers were also impressive as the company managed to grow revenues by 17% compared to 2010.

This is very encouraging for the notebook market because people expected tablets to steal a lot of market share. Because Apple produce their own hardware and software, they do not use Intel chips in their iPads. This is still an ongoing concern and competition from a product that didn’t even exist 3 years ago is one of those unknown unknowns that can crush companies, especially in the tech world. But the growth in internet traffic has boded well for their data centre group and plans to implement Intel based smartphones and tablets makes the future look bright. As an investment we prefer Apple but I definitely would not right Intel off, a fantastic business.

In other (sort of) related news RIM have announced a huge reshuffling of their management. After 20 years at the helm, Jim Balsillie and Mike Lazaridis the co-CEO’s have stepped down from executive management. This extract from the WSJ “RIM announced that Mr. Lazaridis, who in 1984 co-founded the company using a loan from his parents, and Mr. Balsillie, who joined him in 1992, had stepped down as executives and had relinquished their roles as co-chairmen. The board named Thorsten Heins, previously one of two chief operating officers, to be chief executive, the company said.”

In 2008 Rim reached $148 a share, Apple was trading at around $175 at the time. RIM now trades at $17.24 while Apple trades at $420. I use the Apple price to show that it was not the industry that collapsed but the company. It’s a lesson that has been taught time and time again in the tech world, do not fall behind the curve (excuse the pun). Blackberry pioneered the smartphone and had such a loyal following. But even the most loyal of fans will have to succumb to a better product elsewhere. Of course I still like the smartphone sector as globally there is still much room for penetration. Hopefully a reshuffle in management can send RIM in the right direction, if it is not too late of course.

Microsoft. Strangely you would think that this company is old tech, even though Mr. Nerdy (my daughters call me that!) Bill Gates only founded this company nearly 37 years ago. I remember doing some very low key basic programming and visual basic, let me say I was pretty bad at it, but interested. Not interested enough clearly. I was watching a Bloomberg round up of second quarter sales, and for the first time sales in Windows products fell, with devices (read Xbox and Kinect) and servers (enterprise) leading the charge with double digit sales.

The second quarter in their 2012 financial year sees the company report record revenues. That is right. Record revenues of 20.9 billion Dollars, find the press release here -> Earnings Release FY12 Q2. As they say “Strong business demand and holiday sales drive record revenue and EPS.” However, the company expects PC sales to continue to be weak, as of September last year, competitor Apple had sold a whopping 40 million iPads already. Wow. And Windows 8 is coming sometime soon, in the presentation of the results () the suggestion was that the Beta version would be released in February. Next week.

Operating expenses jumped 1.1 billion Dollars when compared to the comparative quarter, a little more than total (record) revenue. Net income for the quarter was basically flat. Diluted EPS clocked 78 cents, the dividend declared was a very generous 20 cents, which is quite a big jump when compared to the quarterly div of 16 cents. I honestly think that they are moving in the right direction, in-house entertainment is going to be bigger and bigger, with console sales having exploded 25 percent higher, the Xbox and Kinect is really well placed. 40 million XLive subscribers now should continue to grow as bandwidth speeds catch up in the developing world. I mean, come on, who does not want to control Messi, Ronaldo, Rooney, van Persie or Drogba? Amongst scores of others of course, excuse me if I left out your favourite footballer.

There are many concerns about their business and the future of the personal computer as part of our lives. They have cash on hand of over 50 billion Dollars. At the current market cap of a little less than 250 billion Dollars that is 20 percent cash only. The stock price at that market capitalisation is 29.71 Dollars, a lofty move north of 5.65 percent. Even at that price the market affords an only 10.75 times earnings. Sad but true. And a dividend yield of 2.7 percent. Oh, and wait for it, a triple A credit rating, for what it is worth. Perhaps cheap for a reason. I would say that the company has the necessary skills to reinvent themselves and a proven track record. Again, this is not a company amongst our core holding of tech stocks, but it could easily be. Like many folks out there who say that Microsoft are stuck in a cul-de-sac with their core offering, this might well be the case I am afraid. I am sure that they will come out fighting strong though.

The decade (or generational) low for the stock was when the market bottomed out in March 2009, the stock was half of where it is now. But on an out and out valuations basis, this is perhaps the cheapest the stock has ever been. I guess market participants are worried about all of the above. I am torn on this one, but think it is too cheap to pass. Perhaps the utility stock of the future, there is a certain irony in that.

Commodities and currencies corner. Dr. Copper last traded flat at 372 US cents per pound, the gold price has ticked up a little to 1669 Dollars per fine ounce, whilst the platinum price has trended a little lower to 1527 Dollars per fine ounce. The oil price is lower as well, notwithstanding the fact that the Americans, the British and the French have all muscled their way into the Persian Gulf. Through the Strait of Hormuz. And breaking news is that the EU have agreed to impose an oil embargo on Iran. That cannot be good news for anyone. The oil price is last at 98.06 Dollars per barrel. The Rand is steady this morning, 7.94 to the US Dollar, 12.33 to the Pound Sterling and 10.27 to the Euro. We have actually started a little better here this morning, up around one quarter of a percent. Of course there is a EU summit to look forward to, another one, yes. And the Greek bond holders, what will they ultimately settle on with the rest of the EU. To be perfectly honest, any deal that they get is possibly a good one.

Sasha Naryshkine and Byron Lotter

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Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. We can start the same as yesterday again, another day, another closing high. Just! The Jozi all share managed to add a whole 36 points to close at 33586. Up just 0.11 percent. There were many things on the go yesterday, I lost out to Byron (second time in a row) on the MPC decision, I honestly thought, notwithstanding the inflationary pressures that the Reserve Bank could have cut rates. Their tone was dovish, but in fairness, their credibility would have been lacking if they cut rates whilst the last inflation read (and coming ones) remained comfortably outside of the comfort zone. Banks rallied a percent and a half, the currency firmed up (perhaps that credibility thing) whilst the flip side of that was lower commodity stocks.

Amplats managed to recover a little from the worst point of the day, but no thanks to a dirty looking trading update, the stock closed down over three percent. SABMiller lost a percent after their trading update, but some of that was currency related. But when I checked the London price, which was off 0.89 percent, I guess that was not really the case.

Let us, in the words of Queen, rush headlong into the SARB: Statement of the Monetary Policy Committee. The opening line should have teed it up and I should have known better, but I thought that there was an outside chance: “Since the previous meeting of the Monetary Policy Committee, the outlook for domestic inflation and economic growth has deteriorated, posing a serious challenge for monetary policy going forward.”

Now this serious challenge is that the MPC will have to stick to their mandate and fight inflation, which at last read Consumer Price Index – December 2011 was outside of the 3-6 percent comfort zone. “The categories of food, housing and utilities, and transport together accounted for 4,4 percentage points of the December outcome. Food price inflation accelerated further to 11,6 per cent, from 11,1 per cent in November, while petrol prices increased by 26,4 per cent. Administered price inflation excluding petrol was unchanged at 8,7 per cent.” So, buy a smaller battery operated car, eat less food and use less energy. Got you!

Strangely our core rate is much lower: “CPI inflation excluding food, petrol and electricity remained unchanged at 3,9 per cent, indicating relatively benign core inflation outcomes.” But as Paul said, most poor people do not consume electronics and other high end products. The impact of those three items, food, petrol and utilities makes up a large portion of that income segment of the population. And as such is far more noticeable when you are at the fringes of society at an income level.

The outlook is mixed, growth rates have been lowered, the European outlook is murky at best, methinks it will surprise to the upside. I was very interested with that one line: “South Africa’s experience with portfolio capital flows during 2011 was similar to the general emerging market experience of slowing bond inflows and net equity outflows. For the year as a whole non-resident purchases of bonds amounted to R42 billion, while net sales of equities to the value of R17 billion were recorded.”

The never ending search for safe enough yield was taking place last year, a steer towards our bonds, and away from our equities. I think on balance the right decision was made by the MPC, I am hoping that if the positive outlook that we have started with continues, then we should see the currency continue to firm up. As it has already this year, unfortunately for consumers, the petrol price outlook is not the best, tensions around Iran and trouble in Nigeria have seen elevated oil prices. This is possibly the biggest problem for the MPC right now, too many short term unknowns, so the decision to stay at these levels is perhaps the correct one. Even if it makes consumers sigh a little. But remember, we are at 30 year lows on rates, one should not complain too much.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. A whole host of results yesterday, but after hours there were results from Google inc. for the fourth quarter, and both the top and bottom line missed expectations. Which is not good, but there were some factors, some unavoidable. A stronger US Dollar eroded international sales, there was a fall off in ad click prices, but perhaps more importantly costs continued to rise and are now nearly one third of all revenue. Check out the press release: Google Announces Fourth Quarter and Fiscal Year 2011 Results where the opening line kind of detracts from where the share price is trading in the extended market, commentary from Larry Page:

“Google had a really strong quarter ending a great year. Full year revenue was up 29%, and our quarterly revenue blew past the $10 billion mark for the first time, I am super excited about the growth of Android, Gmail, and Google+, which now has 90 million users globally – well over double what I announced just three months ago. By building a meaningful relationship with our users through Google+ we will create amazing experiences across our services. I’m very excited about what we can do in 2012 – there are tremendous opportunities to help users and grow our business.”

Yeah. Unfortunately for Page and other Google shareholders, the stock is down 9 percent post the market. A miss is a miss, there is no other way to explain that. Folks are paring back their lofty expectations, you have to expect that to happen when you hold shares of this nature. OK, but because it was the full year, we can compare their business to 2010. Net income in 2011 came in at 9.737 billion Dollars, better than the 8.5 billion in 2010. The top line grew to 37.9 billion Dollars from the 29.3 billion in 2010, but the all important total costs and expenses (including stock based compensation) increased from 18.9 billion Dollars in 2010 to 26.1 billion Dollars in 2011. A big(ish) jump in R&D, as they explore new businesses, this is the nature of the beast.

Check out how much cash they have:

If they were to open now, down that nine odd percent as the pre market suggests, then if you minus the cash, cash equivalents and marketable securities (nearly 45 billion dollars) you get a market cap of around 144 billion Dollars, which means ex the cash you are paying just short of 15 times earnings. Question is, is that too much? Methinks not at all. The rising costs are of concern, but Google is diversifying their business, they still have powerful free cash flow (which does not lie), around three billion Dollars every quarter. We will use the price collapse as an opportunity, I am already starting to see the same suggestions from elsewhere.

Byron’s beats is about his other favourite topic, technology.

Yesterday we had two exciting innovative announcements from two of our recommended stocks in New York. The first one came from Apple and their introduction of a textbook app and then Nike announced an exciting wristband initiative which in fact involves Apple. This is why I love investing in equities. Not only is your money invested in people who create such amazing things but it is also really exciting to follow and embrace these products personally.

Let’s start with the Apple app. It was always going to happen and is already happening with other initiatives but when Apple set their sights on something, you know it’s going to be done properly. Remember the good old days when you had to lug a bag full of textbooks around campus. I was lucky because I was in hostel and I could get my books during breaks but the dayboys literally had to carry up to 10 kilos of former trees on their backs. Now imagine walking around with just an iPad which has everything from a calculator to all your textbooks and notebooks all installed in that piece of metal. Not only does it preserve resources and your back structure but it will also turn out to be cheaper. Textbooks electronically are much cheaper than hard copies.

This New York Times article summarizes the announcement quite nicely if you want a closer look. From an investor’s point of view, if Apple gets this right, it will print money. Not only will they get royalties for every textbook sold (it’s a massive industry) but if it becomes the norm, every single school and student will have to buy an iPad. It’s the hardware where Apple make their big bucks.

Then Nike unveiled a product called the Nike+ FuelBand which tracks ones activities using Nikefuel scores (a measurement of activity created by Nike). The band can connect wirelessly to your iPhone which will then process all the information of your activities. It sounds quite similar to the Nike+ app which connected to your shoe but probably a little more sophisticated yet easier to use. Amazingly that Nike+ app has over 5 million users. I really like the theme as an investment. Everyone wants to look better and get healthier. In fact society demands it. Running is a very easy sport to get into because all you need is a pair of shoes and a road. Maybe Nike can make the FuelBand the next essential piece of equipment for running. Exciting initiatives from exciting companies.

There were another two stalwarts who reported last evening, both Microsoft and IBM. We will take a closer look over the weekend and revert on Monday. Both stocks are higher post the market close, that suggests that stock holders of both were very pleased.

Commodities and currencies corner. Dr. Copper is slightly lower, most of the commodities complex is, last at 377 US cents per pound. The gold price is also a little off, 1653 Dollars per fine ounce, the platinum price is 1513 Dollars per fine ounce. The oil price is last at 100.46 Dollars per barrel, also lower. Lower across the board in the commodities complex in large part due to a below 50 read on Chinese PMI, no thanks to the folks over in Europe. The Rand of course would be getting a little weaker on the equity sell off (just a little sell off), last at 7.93 to the US Dollar, 12.29 to the Pound Sterling and 10.28 to the Euro. As I said, we have started just a little lower.

Sasha Naryshkine and Byron Lotter

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In the message today we have a look at Impala Platinum, pretty big news from yesterday and would you believe, Anglo American Platinum released a rather shabby looking trading update. Grindrod released a surprise announcement, I think it is a good announcement. And then we explore the SABMiller trading update, which I guess is acceptable. Byron takes a brief look at a couple more trading updates from Truworths and Taste Holdings, the retail roar continues. We look at Goldman Sachs results, and all the prickly issues around compensation, as well as them shedding staff.

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. Another day, another closing high for the Jozi all share index, which clocked out at 33550, up 125 points on the day, which nowadays is a 0.38 percent move. So, notwithstanding all of these problems that keep drifting around about Greek defaults and credit ratings agencies trying to be the Grinch that stole my rally, the markets continue to climb the ladder. Banks rallied nearly one percent, general retailers after all of their frenzied sales updates retreated as a whole just over one fifth of a percent. The oil and gas index, otherwise known as Sasol, added three quarters of a percent, whilst the resources 10 added just over one quarter of a percent, held back by Impala Platinum in particular. That stock fell two and a half percent, after a big surge the day before. We shall explore why just below.

Yesterday we saw that Impala Platinum CEO, Dave Brown, announced his resignation. This came exactly a year and a day after then CFO, Dawn Earp resigned. Where do the Impala execs go for their end of year break? Somewhere where the air is too clean, and everyone thinks too much about their future? Time to ditch that place in the berg. Why? Two very high profile resignations, of both your CFO and CEO inside of nearly a year is definitely cause for concern. Alec Hogg came to his own conclusion: Did Mugabe’s latest Madness topple Impala’s CEO?

Perhaps that was the case, just too tired of putting up with all the nonsense. Either way, this is not really a good outcome for anyone in the short term, market participants were clearly disappointed. The company suggests that they have a replacement in mind and in their sights. But Alec Hogg asks some tough questions that are well answered in an interview done last evening, read the Moneyweb transcript of the interview with Dave Brown. There is a good time to leave, and this seems like an in-between time for me. Good luck Dave Brown and even more good luck should be afforded to his successor.

Grindrod finally revealed what their cautionary was all about, I was way off the mark. I was thinking that it was some sort of private public announcement regarding the new line to Maputo through Swaziland, that was my thinking. Check out the announcement on their website: Introduction of a strategic partner in the Maputo Coal Terminal. Nice. As per the agreement “Vitol will acquire from Grindrod a 35% interest in the company which owns the Maputo coal terminal concession for a consideration of US$67.7 million. In addition Vitol and Grindrod will enter into a partnership (65% Vitol/35% Grindrod) to combine their respective sub Saharan coal trading businesses.”

Now listen in closely. Vitol, according to a list of companies by revenue, are the largest private revenue company in the world. In the world, yes. So they are a very good partner to have. They nearly have turnover of roughly 200 billion Dollars. But, like Glencore before they went public, this energy trading company is very secretive. Check out their limited Wikipedia page: Vitol. There is in fact more available on the Vitol website, in the About Vitol segment:

“Our trading is, first and foremost, physical. We charter tankers and transport crude oil and oil products. Products such as, gasoline, diesel, heating oil, fuel oil, jet fuel, naphtha and non-ferrous metals, as well as ethanol and chemicals: all over the world, every day. And we pipe gas, fill and operate terminals, ship coal and sugar.”

For Grindrod this is a big vote of confidence, that is the way that I see it. Remgro must be thrilled. The stock was up over two percent yesterday and is up another 0.7 percent today.

We see a trading update from the biggest miner of platinum, Anglo American Platinum Limited this morning, released at exactly 9am. Brace yourself, it is ugly looking. “HEPS for the period is expected to decrease by between 24% and 34%.” Sad face. For the full year 2010, the company made 1935 cents HEPS. Expect HEPS for the full year to be in the region of 1277 to 1470 cents, 1373 is the middle of the range. Two big reasons for lower earnings, “the impact of the once off accounting charge for the broad-based community development transaction (R1.07 billion)” and something else that we have talking about for a while now: “HEPS for the period has also been adversely affected by the high number of safety stoppages resulting in lower production, as well as high industry cost inflation, particularly for labour and electricity.”

I ask you with tears in my eyes, why is the platinum price not trading higher? Anglo Plats are more than four and a third percent lower on the news. We will get a closer look at the results when they are released around the 13th of February, that is what the company has indicated.

And then another company that is a large and very successful South African global company, SABMiller released a trading update this morning too. This is a trading update for the third quarter for the company that is still referred to as “Breweries” in a South African context. Here are the main lines, which are in fact the first few lines of the update:

“Lager volumes for the third quarter were 3% ahead of the prior year with good growth in all our regions with the exception of Europe and North America. Soft drinks volumes grew by 6% for the quarter with growth across all regions. Organic, constant currency group revenue grew 7% for the quarter. Group revenue per hectolitre grew 3% on the same basis supported principally by price benefits, with mix gains achieved in all regions except Europe.”

The trend continues, remember in our last note back in October titled: SABMiller update, LatAm good, developed world flat. Who would have thought, like Paul said, that there were so many people who loved drinking beer in South America. Byron also tells us that there is actually a FIFA and Brazil stand off on the drinking of beer at football games at the next World Cup. So clearly a beer culture is bad enough for the authorities to ban drinking at local games. And I guess that is both good and bad to operate in geographies with excessive drinking.

Here are the main regions and improvements in larger volumes
Latin America, up 8 percent.
Central America, up 6 percent.
Europe, down 2 percent.
Africa, up a lot, 11 percent higher.
Fosters, in Australia, larger volumes actually declined by 6 percent.
The US is tricky (different measurement metrics), but larger volumes are lower.
South Africa, which is separate from Africa, grew volumes by 2 percent.

On balance, very good in the developing world and not so good in the developed world, because of issues of sorts which include trying economic conditions and greater competition. So, that is exactly what SABMiller is, it is a brewer with a complete global presence. The stock is flat on the news. Which is not bad, flat draught is bad, but a flat stock price is alright. We do not own the stock, notwithstanding their amazing performance over the last decade, we fear over regulation of their core products will impact their business in years to come. But for now, it is a good proxy for the global economy.

Byron’s beats continues with the trading updates. More retail therapy for all and sundry. I said that yesterday and can happily say that today is no different. I am not the biggest fan of retail therapy, but I most certainly do not hate it either.

To keep up with the theme of retail week, today I will cover two trading statements, one from Taste Holdings and the other from Truworths. Two companies, at very different stages of their lifespan but still very interesting to note their progress. Firstly from Truworths who said that retail sales for the 26 weeks (from June 27 until December 25) increased by 10.7% with product inflation averaging 8%. It’s interesting to note that price increases were slightly higher than the other guys who have reported so far. It’s a fine line between increasing prices and sacrificing sales. The perfect mix needs to be established to maximise revenues and its interesting see how each company takes a different stance.

Remember also that Truworths is a big credit retailer with receivables increasing by 16.6% to R3.9 billion. This means that 73% of all sales were on credit whilst the book continued to perform in accordance with management expectations. Obviously this kind of model brings in an extra element of risk but we know that money lending is a profitable business so if they can manage it well we will (and have) see good upside.

I know I shouldn’t base my investment decisions on personal preferences but I sometimes find it quite hard to decipher how Truworths do so well. I am not a fan of their products and don’t know many people who are. From an earnings perspective, these will be up 11%-15% against the previous 6 months. More details when the full results come out.

Taste holdings released a voluntary sales update yesterday which caused the share price to shoot up over 10%. The Jewellery business which is now responsible for more than 50% of revenues grew sales by 4.2% which was actually on the back of fewer jewellery stores. What excited share holders however was the 26.6% increase in sales from the food division. Same store sales increased only 5.4% so this growth is on the back of new stores and a change to their business model whereby franchises are now required to get their supplies straight from the Taste holdings in house.

I must be honest I really like the business model and some of the brands but I am slightly worried about slow same store sales. They really need to entrench these brands into the lifestyle of the average South African like Famous Brands have done so successfully. If they are not successful with their brands, this expansion could back fire. I’m sure management are well aware of this and are doing the necessary.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. Phew, no chance to catch your breath, the market continued to move higher and add to what are impressive YTD gains already. The S&P 500 added over a percent in last evenings trade, to see the broader market up already four percent for the overall year. Tech stocks are up a much more impressive six and one third percent since the beginning of the year. Apparently this is the best start at this stage since 1987. Back when U2 released the Joshua Tree. The Simpsons made their debut back then. In July of that year the Dow Jones Industrial average clocked 2500 points for the first time. Remember Ben Ali, the fellow that was booted from Tunisia last year, 1987 was his first year of tyranny in power. As far as markets are concerned, 19 October 1987 would haunt market participants, with the Dow Jones falling over 500 points or 22.61 percent to 1738. A horrible no good day. Yip, that was 1987, what were you up to?

I would be shivering in my boots if I were a hedge fund manager and had been sailing too close to the wind, in terms of using non public information to trade around. Remember Raj Rajaratnam? He is currently serving an 11 year sentence after having been found guilty of insider trading late last year. The CFA level one ethics segment explains it pretty well when possessing material non public information, this via Investopedia – Material Nonpublic Information: “Members and Candidates who possess material nonpublic information that could affect the value of an investment must not act or cause others to act on the information”

As simple as that. Why do I bring this up? Because as the WSJ reports, an FBI Sweep Targets Big Funds. And as the article points out, the ring of traders (think of them as poachers of rhino of a different kind) illicit gains is about the same as Raj Rajaratnam was put away for. I must be honest, I am glad that this type of activity is taking place. Very happy.

Staying with people who Main Street see as dirty, but secretly is the envy of the industry, Goldman Sachs, reported results yesterday before the market opened. I am pretty sure that the headcount cutting and reduction in employee pay secretly makes a large segment of people happy. Including Matt Taibbi. Goldman disappointed on the top line, but crunched low expectations on the bottom line. Here is the official release from their website: FOURTH QUARTER EARNINGS PER COMMON SHARE WERE $1.84.

As stinky as 2011 was for the whole industry, Goldman did alright, they “… continued to rank first in worldwide announced mergers and acquisitions for the calendar year.”. AND “The firm continued its leadership in equity underwriting, ranking first in worldwide equity and equity-related offerings, common stock offerings and initial public offerings for the calendar year.” Plus they redeemed the preferred stock that was held by Berkshire, remember that great deal for Buffett when Goldman was short of cash? Closed out by Goldman!

Investment banking revenues fell hard in the fourth quarter, full year revenues of Institutional Client Services were 21 percent lower than in 2010. Their asset management business did alright and revenues were unchanged. As were non compensation costs, also flat. That is just weird, but shareholders know well what they own. The main assets go up and down the elevators each and every morning and evening. Or in the middle of the night. So, those assets, human capital needs to be looked after.

The average investment banker works 80 to 100 hours a week. So call that 90 hours. Divide that by six days (take Sunday off if you are lucky) and that is 15 hours a day. You have nine hours outside of that to get to work and back, to eat, to go to gym, to sleep and to try and maintain a relationship with your spouse and or kids. They deserve what they get, and that is well paid. Average compensation at Goldman Sachs, according to the WSJ was 367 thousand US Dollars last year. And that was 15 percent lower from the year prior. Important question, would I own the shares? Short answer is no.

Commodities and currencies corner. Dr. Copper last traded at 378 US cents per pound, the gold price is higher at 1669 Dollars per fine ounce, whilst the platinum price has actually edged higher to 1535 Dollars per fine ounce. The oil price is higher at 101.27 Dollars per barrel. The Rand, well that is stronger at 7.98 to the US Dollar, 12.28 to the Pound Sterling and 10.24 to the Euro. Risk on today sports lovers.

Sasha Naryshkine and Byron Lotter

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Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. An all time high, that is all. Stocks notched up a good day of gains to close at an all time high here in Jozi, even though technical problems saw us down for a period during the day. Byron and I chuckled and said that we were glad that we were on the other side of the fence as far as being able to have access to trade all the time. We can wait. The Jozi all share finished the day at 33425, up two thirds of a percent, climbing 219 points. So far this year (three weeks in) the leaders of our local market have been the resource stocks. And by luck we have news from the biggest of them all.

Some company news from one of our most held companies in our client base, BHP Billiton this morning has released their production report for the half year to end December. There are many highlights in some very key areas, including a record annualised iron ore production in Western Australia of some 178 million tons. Copper volumes increased 27 percent in the second half of the err…. first half of their financial year. A good second half to the first half. Petroleum production increased 36 percent, thanks to the recent US acquisitions.

Straight into black gold, the petroleum division, which produced 109.38 million barrels of oil equivalent for the half. The December quarter showed an improvement of 13 percent over the September quarter. The big shift has come in natural gas, up 108 percent, but we knew this was going to happen with the acquisitions of both Petrohawk and Fayetteville gas assets. As BHP Billiton notes in the commentary: “Natural gas production was higher than all comparable periods reflecting strong performance from the Onshore US and Angostura (Trinidad and Tobago) businesses. Gas production in eastern Australia was down against the September 2011 quarter due to lower seasonal demand.”

Base metals recorded lower across the board comparative period volumes, but as mentioned above there was a strong rebound in copper production in the December quarter when measured against the September quarter. Wait for it, this was a result of a recovery from industrial action. Yes, read strikes in the September quarter. But also as a result of an improved Olympic Dam performance, which produced higher grades of copper as well as “improved smelter availability following the planned outage in the September 2011 quarter.” Check out how far away from everything the town of Roxby Downs is, the town that services Olympic Dam.

If Wikipedia was working properly I could tell you a little more about the town. Check out the reasons behind the Wikipedia blackout today -> SOPA and PIPA – Learn more. Roxby Downs is nearly 600 kilometres from Adelaide in South Australia. And we all know that Adelaide is to Australia what Kimberly (or perhaps Upington) is to South Africa. A distant place that is a regional capital of sorts. The good news for BHP Billiton is that the copper price has been improving rapidly, thanks in large part to decent enough Chinese economic indicator.

The other big division is their Iron Ore division, where the half managed to record a 22 percent improvement of the corresponding 2010 period. And the company managed to produce 4 percent more iron ore in December quarter over the September quarter. All in Western Australia in one of the most sparsely populated regions in the world, the Pilbara. The improved performance was thanks to “Consistently strong operating performance, the ramp up of Ore Handling Plant 3 at Yandi, dual tracking of the company’s rail infrastructure and additional ship loading capacity at Port Hedland all contributed to the record performance.” For the full year however, BHP Billiton will not achieve that 178 million tons, scheduled maintenance and the wet season will see the company clock somewhere in the region of 160 million tons.

Coal, that is I guess the fourth most important division of BHP Billiton, you can see what I mean by that from this table of their various divisions from their annual results last year, in a message titled BHP Billiton looks cheap. A refresher:

Metallurgical coal has much higher margins than Energy coal, the quality of course. First the high quality coal, a few problems, but higher production, 9 percent higher for the December half over the prior one. “Queensland Coal (Australia) volumes for the December 2011 quarter remained below capacity as a result of stoppages associated with the ongoing labour negotiations and the remnant effects of wet weather. In addition, geotechnical issues at the Gregory Crinum longwall adversely affected production in the period. While system capability is no longer constrained by the 2011 floods, the extent to which industrial action will continue to impact production, sales and unit costs is difficult to predict.”

Well, let us HOPE that the Queensland floods will not be repeated. It is worth noting that sometimes a snarky remark when speaking about agricultural companies and reliance on the weather. Well here goes, the world’s premier mining company was heavily impacted by the weather. Heavily impacted. Energy coal achieved half year records in New South Wales (thanks Michael Clarke), but noted that “unfavourable mining conditions and an industrial dispute at South Africa Coal, together with the suspension of operations at San Juan Coal (USA), resulted in lower production relative to the September 2011 quarter.”

On balance the report seems quite favourable. Petroleum and Iron Ore are major divisions that are pumping for lack of a better word. Coal production is fine, but not without their problems and the issues that their copper assets have had seem to be working their way out of the system. The stock is marginally higher here at the open. The stock closed higher by just over four fifths of a percent in Aussie, down under, Nadal had a similar type of performance in Melbourne. We continue to accumulate the stock.

Next, the BHP Billiton exploration and development report, which gives you valuable insight into the direction of the business. Where they are geographically and which assets are they focusing on. As the company says: “A focus on high return growth projects, diversified by commodity, geography and market was further reinforced during the December 2011 half year with the approval of projects in the Metallurgical Coal and Energy Coal businesses. BHP Billiton’s commitment to its world class growth pipeline now exceeds US$26 billion.”

26 billion Dollars? Wow. Gas, gas/liquids and LNG development in Australia accounts for some 4.5 billion Dollars of approved capex. A massive alumina growth and efficiency project in Aussie of around 3 billion US Dollars will yield around 1.1 million tons per annum. Almost complete that project, 6 percent to go! And then the big one, 7.3 billion Dollars worth of capex in various Iron Ore projects in Western Australia. That is the bulk of the spend. Add in another 1.75 billion Dollars worth of capex in the Samarco iron ore project in Brazil and you have over nine billion Dollars. Wow. 4.6 billion Dollars has been allocated to various Metallurgical Coal projects in Australia.

That is the development part, the exploration part is not for sissies. Copper targets in Zambia, Mongolia, South America and Australia have been identified. “Exploration for iron ore, potash and uranium was undertaken in a number of regions including Australia, Africa and the Americas.” seems more than a little vague. However, these activities account for spend of 532 million Dollars for the half year. That is right, annualised at more than one billion US Dollars, thanks so much shareholders, but this is what you get with a mining company.

There wasn’t too much luck in their Gulf exploration for the half, but there were two hits on partial ownership of wells. Now, I can hear you howling that this seems like money badly spent, but I can promise you that I would prefer this. As Paul pointed out, what you do NOT want is the expensive Ravensthorpe Nickel development that BHP Billiton closed in January 2009. They wrote off nearly 4 billion Dollars worth. See what I mean? You would rather pay the school fees. I hope I got that.

Byron’s beats continues with the trading updates. More retail therapy for all and sundry.

Two more retailers coming out with trading updates, Foschini showing some fantastic growth, Clicks not so much. Obviously these guys are in different categories within the sector so you would expect Foschini to have a better festive season. There is more below the bonnet I would expect however, let’s take a look at what these updates reveal.

The Foschini update does not give away much but it does tell us that sales growth for the December period (27 November 2011 to 31 December 2011) grew by 17.3% and same store sales grew 11.4%. This was off a high base as sales growth in the year before actually grew 22% compared to the period before that. For the three month period similar growth of 17.2% was experienced which shows that it wasn’t just a whopping festive season that will affect earnings.

Foschini often falls under the radar and does not get much investor attention but this should grab some of the spotlight as they creamed the likes of Woolworths and Mr Price. The share price has also had a fantastic run coming from 2800c in mid 2008 to what is now an all time high of 11000c.

The group is expected to make around 735c for the year ending March 2012 which puts it on a forward PE of around 15. This is pretty standard for the industry and not what I’d call expensive considering all this growth.

The next update was from Clicks which was not as pretty. Retail sales were up 6.7% but you can see the laggards in the mix starting to pull the rest of the group down. Amongst the mix, Clicks grew sales by 8.1%, The Body Shop grew sales by 10.1% while Musica decreased by 5.2%. UPD, the pharma wholesaler grew sales by 3.6%. Another important comparative factor was that this industry faced deflation whilst the clothing industry faced inflation which helps sales growth (measured in value).

The issues lie with Musica for obvious reasons and UPD which face caps from the government. The company trades on a forward PE of 15.3 which makes me think it’s slightly overvalued because for the same sort of valuation you can get Foschini. Again I realise that these companies have different specialities and face different risks. You would imagine that Clicks would be a lot more defensive were the South African consumer to slow down. They just need to get rid of that Musica business, but who would want to buy into a dying industry?

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. Stocks ended in the green but were comfortably off their best levels of the day. The major news without a doubt is that cofounder of Yahoo! has been pushed slash resigned. That is right, Jerry Yang, the eccentric and colourful Yang is waking up (possibly going to sleep) without permanent employment tomorrow/today. As Paul said, nobody is going to be writing a moving company epitaph as they did with jobs, for Yang that is. And worse for Yang was that the price of Yahoo! stock actually rallied. Here is the press release on the MarketWatch website: Yahoo! Announces Resignation of Jerry Yang.

Although when you take a breather and look back on the business that he helped create, he was all the things that the chairman said he was. A visionary. And he has done well for himself! The FT points out that his 3.6 percent stake in the business is worth around 720 million Dollars, nice. But that is at the price of 15.43 Dollars per share. It was worth more than seven times that back in the overinflated valuations go-go days of 1999, in fact on the last day of the trading week, month, year, decade and millennia – 31 December 1999. Remember when Microsoft made a 33 Dollar a share offer for Yahoo! back in 2008, 47 and a half billion Dollars back then. Who knows, perhaps they could get it for 20 Dollars a share now. One note that I read suggests that there is a reorganisation of the Asian assets on the cards. And the other suggestion is that sum of the parts valuation of Yahoo! is greater than where the share price is now. I am thinking that Yang included, shareholders are wishing that Microsoft deal had gone ahead.

Commodities and currencies corner. Dr. Copper is last at 369 US cents per pound close to a four month high. Good news for the producers of the metal, and the market hardly looks well supplied, check the production issues that BHP Billiton just reported on. The oil price is last at 100.78 Dollars per barrel. The gold price is lower at 1649 Dollars per fine ounce, the platinum price is also lower at 1513 Dollars per fine ounce. If you want to learn something completely different today that is useful for braai talk, then check out the Contract Specifications for Live Cattle Futures. Nice. The Rand is weaker today, not by much, last at 8.03 to the US Dollar, 12.33 to the Pound Sterling and 10.30 to the Euro.

We have started weaker here this morning, there was a reasonable local inflationary reading, there is talk of a Greek debt settlement with their creditors at around 32 cents on the Euro, that is half encouraging, but should those such talks fail, worst case scenario folks. But for now, you know, they are not worthless. The World Bank has also cut their global growth rate, thanks for that mate. Portugal, junk status and all, are having a small sized auction today of government debt. Very short term debt.

Sasha Naryshkine and Byron Lotter

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