Research in reverse motion

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Research in reverse motion

March 30, 2012 in Uncategorized

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“Apple is worth 79 times more than Research in Motion. In June 2008 Apple was worth roughly 2.2 times more than RIM. Since then RIMM is down 88%. Wow. RIMM has crashed and Apple has taken off.”

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. We were lower for most of the day, nothing too awful, but the same concerns have been ongoing. You know. Europe having kicked the can really hard down the road, that sort of talk. So debt swaps are seen for most people as kicking the can down the road, I can’t imagine that when General Motors bond holders took cents in the Dollar on their corporate bonds, they thought it was a good idea. Better than getting nothing. In a European context, what do you think is better from here? I have just also seen a chat moderated by David Tweed, the Bloomberg London Economics editor involving himself and guests Jim O’Neill and Nouriel Roubini, at the beautiful lake Como in northern Italy. Certainly, for all the woes of Europe, the place still looks incredibly beautiful. And as I often say, people want to live there as opposed to North and West Africa, where there are large growing communities of immigrants. That chat between the two should be up somewhere shortly.

We had the end of the SARB’s MPC meeting with the interest rate announcement yesterday. The decision after all was said and done was to keep rates on hold, the repo rate would remain at 5.5 percent, and the main banks would then keep the prime interest rate at 9 percent. I think the tone of the statement was a little more upbeat, there were tweaks to the outlook for growth, in the positive column, that was the first time I have seen a subtle upgrade to growth. All I am saying is that if the change to growth had been lower, the headline would have read, “SARB lowers growth outlook”. But the headline in reverse makes for less appealing reading. Somehow, humans are drawn to the morbid details in life. This Statement of the Monetary Policy Committee is not that morbid, as I said, a little more upbeat.

The line, slightly better outlook than previously expected sets the tone to tell us that growth for this year has been upgraded: “The Bank’s GDP growth forecast has been revised marginally upwards to 3,0 per cent in 2012, compared with 2,8 per cent in the previous forecast, mainly as a result of a slightly more favourable global outlook, which remains uncertain. The growth forecast for 2013 has increased from 3,8 per cent to 3,9 per cent.” OK, that is nice, but tell me a story (as my father in law would say) here, what will the forecast be at the end of this year? If “things” continue to improve this year, then I expect that rate to be raised even further. In a South African context somewhere around five and a half percent growth should be the magic number that we try and gravitate towards. That number of course has not been reached for a while.

So, what are the other important take aways from this statement? No change, no change likely for a while in interest rates, oil price shocks remain a major concern, inflation seems to be anchored just outside of the target range and the MPC are keeping a close watch on all of these factors. Plus, the stodgy situation in Europe, closer to some sort of resolution than not is also being watched. By all of us, expect the ceiling on the various funds to be raised over the weekend. Spain presents their budget today in the face of one third of the population having taken to the streets in protest to the austerity cuts. And of course the small matter of China. Some folks call it a slowdown, I call it a less steep ascent. Slowdown points to negative growth. So, if anything changes with any of these things expect the Reserve Bank to act. I would think that based on all the new information that we have, the Reserve Bank is more likely to hike rates next, and that would mean that the economy is showing signs of improvement. When that is coming however, that is perhaps the nerdy debate amongst economists right now.

Byron’s beats takes a look at the MTN response, released a little after market yesterday.

“While the claim has not been served on MTN, MTN understands that a claim has now been filed by Turkcell in the US courts against MTN and its wholly owned subsidiary, MTN International (Mauritius) Limited, in which Turkcell claims no less than US$4.2 billion, plus interest and punitive, consequential and other damages in connection with the award of the second GSM licence in Iran to Irancell.”

What does $4.2bn mean to MTN? It’s big. For the year ending December 2011 they made $3.2bn in earnings. And as I mentioned earlier, Iran forms a big part of MTN’s future plans. Did you know that they have a population of 75 million? That is a big country. MTN still find no merit in these allegations and are ready to fight it in court.

“MTN continues to believe that there is no legal merit to Turkcell’s claim and no basis for such claim to be brought before a US court. MTN will accordingly oppose the claim. MTN further notes the South African government’s denial of the allegations that MTN exercised influence over it.”

Their defence mechanism is going to be based around the Hoffmann committee which has already begun its investigations and tried to engage with Turkcell.

“In advance of Turkcell filing its claim, MTN announced the formation of an independent committee, under the chairmanship of the internationally renowned jurist, Lord Hoffmann, to investigate Turkcell’s factual allegations. The Hoffmann committee has already begun its investigations and will report its findings to the MTN board, together with any recommendations as to actions to be taken as a result of its findings, including as to their publication. The Hoffmann committee has invited Turkcell to participate in its investigation, but Turkcell has to date not done so. The invitation remains open to Turkcell to participate in the Hoffmann committee’s investigation.”

There is a lot of copy paste here but everything needed to be read. Am I confident in their response? Again how can you tell? Unless you have inside information we are stuck on the sidelines. My gut says Turkcell are clutching at straws. Especially by filing this in the US and trying to involve US law. I do not see how the US can have jurisdiction. Not that I am an expert. We will carry on holding this one with caution. For further reading Mail and Guardian published another piece yesterday evening

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. Phew, poor Research in Motion. Ironically the company is located in a town by the name of Waterloo, in Ontario, a province of Canada. Now it all depends who you are, but at the battle of Waterloo (in Belgium) it would have been better to have been the Duke of Wellington, rather than Napoleon. Research in Motion have kind of done this backwards, having experienced their Elba, and about to try and make a comeback, will there ultimately be a St. Helena moment? Post Waterloo? The history buffs will know what I am talking about. The company talks about having shipped 11.1 million handsets last quarter, that is around a 21 percent drop in handsets from the prior quarter. Amazing! Phew, but strangely, this was ahead of peoples overly pessimistic forecasts.

They do say that they also shipped 500 thousand PlayBooks, most sold through deep discounts. They also took a hit from a charge taken from inventory valuation related to the Blackberry 7 product. Meaning that they think it is less than initially thought. Thorsten Heins seems upbeat. He has only been in charge for two months, as of today he is left with fewer senior execs. Including long time former co-CEO, Jim Balsillie, he is departing. As is the chief technology officer, he is leaving the business after 13 years in charge, a fellow by the name of David Yach. Jim Rowan, the global operation chief operating officer is also on his way out. Sad. But I guess Heins is doing some long broom cleaning here.

I do not know what to say about RIM, they have posted a loss of 125 million Dollars for the quarter, mostly through write downs. Their products are no longer the only business tool, both Android and Apple have left them in the dust. I suspect that RIM will make a comeback of sorts, but at the expense of who? I often see throwaway comments that people swapping from their beloved “crackberry” to a superior phone, be that an Android or an Apple product. For the time being whilst the business goes through all these changes, I expect them, like Nokia, to hang onto the customers that have not already migrated to other handsets.

The Business Insider had this nice piece: RIM MISSES BIG ON REVENUE, STOCK TANKS. The stock did pick up a little. But the worst part is that there is no more guidance from RIM, because things are just going to be awful. Perhaps this is a moment to pounce, perhaps wait for the beast to really be on its knees before you see a bid.

Besides, like I pointed out this morning, the market cap of RIM is three and a half billion Dollars less than newly listed LinkedIn. As I tweeted this morning: Apple is worth 79 times more than Research in Motion. In June ’08 Apple was worth roughly 2.2 times more than RIM. Since then RIMM down 88%. Wow. RIMM has crashed and Apple has taken off. And the customer has spoken. When I kept telling my friends 24 months ago, they kept telling me I was wrong. Only the brave would be attracted to the stock right now, in hoping that ultimately an HP Palm type tie up would unlock some sort of value. Not for us.

Currencies and commodities corner. Dr. Copper is last at 383 US cents per pound, not really going anywhere for now, that has been my perception for a while. The gold price is last at 1664 Dollars per fine ounce, slightly higher on the day, the platinum price is also higher, last at 1643 Dollars per fine ounce. The oil price is last at 103.44 Dollars per barrel. The Rand is firmer today, 7.66 to the US Dollar, 12.27 to the Pound Sterling and 10.23 to the Euro. We have started higher here, as a result of a better finish in New York.

Sasha Naryshkine and Byron Lotter

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by sashan

Don’t be offended by S&P ratings

March 29, 2012 in Uncategorized

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“You can present exactly the same dataset to both an optimist and a pessimist and they both come to completely different conclusions. That is the market forces at work every day.”

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. We closed right near the lows of the day, the Jozi all share index ended at 33622, down 236 points on the day, or 0.7 percent down after all was said and done. Lagging the broader market and in fact doing all of the moving lower were the resource stocks. Down, down, down. Construction stocks still continue to edge ahead from their completely trounced levels of late last year. It has been one way traffic since then but starting to level off a little I suspect.

Hold onto your knickers there. For better or for worse, the general public tends to take these things very seriously, what the ratings agencies say. I suspect that the ratings agencies have gone from a time where nothing could go wrong to seeing all sorts of things that could go wrong, go wrong. And as such have become reactionary, because they seemed to have missed the great financial crisis of 2008. Or even worse, seen as one of the villains because their ratings were blindly followed by bond investors, and triple A ratings were given to mortgage backed securities and then packaged and sold to Swedish town pension funds and the like. And the quality of the mortgage book started to show. And the quality was should we say, not triple A. So, that is why I think that the ratings agencies have become more outspoken and cautious, because when the tide went out, to use a Buffett analogy, there were no swimming trunks within a country mile. And the ratings agencies amongst others were badly caught out.

So, when Standard & Poor’s yesterday revised their outlook from stable to negative, and affirmed our BBB+ rating, seemingly everyone gets irritated. Personally I don’t care from an investment point of view, if you are not willing to do your homework when investing in South African bonds, and listen to these guys, then that is your own indaba. However, where I do care, is where the perception of our country lies from the views of a foreign party. That matters. Treasury might say this or that and not agree with the actual reasons, but there are some reasons that one should or could agree with.

For instance, this could be interpreted in a number of ways: “The negative outlook reflects the potential for a downgrade if economic and social problems feed into the political debate in the run-up to the 2014 national and provincial elections and consequently further put pressure on the policy framework.” Does this mean that talk could lead to greater government intervention? That is then the will of the masses, the voting base in South Africa, not so? Perhaps the core of the issue is the same problems that we grapple with, different messages from the ruling party. Mixed information. A not too friendly operating environment for both business, labour feels aggrieved, too much parastatal involvement in the economy. Those are real issues. These lines from the official release, which you can get too if you go and sign up for free at the Standard & Poor’s website -> South Africa Outlook Revised To Negative On Persistent Economic And Social Problems; All Ratings Affirmed.

Is this not true? “However, fundamental structural economic and social problems continue, such as very high unemployment and a structural current account deficit that makes the economy dependent on external financing.” Could that not happen? Yes, maybe, who knows. To understand the ruling parties politics is a full time job, check this article out from Justice Malala in the Financial Mail -> Loving and loathing. Amazing. See that?

My parting on this downgrade are that it does and it does not matter. Do not engage in hand wringing. Our credit rating company is in the same company as a country like Thailand. According to this Wiki page -> List of countries by credit rating, sort it by rating, you can see that we attract a better rating than Russia, Mexico and Brazil. Better than India. Worse than China. So, whilst it is a problem, I am reminded that National Treasury had this response in January when the other two ratings agencies led with the same line -> MEDIA RELEASE. And besides, why get upset about something you can’t change, perceptions take a life time to change. In this case, a life time for the image of Africa.

Byron’s beats tackles an issue. A big issue. One that we have been talking about for a while now. MTN.

Fortunately there are investigative journalists who have already done some research from which I can start forming an opinion. This Bloomberg article summarises what Turkcell had to say in their files, I suggest you give it a read and you will see what I am talking about.

This Mail and Guardian article also does a good summary but doesn’t say anything new. It does however state that “MTN was due to put out a SENS statement before markets opened on Thursday morning but a spokesperson said that they believed in the Hoffman inquiry to investigate the claims.” Of course MTN released a SENS which we covered here when the allegations first came out in February.

As an analyst these kinds of things are tough to call. The truth is, we have no idea about the facts and who is right and who is wrong, that is why it is going to the courts. We can only speculate. What I can tell you is that it is certainly negative for MTN from a PR perspective. The share price is down 2% on the news so that is what the market thinks.

The other issue of concern is the U.S sanctions being imposed on Iran concerning their nuclear programme. As mentioned in the Bloomberg article, MTN have many ties with US companies which may halt services if MTN carry on operating there. This is certainly a worry because communication is such an important part of a countries operation these days.

Not only do MTN get 9% of their revenues from Iran but it forms a big part of their growth plans. I’d say that most of the bad news is factored into the MTN share price which looks extremely attractive on a valuations and a yield perspective. However, for the time being we would trade with caution on this one. We will keep a very close eye on the proceedings.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. Markets advanced from their lows, but that was not good enough for another losing session on Wall Street. I think two days ago this had been the best first quarter since 1998, whatever that means. Good, bad, not sure. The Dow closed just over half a percent lower to 13126, the nerds of NASDAQ lost the same as the broader market, 0.49 percent, for all the major indices to be inline with each other for a change. Energy and basic materials were the big losers again. Goldman says that the oil price is going up. But others are asking, what did the Bernank actually say? Read the speech, interpret it in any way you want. Humans are brilliant at that, you can present exactly the same dataset to both an optimist and a pessimist and they both come to completely different conclusions. That is the market forces at work every day.

Remember from yesterday where we were talking about Foxconn and Sharp and Apple TV? Well, it did not take long. The Foxconn-Sharp Alliance is all about Apple’s Coming HDTV. Read it. It might be the coolest thing that you read all day. TV’s with a touch screen usable in medical science. Amazing.

Currencies and commodities corner. Dr. Copper is last at 378 US cents per pound, that is lower on the day, the same with the gold price, that is down at 1656 Dollars per fine ounce. Not the platinum price, that is slightly better at 1637 Dollars per fine ounce. The oil price has also eased back to 105.17 Dollars per barrel. The Rand is weaker, risk off, 7.69 to the US Dollar, 12.24 to the Pound Sterling and lastly 10.23 to the Euro. Risk off like I said today, selling because of concerns of global growth. Err…. but the same “investors” were cheering Bernanke’s outlook on the US economy and ultra low interest rates. I can’t and won’t try and figure it out.

Parting shot. This is really, really good: 9 ECONOMIC MYTHS. It is a piece by one of my favourite bloggers who takes on the 9 economic myths of self proclaimed realist (I think he is bearish), Dave Rosenberg. Dave Rosenberg is really smart. So is Cullen Roche, who writes for his website/blog Pragmatic Capitalist. Roche used to manage money, and seems to talk about his own activities now. And Rosenberg manages money too. I know it sounds silly, but it matters more what people do and say who actually make market “moving” decisions rather than bearish market commentary or Uber (missing the Umlaut) bullish market commentary. If you have thirty years to invest, look at this: Dow Jones Industrial Average (1900 – Present Monthly). None of us have 110 years to invest, but many of us have at least thirty years. Even the worst periods there, if you kept buying through the period you would have been OK.

That makes the levels of anxiety right now seem silly. If anything, if there is anxiety and not everyone is in agreement, that is good if you are in accumulation mode. Thirty years I hear you say? I have clients in their sixties who keep telling me that they might, or might not be around shortly. I always say to them nonsense, medical science has advanced significantly. Which means that if you are in your mid sixties you might well live for another 35 years. Yes. My great grandmother lived to 101. Yes, so if you are anxious, you have time. More than you think normally. Equally, don’t delay.

Sasha Naryshkine and Byron Lotter

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by sashan

Post Ben glow

March 28, 2012 in Uncategorized

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“You are never ever going to get the timing right. I would loved to have bought GE stock for 1.20 in 1980, currently 20 Dollars. That would have been great. Or Coca-Cola for 1.50 back in that year too, the stock trades above 70 Dollars a share now. Both these companies trade below their all time highs of the biggest PE expansion we have ever seen, back in late 1999 and early 2000. Coke pays a 51 cents per share dividend per quarter now, versus a 15 cent dividend when it traded at that all time high, quite clearly the stock was overvalued at that point.”

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. We were better at one stage during the day, clocking a percent or better, but we slid during the middle of the day and settled to a level around where we closed. Which was 193 points better to 33858 on the Jozi all share index, a gain of 0.58 percent on the day. The resource ten did little to help the overall market gain traction, Anglo American actually traded down 1.2 percent on an ABSA capital report that mining output would be impacted this year again as a result of electricity constraints (Eskom) and strikes. More on that a little later, we will also talk about their (Anglo) diamond acquisition when put next to BHP Billiton and Rio Tinto looking to exit their smaller diamond businesses. As I said, I suspect that there is nothing sinister in that, because for both the Australian based companies, the diamond assets are non-core to their overall business.

PPC released a Merrill Lynch Investor Conference slideshow two days ago. Or was it yesterday? This is as far as I can tell, a yearly event, and every year PPC does this presentation. On both their business and the overall cement business in South Africa. It really is worth a look as both an interested party, as well as a shareholder of PPC specifically. We will have a look at a few of the key slides, I am sure that you are all slided (an invented word) out from yesterdays message on the Fed. But, these are important, and a picture always tells you a lot. Although, I started reading my daughters Alice in Wonderland last evening and they seem engrossed enough. No pictures. Imagination.

PPC have said that sales volumes for the first five months of their financial year (they are a September year end) have been 9.4 percent better than the prior year. Imports have put pressure on the coastal market, but at this stage imports only represent around 5 percent of total South African demand. So, in reality this is not that big. PPC hiked prices by 5 percent on the first of Feb this year and as a result they have seen a negative impact on sales. But as they put it, “Price still has better leverage on bottom line than volume.” I believe them.

Perhaps the most exciting part, or the real rump of the slide show for me anyhow is this part, their African expansion plan. PPC are looking to increase the percentage of African sales to 40 to 50 percent of the overall sales mix by 2016, it is currently 18 percent. Which then means that PPC will be a lot more exposed to other currencies, and as we know is both a good and bad thing, swings and roundabouts. Either way, PPC will be building plants in the below geographies, you can see that East Africa will be the first focus, and then they will target West Africa.

And as you can see later in the slideshow, most of the initial focus will be on green fields plans, looking to build plants with capacity of 600 thousand to one million tons of cement per annum. According to the slide show, these plants are set to cost around 200 million Dollars apiece. But, they will have to more importantly find limestone deposits within a 250km radius of their core markets. And that is what is going to take time.

We are aware that Sephaku cement is building a sizeable plant (as far as we know around 2.5 million tons per annum) in the Lichtenberg area. Where corn and cement meet, both Lafarge and Holcim have plants here. Don’t knock Lichtenberg either, apparently the largest cheese factory in the country is there too, courtesy Clover. Yum. The story today is in Engineering News -> Sephaku says new cement project on track.

See that, 2.5 million tons per annum. Just to put that number into perspective, the last cement sales stat from the Cement and Concrete Institute refreshed our memories as far as cement sales are concerned. In 2009 yearly sales were 11,783,670 tons, 2010 dropped to 10,870,394 tons and 2011 was 11,234,335 tons. So, you do not have to be a genius to see that 2,5 million tons added to this mix is really sizeable. And PPC clearly see this market getting crowded, hence the push to faster growing and less developed northern neighbours.

Quite a lot of people have been asking questions about Rio Tinto exiting their diamond business, this after BHP Billiton announced a similar strategy. All after Anglo American announced that they were taking an even larger and much more sizeable stake in the diamond asset that they own already. Remember, two refreshers -> Anglo American acquiring De Beers stake from Oppenheimer family and BHP Billiton looks to offload their diamonds business. As you can see, for BHP Billiton, less than two percent of underlying EBIT. So, nothing sinister here about Rio Tinto and BHP Billiton getting out, they are just noncore. Moving along now….

What? Foxconn is buying 1.6 billion Dollars worth of Sharp, or 9.9 percent. My immediate thoughts, like everyone else, is why? And then of course I (and everyone else had already) put two and two together, Foxconn and Apple and television. Err, but that only makes three. Of course the fourth one is the Apple TV. Or perhaps it is going to be called the iWatchTV. It is tricky to understand the relationship between Hon Hai and Foxconn, but the two are intertwined. And as this Bloomberg article points out, Sharp are in trouble -> Foxconn Counts on Apple’s Future Through Sharp Investment. Either way, this does confirm that Foxconn see their customers (which include Microsoft (Xbox) and Amazon (Kindle)) needing better displays. Sharp closed limit up, over 16 percent. As I often say, proximity to China will hold Japan in good stead. So, whilst their population might be ageing, the same could be said for China too, the growing middle class across the rest of Asia will help existing Japanese businesses too.

Byron’s beats are back. He talks about a sector that I really like.

According to management this growth was attributable to a heading they have labelled ‘It is all about the clients’. “Acquiring new clients and encouraging existing clients to use more of our products and services is what we do. We’ve acquired 877 000 new active clients for the year.” This has grown their client base to 3.7 million while loans advanced grew by 35% to R19.4bn.

“The unsecured credit market is showing continued growth. Unsecured credit (excluding credit card facilities) granted during the year to September 2011 grew by 56% according to the statistics published by the National Credit Regulator (“NCR”). The loan sales reported to the NCR by Capitec for the same period grew by 71%.”

I suppose the biggest question being asked is about the quality of these loans. Many people have been calling the unsecured loans sector in South Africa a bubble. I beg to differ for two reasons. Firstly I think we underestimate how under banked we still are as a nation thanks to our horrific past. We also underestimate the informal sector who have unsecured loans as their only form of finance even though they have a consistent income. Secondly, disposable income in South Africa is growing. Standard Bank had this to say in their financial results last month. “While households took on additional debt, growth was lower than the increase in disposable income, bringing down the household debt-to-disposable income ratio to 75% from 78% in 2010.” Above inflation wage hikes thanks to our overpowered unions actually has some positive knock on affects on the economy and specific companies in the right industries.

So how do they see the future? The focus is on clients, growing the numbers and improving services. They plan to open 55 new branches and are clearly confident that the demand is still there for affordable banking and unsecured loans. As an investment we still prefer African bank. Micro lending seems to be where the best returns are and that is where African bank dominate with a loan book of R44.6bn, more than double Capitec’s. They are also on a massive growth drive using their Ellerines stores as kiosks. The valuations look cheaper and the dividend yield is higher. If you hold Capitec however I wouldn’t be selling, it is a fantastic business, but you did not need me to tell you that.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. Stocks fizzled from earlier sizzling time, all the major indices turned lower in the last hour of trade. In fact, the nerds of NASDAQ were comfortably above one third of a percent higher an hour before the close of trade, and ended up trading in the red. But the winners remained winners, a whole host of stocks closed near their highs.

I have been asked this question before, with some of your stocks at a 52 week high, are you still buyers? Well, some of them are nowhere near their all time highs, some of them are there for a reason, either an improving outlook or PE expansion has led us to this point. So the question was, do we buy, or do we hold back a little. I like to think of it in this way. You are never ever going to get the timing right. I would loved to have bought GE stock for 1.20 in 1980, currently 20 Dollars. That would have been great. Or Coca-Cola for 1.50 back in that year too, the stock trades above 70 Dollars a share now. Both these companies trade below their all time highs of the biggest PE expansion we have ever seen, back in late 1999 and early 2000. Coke pays a 51 cents per share dividend per quarter now, versus a 15 cent dividend when it traded at that all time high, quite clearly the stock was overvalued at that point. Very overvalued. And now? Well, US domiciled companies have changed their sales mix geographically, into much faster growing parts of the world.

Currencies and commodities corner. Dr. Copper is lower at 383 US cents per pound, the gold price is also lower at 1676 Dollars per fine ounce. Ditto the platinum price, which is down at 1632 Dollars per fine ounce. The oil price is also lower at 106.29 Dollars per barrel. The Rand is weaker at 7.63 to the US Dollar, 12.15 to the Pound Sterling and lastly 10.18 to the Euro. We have started lower here today, in part slippage in the last part of New York trade.

Sasha Naryshkine and Byron Lotter

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by sashan

Stop your Ben bashing!

March 27, 2012 in Uncategorized

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” The Federal Reserve sets the nation’s monetary policy to promote the objectives of maximum employment, stable prices, and moderate long-term interest rates. The challenge for policy makers is that tensions among the goals can arise in the short run and that information about the economy becomes available only with a lag and may be imperfect.”

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. It was an improvement throughout the day, first the German based IFO report showed that “things” were improving in Europes biggest economy and then perhaps the most exciting event all day was the Bernanke speech. It really was a day, other than those two events and the Spanish regional election results completely devoid of news to digest. Instead it was scraps, and you got the sense that those tasked with the news jobs were scratching like chickens do when looking for grubs. Ever hopefully two and then one scratch with opposite feet. Markets turned green by two in the afternoon, and continued, albeit slowly to gain a little traction. The Jozi all share index managed to by the end of the market tack on 92 points to close up shop at 33664, a percentage gain of 0.28 percent.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. There was of course “the Bernank”, or the commentary from him, Ben “the measured” Bernanke delivered a speech that changed the tone of the whole day before we even started. It is kind of crazy if you think about it. Ben Bernanke tells us that the Fed are ready to act and that the labour markets are better than most people thought. Yes, we have been paying attention and watching the same data. But Mr. Market and all the participants suddenly get the faith and send all the major markets much higher on the day. What? That almost sounds crazy and I was definitely scratching my head. Surely we could have or should have been trusting our own instincts and in seeing the same data come to the same conclusion? But yet we see headlines like this: Hedge Funds Capitulating Buy Most Stocks Since 2010. The article came to me via a counterparties RSS feed, and there was a cheeky headline that said “Smart money” joins the long crowd. Smart indeed.

OK, so here is the speech that Fed chairman Ben Bernanke gave yesterday that has gotten everyone so excited across the globe. Here is the speech available for anyone to download off the Federal Reserve’s website -> Recent Developments in the Labor Market. The best part of the speech was that there were a whole host of cute slides attached to the speech.

Before I get into that, there are some very interesting and important comments that Ben Bernanke makes about long term structural unemployment, something that this great country of ours (South Africa) is cursed with. Listen in and see if this sounds at all familiar.

“Long-term unemployment is particularly costly to those directly affected, of course. But in addition, because of its negative effects on workers’ skills and attachment to the labor force, long-term unemployment may ultimately reduce the productive capacity of our economy. The debate about how best to address long-term unemployment raises another important question: Is the current high level of long-term unemployment primarily the result of cyclical factors, such as insufficient aggregate demand, or of structural changes, such as a worsening mismatch between workers’ skills and employers’ requirements? If cyclical factors predominate, then policies that support a broader economic recovery should be effective in addressing long-term unemployment as well; if the causes are structural, then other policy tools will be needed. I will argue today that, while both cyclical and structural forces have doubtless contributed to the increase in long-term unemployment, the continued weakness in aggregate demand is likely the predominant factor.”

Wow. What does he actually mean by all of that? Well, clearly the first part is understandable, being out of work long term is awful to the individual concerned and it does very little for their skills development, that much we can definitely understand. But the impact on productivity to the overall economy is even worse, because quite simply when folks re-enter the workforce, their skills at the companies expense need to be brought back to the level required. And by doing that, you impact on overall productivity. Sound familiar? You betcha! OK, but the second part, the questions that Ben Bernanke asks, and then concludes that weakness in aggregate demand is to blame. OK, what is aggregate demand?

Definition time, from Investopedia: “Aggregate demand is the demand for the gross domestic product (GDP) of a country, and is represented by this formula: Aggregate Demand (AD) = C + I + G + (X-M)
C = Consumers’ expenditures on goods and services. I = Investment spending by companies on capital goods. G = Government expenditures on publicly provided goods and services. X = Exports of goods and services. M = Imports of goods and services.” Also known as total spend of a country. So what the Fed plans to do then is continue to maintain their accommodative monetary policy stance, which should continue to lower the overall unemployment rate. Now the question is asked, why? Why should the Fed do this?

In the explanation, from the Feds pdf site: Monetary Policy and the Economy, “The Federal Reserve sets the nation’s monetary policy to promote the objectives of maximum employment, stable prices, and moderate long-term interest rates. The challenge for policy makers is that tensions among the goals can arise in the short run and that information about the economy becomes available only with a lag and may be imperfect.” So, quite simply, they will act with a mind to make sure that these factors are balanced. Seeing that rates are rock bottom and prices are stable, then it is best to act to promote maximum employment. Because that is in the interests of all Americans, which also includes the White House. So no, Bernanke might be a political appointment, but he accepts the job based on his own views and in his desire to be a civil servant. He could have stayed at Princeton and earned more. No really.

What Bernanke said was interesting. “And the unemployment rate in February was still roughly 3 percentage points above its average over the 20 years preceding the recession. Moreover, a significant portion of the improvement in the labor market has reflected a decline in layoffs rather than an increase in hiring.” See that, the twenty year long term average is around 5 percent, so there is loads of work for the Fed still to do, in order to get there!

OK, people will still shout that the US has kept an accommodative monetary policy, or simply been too loose. That is the choice that they took, better than the 1930′s choice. Let us search and look at those Bernanke graphs that were attached to the speech. First one, which I thought was very interesting, because as private payrolls start to improve (number 1 graph titled Change in Private Payroll Employment), so labour utilization drops (number 4 graph, titled Measures of Labor Utilization). But that is obvious.

And then the slides go on, let us look at the balance of the slides, in succession, all visual today:

OK, and now the picture that started the whole conversation. Long term unemployment and duration of unemployment. This graph makes for the most horrible looking at. Because the levelling off is one thing, but we are hoping for a decline at some stage. My spider sense intuition tells me that it is coming. And you can see that in graph 13, Probability of reemployment by Duration of Unemployment.

The jobs opening rate from the very last visual attached to the speech is starting to improve as the unemployment rate falls away.

I am now pretty sure that you have a complete information overload. Too much information and graphics, but that was intentional, this was the single biggest event from yesterday. And this made markets across the globe go completely bananas and buying giddy. And strangely, a whole lot more bullish than before.

Currencies and commodities corner. Dr. Copper is last at 385 US cents per pound. The gold price of course rocketed on the whiff of whatever it is that folks who trade the precious metal think that the Fed is going to do now. QE3 you know. I keep saying, they never built that ship. The gold price is last at 1689 Dollars per fine ounce. The platinum price is last at 1658 Dollars per fine ounce. The oil price is also higher at 107.26 Dollars per barrel. The Rand is firmer as Mr. Miyagi says that it is risk back on, 7.55 to the US Dollar, 12.06 to the Pound Sterling and 10.09 to the Euro. We are better today, our markets, but not as much as before, because there was a Spanish and Italian bond auction that seemingly did not go ahead in the same way as other expected. Sigh, who knows.

Parting shot. I have spoken about the human element often in markets and in business, the future innovation that people are creating today. And then this is confirmed when you look back in time at what has happened. Now I am referring specifically to a piece I found via Carpe Diem that points to a dramatic jump in fuel efficiency. “Adjusted for inflation, gasoline today is about the same price as in 1980 ($3.58 per gallon in February). However, adjusted for both inflation and increased fuel efficiency over time, the costs per mile driven were about 23 cents in 1980 compared to 16-17 cents per mile in February 2012, according to the EIA.” Find the original EIA article here -> Gasoline prices rise due to increased crude oil costs. So the motor vehicle industry has adapted to higher gasoline prices, and continues to innovate. You see, as humans we are better at innovating. Which means we are making progress.

Sasha Naryshkine and Byron Lotter

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by sashan

Another Nike slam dunk

March 23, 2012 in Uncategorized

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“The world economy in 1700 was 371 billion Dollars, in 1990 Dollars. India was 90 billion Dollars, 24.25 percent of all world GDP, whilst Chinas economy was 82 billion Dollars strong, 22.1 percent of global GDP. So, collectively 46 percent plus of global GDP back in 1700. So, all this is, this massive shift in economic growth is a return to the past. Rewind back to 1AD in the same Maddison model and India (32 percent) and China (25.5 percent) account for 57.6 percent of global growth. In 1700 where the USA contributed a paltry 0.14 percent to global GDP. How times have changed.”

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. Not helping matters following on from the Chinese “disappointment” was the fact that the Europeans weighed in with weaker PMI data across the zone, and from the two majors, France and Germany. French and German services PMI managed to keep their noses in front of 50, which indicates growth, but manufacturing PMI disappointed, just like the manufacturing data had disappointed earlier in the day from the worlds growth engine, China. From that point on the commodity stocks, which are in a sector that has looked vulnerable, sold off heavily. Paul recounted a day where BHP Billiton had fallen 8 percent in a single day back in 2004 or 2005, strange how we remember the price falling from 84 to 76 Rand (thereabouts), but not the exact date. The reason that they sold off back then was because Chinese growth was seen to be slowing. And Paul said, how many times over the last decade have we been anxious about Chinese growth slowing? At least once a year.

And all the while we continue to see growth ahead of expectations off an ever increasing base. So without dismissing the anxiety yesterday and earlier in the week, we all have several t-shirts associated with this slow down talk. The ultimate plan for the Chinese is to lift their economy to rival the poorer nations in the developed world (Portugal and the like) and there would be more focus placed on internal consumption. I don’t get too anxious about the day to day moves, I know we are all human, but perhaps we should just ignore the absolute levels. And pay more attention to the companies and their results slash prospects. After all, we own companies, not share prices? But ultimately we want those share prices to go up a lot more from the levels that we bought them at, and get rewarded by way of dividend pay outs. Yip, that is the end goal.

Byron’s beats looks at the large capital raising exercise announced by Shoprite yesterday. That caused the price to fall in a heap. But I guess that was expected.

The raising will be done through an issue of 27.1 million shares at a price of R127.50. This represents 5% of existing shares and looks to raise R3.5 billion. A further R4.5bn will be raised using convertible bonds which are also potentially dilutive. Like Sasha mentioned, the share price took a knock as it converged to the new (lower) issue price.

Here is the rationale from the company. “The net proceeds of the Transaction are intended to be used by Shoprite to strengthen and improve the structure and efficiency of its balance sheet, to enhance working capital management, to continue investment in organic growth initiatives and to selectively pursue acquisition opportunities.”

That is quite general but the speculations have started doing the rounds especially concerning the last part ‘acquisition opportunities’. Cashbuild has been thrown into the mix by a few reporters. It makes sense. Big rivals Massmart have Builders Warehouse while Spar own Build it. Shoprite do not have a building retailer and the Cashbuild consumer falls well within their target market.

To be honest though I think most of this capital will be used for organic growth. I’m not writing off an acquisition but after seeing interviews with Whitey Basson I get the sense that north of our borders is where the focus is. In countries like Nigeria, where Shoprite are exposed, there is a big lack of infrastructure and not many shopping malls. So unlike in South Africa where the company can just rent, Shoprite will have to build their stores. This will include parking lots, infrastructure, water, cooling, electricity and distribution. Although the base is very low in many of these countries the lack of infrastructure requires massive capital expenditure.

Shoprite are the biggest retailers in Africa with 250 stores in 15 countries outside of South Africa. We know Massmart are targeting this market aggressively with the backing of Walmart. For Shoprite not to lose market share they are going to have to be proactive. With the share price at over 24 times earnings maybe raising capital through equity is not such a bad idea after all.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. Slipping and sliding away on Wall Street, markets globally taking their cue from a weaker Chinese PMI number released from the HSBC guys. I also read a report which was kindly sent to me that suggested that the Chinese were going to look to manage higher commodity prices over time. Well, I thought, they should have thought about that before the price of iron ore went up tenfold over roughly a decade. If anything the great Chinese growth miracle has enabled mining companies to enjoy sustained periods of gains, which have led to them embarking on bigger projects to meet the pending demand. We had a throw away question, who was the biggest and strongest economy in the world in 1700? It was India and then China.

And as a percentage of the overall contribution to the global economy you will be pleasantly surprised. Angus Maddison, a famous economist was featured in the Economist, I remember, with some surprising graphics. The world economy in 1700, according to him, was 371 billion Dollars, in 1990 Dollars. India was 90 billion Dollars, 24.25 percent of all world GDP, whilst Chinas economy was 82 billion Dollars strong, 22.1 percent of global GDP. So, collectively 46 percent plus of global GDP back in 1700. So, all this is, this massive shift in economic growth is a return to the past. Rewind back to 1AD in the same Maddison model and India (32 percent) and China (25.5 percent) account for 57.6 percent of global growth. In fact, Asia (excluding Japan) as a whole accounted for 72 percent of global GDP. But remember that the USA were completely unimportant as far as economic prowess was concerned. Even in 1700 where the USA contributed a paltry 0.14 percent to global GDP. How times have changed.

Nike delivered their third quarter earnings after the race bell last evening. It was a beat which is all the street really seems to care about I guess, EPS for the quarter clocked 1.20 Dollars versus the streets estimates of around 1.17 Dollars. So a comfortable beat. As much as I care about whether they managed to do better than the analyst community thought they would, I also don’t get too excited about that specifically, the pitfalls of contracting quarteritis skew what you are trying to achieve. And what we as investors are trying to achieve is buying quality companies in a sector that we like. Nike happens to fall into an investing theme that we like, aspirational consumerism. Or soft luxury in this case, on the local front we like Richemont, which is at the other end of the spectrum.

Nike managed to grow revenues by 15 percent to 5.8 billion Dollars in Q3 when compared to the corresponding third quarter in 2011, 16 percent better on a currency neutral basis, in other words in same currency sales. Headline earnings increased 7 percent to 560 million Dollars, gross margins were squeezed lower by 200 basis points to a still healthy 43.8 percent. Mostly as a result of higher product costs. There were cost saving initiatives in the form of product cost reductions, whilst more online sales decreased costs too. I have no doubt that whilst many of us are comfortable to shop online, many of us have still yet to embrace the future yet. There was of course some shares purchased in the buy back program, 239 million Dollars was spent on buying back 2.5 million shares, well done guys, you got them below 100 bucks. Current price at last evenings close was 110.99 Dollars per share. Good going. Since the repurchase program was announced in 2008, the company has bought back 48.1 million shares for 3.9 billion Dollars. 1.1 billion left to go, I suspect another five quarters. And average price of around 81.08 Dollars per share, that sounds about right.

So, sales better, earnings better, margins the only weakness really. And down the line the product pipeline looks really good. The US still is the main part of their business accounting for 2.149 billion Dollars worth of sales, which was a healthy 17 percent increase in regional sales, driven by a 31 percent increase in equipment sales, but more importantly, a strong performance from the core of the group, the footwear (+15 percent) and ever growing apparel (19) divisions. Western Europe, as finished as it is, managed to clock a 4 percent increase in revenue, thanks to a 7 percent jump in footwear sales. Taking to the streets both protesting and getting rid of that frustration, beating the streets I guess. Greater China sales increased 25 percent, with a 35 percent increase in footwear sales driving the overall mix there. Even Japan managed to increase sales by three percent. Emerging markets, which I guess is us increased sales by a whopping 23 percent, much the same as China. Apparel in our segment, not so much in China where I guess you can get cheap clothes all of the time. That is completely Linsane! I mean, you need to find out, if you do not know already about Linsanity.

Take a look for yourself at this graphic that I hacked from their results pdf, which you can find at this link -> CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED FEBRUARY 29, 2012. The two things to look out for are increased footwear sales in China (Nike shoes!) and apparel in the developing markets, football shirts! Those are growing at breakneck speed. The first two measure the two corresponding quarters against each other, whilst the other two columns are the nine months of the financial year thus far.

Future orders, so that is stuff in the pipeline increased by 18 percent in home based currencies and 14 percent in Dollar terms. And take note of these decent results in a very ordinary year. A very ordinary year across the globe still managed to translate to their main division, footwear, growing revenue by 17 percent. I suspect that as we start to see a little more confidence return, the apparel division should continue to grow even stronger. And if Tiger should emerge from the drought Woods, then expect people to get excited about the golf club buying again. Golf, not for me. But I will beat the streets and kick a ball or two. We continue to accumulate the stock at current levels, even if 23 times earnings looks expensive, it is for a reason, the company is growing exceptionally fast in the poor times.

Currencies and commodities corner. Dr. Copper bounced a little yesterday, last at 3.81 US Dollars per pound. The gold price is last quoted on my screen at 1645 Dollars per fine ounce, the platinum price is below that at 1625 Dollars per fine ounce. The oil price, which took a drubbing yesterday, like the rest of the commodities complex, last traded at 105.82 Dollars per barrel, WTI as per quoted on NYMEX. The Rand is slightly firmer at 7.68 to the US Dollar, 12.19 to the Pound Sterling and 10.22 to the Euro. We have started better this morning, around one quarter of a percent higher.

Sasha Naryshkine and Byron Lotter

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by sashan

Chinese goulash

March 22, 2012 in Uncategorized

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“So the report shows a contraction in new export order, which is a change, but weirdly shows signs of employment growth, also a change. With input prices the same and output prices contracting, hey presto, the authorities can wait for the official release closer to the end of the month and make a decision from there. Although I will tell you something, the official report differs from the HSBC report, and there has been some divergence over the last few months. Whilst you might think, oh dear, this is another read under 50, the silver lining is that this is a four month high. And that perhaps accounts for the increase in employment, “things” might just be getting better, and not worse.”

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. We celebrated Human Rights Day yesterday, some said on the wireless this morning that the day should still be remembered as Sharpeville day. After the events that the day is associated with, those awful events that took place back in 1960. Hurting on Tuesday too was the BHP Billiton comments from their slide presentation in Perth, I showed you two of the slides that I thought were important, obviously slowing to only single digit growth in iron ore saw folks sell the sector hard on Tuesday, as a whole down nearly two and a half percent. In case you missed it -> BHP Billiton iron ore presentation spooks Mr. Market.

And that led to the rest of the market falling hard, because that is what tends to happen, our market still is a top heavy commodities market. The Jozi all share index closed down 0.98 percent on the day, a loss of 335 points to 33878. Eish, more not so good news in the form of Chinese flash PMI from the fellow over at HSBC this morning. At face value at least, but drill down a little further and you always get the real news. Because of the underperformance of the commodity stocks relative to the rest of the market, the swing from the commodity producers in importance has been somewhat diluted. In our market at least. Remember that BHP Billiton is underrepresented in our market, globally the market cap is around 180 billion Dollars. But here the market cap is only 509.5 billion Rand, it is not the two different listed entities, that would include the Sydney one. Whereas, the British American Tobacco market cap is fully accounted for here, 783 billion Rand, the weighting is not.

The service for all the weightings used to be free, but sadly is not anymore, the description of the constituent data on the JSE website is as follows: “This service provides subscribers with a file which contains information on all the index constituents, inter alia the constituent name, the ISIN and Exchange Code, the closing price, the total market capitalisation, the investable market capitalisation (the total market cap adjusted for free float), the number of shares in issue and the percentage weight of the constituent in the index”

The top ten companies by market cap on the JSE make up nearly 52 percent of the overall index. Meaning that the other 366 stocks listed on our exchange make up the balance, 48 percent of all the listed stocks weighting by market capitalisation. Taking that one step further, the top 20 stocks account for just over 68 percent of the overall JSE by market capitalisation. And the top 40 companies by market cap account for 81 percent of the overall index. So 336 companies below them collectively account for 19 percent of the value on our markets. And probably less by traded value, because of a tight ownership structure of smaller companies and low liquidity. Astonishing. So we should only talk about the same top companies, as boring as it is, because they constitute all the value. Imagine giving a third rate winger for a social club team the same time of day as Lionel Messi. Imagine.

Beijing central. 39^o 54′ 50″ N, 116^o 23′ 30″ E Flash saved everyone of us according to the guys at Queen who wrote the song for the movie, which was as far as I understand it, the only good thing about that movie. Talking Flash, the HSBC flash PMI for China was released this morning, and it disappointed. This number is by far and away the focus point today. Here it is sports (and food) lovers, the official HSBC Flash China Manufacturing PMI. Immediately when I saw this on my twitter stream earlier this morning I thought, right, time for the Chinese authorities to cut the triple R again, remember that they have done it once already this year. Without much fanfare at the time, I think that there was bigger news just then.

So the report shows a contraction in new export order, which is a change, but weirdly shows signs of employment growth, also a change. With input prices the same and output prices contracting, hey presto, the authorities can wait for the official release closer to the end of the month and make a decision from there. Although I will tell you something, the official report differs from the HSBC report, and there has been some divergence over the last few months. Whilst you might think, oh dear, this is another read under 50, the silver lining is that this is a four month high. And that perhaps accounts for the increase in employment, “things” might just be getting better, and not worse.

I love this blogger, Mark J. Perry and his blog, Carpe Diem. Perhaps because he is an optimist, but then again, as a collective we all are. Otherwise we would all still be sitting in the cave wondering what our next move is. Or not wondering in fact, just eating the same old stuff. This is his latest piece, titled World Trade and Output Set New Records in Jan. But what about hard landing in China, European recessionary concerns, all of that jazz? Well, take a look at the picture and you can see the heavy fall off in 2008 and 2009, but the bounce back now sees world trade volumes and world industrial output at an all time high. Now obviously we only compete with ourselves, as far as I know it, the aliens on Mars are very secretive about their industrial production data. Ditto the ones on Mercury, it is too hot to collect statistical data there.

But check out the graphic, courtesy of the good professor and his blog, which you should subscribe to -> CARPE DIEM – Professor Mark J. Perry’s Blog for Economics and Finance

His conclusion on the data: “Both world trade volume and world industrial output reached fresh record monthly high levels in January. Trade and output are now far above their pre-recession levels, providing evidence that the global economy has made a complete recovery from the 2008-2009 recession. For the U.S., the annual growth rates for exports (10%) and industrial output (3.5%) reflect the underlying strength in America’s manufacturing sector.”

Notwithstanding the few hiccups we have had in the commodities space so far this year, the talk on the screens is that we have moved from a space of fear to one where people are talking about the selling of fixed income in favour of equities. We are actually having that conversation. With intelligent people on the screen. But, that means that the people who are paid vast sums of money to manage err…. money, are emerging from the woods. And in desperate need of a wash and a good meal, the hiding perhaps is over.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. Oh dear, Jim Skinner the McDonald’s CEO has announced his retirement. He has been at the company basically all of his working career, four whole decades. At retirement, his last day at work will be 30 June 2012, he would have been running the company for seven and three quarters of a year. And who is going to supersize Jim? Well, none other than current Chief Operating Officer, Don Thompson, this is a classic McDonald’s move. Hey, don’t say that they are nothing other than predictable. Just like their burgers. Predictable.

Currencies and commodities corner. Dr. Copper last traded at 377 US cents per pound, the gold price is now higher than the platinum price, at 1636 and 1615 Dollars per fine ounce respectively. The oil price is lower, last at 105.74 Dollars per fine ounce. The Rand is weaker at 7.73 to the US Dollar, 12.21 to the Pound Sterling and 11.21 to the Euro. We have started much lower again here. Chinese anxieties.

Parting shot. I had a light bulb moment when chatting to my dad about the encyclopaedia Britannica crowd no longer printing the physical version. It was not to do with the quaint way of accessing information, but rather the world that is Wikipedia. Let me try and explain. Wiki is for free (provided you have an internet connection) and is moderated by a community for free. And if there are question marks about the content, then that is queried by the community. Only the pages that are open to vandalism are locked for editing by the community. Locked from the haters. Just don’t be haters yo! There are according to their own website 100 thousand regular contributors, people who watch the news and make it their mission to keep the content up to date. Which lead me in my conversation with my father to believe that these people give their time for free on a platform for free and are forming the most pure form of democracy on the planet. Did I get that right? Anyhow, if Wiki was a country, I would want to live there. Because it seems that there are no politicians.

Sasha Naryshkine and Byron Lotter

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by sashan

Apple. iBe having it!

March 20, 2012 in Uncategorized

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“To add to the excitement, the company announced that they had the very best “new iPad” launch ever, selling over three million on the first weekend alone, take that at one million per day, because the launch was Friday morning. The run rate last quarter on a daily basis was roughly 167 thousand unit a day, so iPad sales were six times hotter than usual over the weekend. And to think that the new tablet goes on sale in an additional 24 countries on Friday.”

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. We tried hard throughout the day and managed to close comfortably off the worst levels, but not quite enough to squeeze us into the black. If you want to use accounting terminology, I prefer green and red, that is the colour on the screen. The Jozi all share closed 8 points lower to 34214 points. 0.02 percent lower on the day. Banks were the hardest hit of the lot, down nearly a percent on the news that the regulator is going to be probing the unsecured lending space, with worries that it is growing too quickly. The analysis is expected to come sometime in the second half of the year. And specific reference is made to the big banks. Who is big and who is not?

This is very important, pay attention. This morning the fellows from BHP Billiton said that they thought that Chinese iron ore demand would drop to single digit growth, if it is not there already. This is as the Chinese economy continues to slow. Oh dear I hear you say, but wait, because in addition to their current consumption, expectations are that Chinese iron ore consumption will grow at 100 million tons per annum for the next eight years. And in addition to that 600 million more tons to satisfy growth expectations, as well as replacing around 200 million tons of current supply. So that sounds like over one and a half billion tons of iron ore needed in excess to the current supply. Wow. Just to put it into perspective, the chamber of mines website told a friend who told me that more steel is poured in one hour than all the gold ever poured. I am pretty sure that if you did the math you would come to the conclusion that perhaps gold ought to be priced higher, simply because of the rarity.

BHP continued to say that they expect their annual run rate to top the forecast 159 million tons, and to be closer to 165 to 170 million tons. Nice. They also expect a floor on iron ore prices of around 120 dollars per ton. Since November the spot price for iron ore has nearly clocked 150 dollars per ton, and traded as low as 130 dollars per ton. Back in August last year however the price traded at around 177 Dollars per ton, so we have seen a slide since then. So, the share prices of all the iron ore producers have taken a knock, but I think the bigger picture still remains intact. China will continue to grow, but not at the same pace as in the past. All this talk is interestingly taking place at the AJM Global Iron Ore & Steel Forecast Conference in Perth, Australia. The presentation, given by Iron Ore group President, Ian Ashby is available here -> BHP Billiton Iron Ore – Growth and Outlook.

The line about the long term outlook is what I am interested in: “Structural drivers of industrialisation and urbanisation in the developing world remain intact.” This chart is eye popping, it compares the US at various junctures with where the Chinese are now. It measures motor vehicle density in the US in 1916, during the first world war, and suggests that in China 2010, the density is the same. Let me get that right, the number of vehicles to population in the USA in 1916 is roughly the same as it is in China now. Wow.

Wow. This next slide however is the one that you have to see, before you get too anxious about all the headlines on the Iron Ore market that you no doubt are going to see today. The next graph is the one you have to see.

Errrr…. slowdown? Where do you see a hard landing? Not really. But I guess it is what it is.

PPC announced an acquisition yesterday of a crowd called Pronto Holdings. The acquisition was actually made back in November, but the competitions authority has given unconditional approval. The purchase price in total is not expected to exceed 400 million Rand, and is expected to be completed in two years times. The first tranche, 25 percent of the purchase price, based on a 5.6 times EBITDA less net debt comes to 70 million Rand. The second tranche of 25 percent will be paid next year and the next 50 percent will be paid in Feb 2014 as far as I understand it. In the official release, the PPC CEO says that this transaction would be value-adding for shareholders and customers of both parties. Both Pronto and PPC. All I can say is that deals happening normally come after the bottom. Or near the top. I am confident to say that we are passed the bottom, we kind of indicated that with much improved cement sales in the last quarter of last year.

Byron’s beats explores the South African informal building sector. And a stock that has done fabulously well.

Here was my analysis of the update

The results came in the middle of the range with headline earnings per share up 24%. This equated to income of 158 million from R5.6bn of revenue which had grown 9%. Per share earnings equated to 661c with 296c paid to share holders. Like I mentioned in the update, this puts the company at some very attractive valuations. If you annualise these earnings with a dividend cover of 2 (which I think is a realistic assumption) you get a forward PE of 9.2 and a dividend yield of 5.5%. This for a retailer is fantastic.

Let’s look at where the growth came from. “Stores in existence since the beginning of July 2010 (pre-existing stores – 185 stores) accounted for 8% of the increase in revenue with the remaining 1% increase due to the six new stores the group has opened since July 2010. Despite the competitive environment, gross profit percentage margin increased to 22.8% during this half-year and was higher in percentage terms than the 22.3% achieved for the comparative period of the prior year. Operational expenses for the half-year remained well controlled with existing stores accounting for 6% of the increase and new stores 1%. The main contributor to the increase on existing stores is the people cost component in order to maintain and improve customer service standards.”

So good management and cost cutting resulting in a company that is more efficient and profitable. And how do the prospects look? “Management remains positive about the top line trading prospects for the next quarter. The first nine trading weeks since period-end have reported an increase in revenue of 10% on that of the comparable nine weeks.”

I don’t want to sound repetitive because I did talk about the fundamentals behind this company in the update but I really do like the sector. This company has captured the core of the up and coming middle class in South Africa. They have situated their outlets in the right areas and got the pricing spot on. Your home and comfort is a priority and one of the first things you invest in when you get more economic freedom. Home improvement has become a South African pastime, like braaing. At these levels I would definitely be adding.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. It was basically all about the Apple announcement (actually from Cupertino, California) for the better part of the morning in the US. We listened into the conference call, but our bandwidth was poor and the call was not always reliable. But it was awesome nevertheless to hear the analysts asking Tim Cook (CEO) and Peter Oppenheimer (CFO) questions, and to hear them answered. We thought of submitting a typical analyst question, but it was both too late and we were talking about flow channels and blue sky in the kind of way that analysts think makes them sound so smart. So we just listened to the end, not for long and then we watched the share price. The share price in the after (pre) market had initially spiked on the news of the conference call, but then fell after the company announced that they expect to “spend” 45 billion Dollars in three years.

I think that spend is the wrong word here. Apple might be buying back shares to the tune of 10 billion Dollars, using shareholders cash, neutralizing employee equity grants and stock purchase programs for the same said employees, but the other 35 billion Dollars is expected to be used for dividends. Apple has announced that they will start with a not so modest 2.65 Dollars per quarter dividend. Sure, it sounds modest when you annualize that (10.60), and then work out the yield at the closing share price (601.1 Dollars, a record high), you get to a yield of 1.76 percent. Hardly a kings ransom, but to put it into context, when Cisco announced that they were paying a modest quarterly dividend of 6 cents per quarter, the annual yield was around 1.3 percent at the time.

So does this mean that the company is ex growth? Nope, what it does mean is that there was building pressure from stock holders for Apple to do something with their cash, and in this case it is their domestic cash of course. Domestic being US cash. Because their foreign cash cannot be brought back home to the US, without being taxed again. And Apple will continue to reinvest in their business rolling out retail stores, spending wild sums on R&D, building their own infrastructure and continuing to spend the necessary capex on their supply chain, Tim Cook explained. This was just another part of their cash redeployment, this time to the rightful owners, the stock holders. I know that some people think that the board are better placed to make decisions re the companies cash, but it has been shown that stock holders make better decisions. Why? Because naturally it is theirs.

The stock price initially took a tumble as soon as they became unsuspended in pre market trade, around 30 minutes before the opening bell, but in normal trade on the spot market the stock opened up and proceeded to close at the record high of 601 dollars and ten cents. Leaving you with a mind boggling 4718 percent return over exactly ten years. Err…. what is that measured in gold.

And to add to the excitement, the company announced that they had the very best “new iPad” launch ever, selling over three million on the first weekend alone, take that at one million per day, because the launch was Friday morning. The run rate last quarter on a daily basis was roughly 167 thousand units a day, so iPad sales were six times hotter than usual over the weekend. And to think that the new tablet goes on sale in an additional 24 countries on Friday. Don’t ask when it is coming here, I do not know. Ask the people at the Apple stores around the land, and you get the same answer, they do not know either. The launch everywhere is very secretive, it is the allure of the product that keeps them comfortably ahead of the pack.

So do you still buy the stock? Well, for what it is worth, the few analyst reports that I have seen suggest somewhere in the region of 43 Dollars worth of earnings in 2012 and nearly 51 Dollars worth of earnings in 2013. At 600 Dollars a share that suggests a forward multiple of less than 14 times and a historic multiple of 17 times earnings. Cheap? For a company that is growing so fast, definitely cheap. The two major risks for me are growing legal risk and regulatory concerns and the most important one to watch of course is increased competition. For the moment it is a Sergey Bubka type scenario. Who still holds both the indoor and outdoor polevault records, set in 1993 and 1994 respectively. Yes, vaulting to new highs, careful of the Olympics though. He won gold in 1988 in Seoul, but never again through to his retirement in 2001. We continue to buy the stock, but take note of the risks.

Currencies and commodities corner. Dr. Copper is last at 386 US cents per pound, the gold price is steady at 1654 Dollars per fine ounce. The platinum price is a little lower at 1670 Dollars per fine ounce. The oil price is also a touch lower at 107.45 Dollars per barrel. The Rand is weaker this morning, but I get the sense that all commodity prices and by extension our currency has been hanging around these levels. 7.58 to the US Dollar is where last the currency traded to the US Dollar, 10.02 to the Euro and 12.02 to the Pound Sterling. We have started worse today, no surprise that the commodity stocks are taking some heat.

Parting shot. I liked this a lot. I am not too sure what it means however. It is an article titled New Restaurant Index Suggests Improving Economy. Not here, but in the US. Because as the article implies, when people are feeling better about their earnings power they are more likely to go to formal restaurants and not informal ones. However, do you remember the McDonald’s same store sales in the US in February, it was a vastly better number than expected. So I would take it a step further and suggest that the whole sector is experiencing some uplift. But it makes sense. Things are getting better.

Sasha Naryshkine and Byron Lotter

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by sashan

Lucky Irish?

March 16, 2012 in Uncategorized

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“Too risky and volatile. In the capital markets division they use all sorts of fancy financial instruments which have the potential to go very wrong as we saw during the financial crisis. Banks can be good businesses if they stick to the old fashioned banking model but with such high cash reserves they get tempted into seeking higher returns.”

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. Slip sliding away, after initially starting better here in Joburg we continued lower through the day. All the major sectors except the banks ended in the red, the Jozi all share index slipped 0.6 percent or 211 points on the day to end at 34215. Perhaps Steve from {expletive} Bank has finally given up as client retentions officer, I hear ex Goldman Sachs employee Greg Smith is looking for a new job, Steve could be out. And in with Greg, he has serious experience and won’t treat his clients like muppets, that is in his old job. Oh, don’t be like that!

Poor Avusa, earnings per share are expected to be between 25 and 35 percent lower than the prior financial year. And these are results for the full year to end March, we still have two weeks to go and there is that kind of certainty. Headline earnings per share are expected to be between 35 and 45 percent lower than the comparative full year. Expect results in three months time, around June 21. OK, so what were the numbers last time and what should we expect the range to be this time? Well, EPS for the 12 months last year to March was 175.52 cents per share. So we should, in the middle of the range, expect around 122 cents per share. The share price was last at 2010 cents. But they made only 25 cents per share for the first half, so this seems like a big improvement, around a Rand worth of earnings for the second half. Perhaps not so poor Avusa then, they seem to be getting a grip. Not our favourite sector here at Vestact, and not a company that we would own. Sorry, got lots of friends who work there, but those are all different things.

Remgro released results for the six months to end December 2011 as the closing bell rang. Or the screens shut off for continuous trade into all sorts of trades that I don’t know well enough. After market trades and the like. I like the old Remgro model, possibly before all the restructuring when it was still called the Rembrandt Group. Where the “Rupert magic” would have been at work in the past. Is it not fair to say that all the focus, all that magic would be elsewhere, at least from the point of view of Johann Rupert. I suspect that he is more interested in Richemont and Reinet than Remgro. But that presumes that the current management at Remgro is not a dynamic bunch. I am more inclined to think that the Steinhoff management and the PSG management (who know each other well enough) have a proven deal making ability that has worked for shareholders over the last half a decade. Although having acquired a large Grindrod stake means that Remgro have not been quiet at all.

What do you get when you hold Remgro? Well, easy, check this out from their results release -> COMPOSITION OF INTRINSIC NET ASSET VALUE. The ones that I would want to own on that list, either listed or not are not many. My question is, should the share price then not trade at a discount to the intrinsic value? The short answer should be yes. For the half EPS clocked 767.5 cents per share, HEPS was 22 percent higher to 515.5 cents per share. The dividend was hiked to 126 cents.

There was a slide in the INTERIM RESULTS PRESENTATION that kind of answered my question, why should you own this one, pay the management handsomely and get an average return, when you could own the Satrix FINI and Satrix INDI? So, I compared the three. Over three years, in a life post BAT, when that was unbundled to shareholders. Why did I do this comparison? Well, check out slide four. Contributions from their industrial holdings in this half (excluding treasury and corporate costs) account for half of the overall earnings. And financials account for nearly 43 percent. Mining, actually only Impala Platinum, accounts for a mere 4.2 percent. So, how has Remgro done relative to the STXIND, Satrix Industrials and STXFIN, Satrix Financials? Well, Remgro over three years has beaten the STXFINI by 14 percent and underperformed the STXIND, the industrials by around twenty percent. So, I suppose about the same as the two combined. And that was the point I was trying to make. Do you own an index tracker and not worry about management execution, or do you say that the eating of the pudding should be a much longer affair. To be honest, not for me and us.

Byron’s beats looks at Investec.

“This is why we don’t invest in the stock. Too risky and volatile. In the capital markets division they use all sorts of fancy financial instruments which have the potential to go very wrong as we saw during the financial crisis. Banks can be good businesses if they stick to the old fashioned banking model but with such high cash reserves they get tempted into seeking higher returns. Remember that quest for instant gratification I spoke about?”

It’s been a tough period for Investec who found themselves at the heart of the financial crisis and are now being further regulated as a result. This is what they had to say about conditions in the sector.

“Volatile markets and low levels of activity have characterised the second half of the group`s 2012 financial year. While earnings from principal activities are expected to decrease substantially, the Specialist Banking businesses are expected to benefit from growth in both margin and fee income. The Asset Management and Wealth Management businesses continued to see net inflows and the proportion of revenues derived from the group`s non-lending activities has continued to grow.”

They are on an absolute tear to grow that asset management business where they see the future of the company. That makes sense, less regulation and good margins. The UK business seems to have grown slightly which is good to see while the South African business will be pretty much flat. The Australian business is going to make a loss, sponsoring the Super Rugby there is obviously not enough.

“While the pace of economic recovery varies across the world, and the regulatory environment remains challenging, the significant reshaping of the business that has taken place over the past few years ensures the group is well placed to benefit from any improvement in the level of economic activity.”

The company is certainly offering value and no one can doubt the Investec management team who have done so well in the past. I just think they operate in a very difficult sector at the moment. The asset management shift is a good call in my opinion but it is still an investment bank in a very tough environment. I would stay away from this whole industry.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. There was a decent enough jobless claims number, following up from better than anticipated retail sales earlier in the week and cemented by some manufacturing data from the New York area of all places. PPI was slightly lower than anticipated. All good I guess. The S&P 500 topped 1400 for the first time in an age whilst the share price of Apple topped 600 Dollars for the first time on the news that the “new” iPad sales are going well. Apparently it is not an iPad 3, but we knew this last week. The stock actually settled lower underperforming the rest of the market. I can tell you that there are many people anxious about the price of the stock, but in truth, the company trades on a historical multiple of 16.6 times earnings. For a titan of this size that is growing at an amazing click, that still looks cheap to me. Bearing in mind that you pay more for Oracle stock on an out and out valuations basis and not much more for Microsoft. OK, you do pay up over Microsoft, but at next set of annual numbers I would say that it would be not too different.

Cisco were rumoured to be buying a company called NDS Group for four billion Dollars, and this was confirmed yesterday -> Cisco Announces Intent to Acquire NDS. NDS are as per the press release: “a leading provider of video software and content security solutions that enable service providers and media companies to securely deliver and monetize new video entertainment experiences.” This is a private business that is 49 percent owned by Rupert Murdoch’s News Corp. Cisco say in the presentation that this acquisition “Deepens Cisco’s commitment to video as a foundational priority” Yip. AND, “Transforms how service providers and media companies securely deliver and monetize next generation video experiences”. Now, although costly, you can see what Google was thinking about YouTube. And the whole idea of more content being streamed. It seems costly, but it is supposed to be earnings accretive in the first half of 2012.

Currencies and commodities corner. Dr. Copper is last at 386 US cents per pound, the gold price is steady at 1657 Dollars per fine ounce. The platinum price is last at 1685 Dollars per fine ounce. The oil price, where is that trading, the whole Iranian affair seems to have quietened down a little. Afghanistan, well that seems like a very expensive exercise with little to show for it. Well, at least that is the impression that I get from the liberal types. The oil price is last at 105.46 Dollars per barrel. The Rand is steady to firmer at 7.62 to the US Dollar, 11.97 to the Pound Sterling and 10.01 to the Euro. Mr. Market is better this morning at the start, we are around half a percent better mid morning.

Sasha Naryshkine and Byron Lotter

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by sashan

Britannica used to rule the shelves

March 14, 2012 in Uncategorized

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“Would you rather have, extraordinary intervention from the central banks or do people actually want to see central banks sitting on their hands and blinking at the situation? Because if you needed a reminder of how that worked out, the Fed had neither the powers or the history to do anything back in 1929 and it took a whole three years before the US government did anything. Unemployment spiked to 25 percent and GDP contracted by one third. I am pretty sure that the bears and fiscal conservative types would prefer that approach, let the free market forces take care of themselves. That sort of approach does little for society now, creates civil unrest and sidelines the most vulnerable amongst us.”

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. We opened higher and hung onto those gains all day long, we had a pretty broad based rally. I have always wanted to say that, ha-ha! The gold stocks were under pressure with a firm Rand and a weaker bullion price. MTN after having a cracking start to the day faded, a bit like the Sri Lankan innings yesterday in the Asia Cup. We should have an ICC sanctioned Africa cup, where we are pitted against the mighty Zimbabwe, Kenya and Namibia. We can see who would come out tops, and perhaps we could win an ICC trophy. Yes, good idea. Also winning after all was said and done was the Jozi all share index, up 0,81 percent, or 273 points on the day to close at 34175.

EOH have reported numbers for the first half to end December this morning. Without a doubt this is one of the most amazing stories over the last decade across the market. The company has grown both organically and through acquisition without fail. To illustrate my point, revenue for the half clocked 1.642 billion ZAR, H1 2012. For the whole year back in 2007 the company had sales of 704 million Rand. For the whole year. Similarly profits have kept pace with the breakneck speed of increasing sales, increasing at an average pace of 32.5 percent per annum for the last half a decade. And, it comes as no surprise then that the market cap has kept pace, up from 650 odd million Rand at the end of 2007 to the current level of 2.879 billion ZAR. The share price is up an astonishing 350 percent over the last five years, last evening the stock closed at 30.85 ZAR. The figures do back it up though. HEPS increased by 31.8 percent 127.2 cents per share.

What does the company actually do? Well, nothing that they do sounds overly smart or hard, but we have it on good authority that this is a very smart management team, well regarded. Well, what do they do first, they are what we roughly referred to in years gone by as an IT company. Have you ever heard someone say, “ja, my cousin is in IT, (s)he will understand it”. My other favourite is when someone says “they know computers” as if the machines have some sort of secret understanding with folks in society that are, how should we say, of nerdier persuasion. Whatever “it” is, apparently EOH are the folks that get it. The company offers three core business solutions, consulting, technology offerings and outsourcing. So, if you need to upgrade your technology solutions, EOH can offer you a solution beginning to end and thereafter. Everything from anxiety over your internet security through to hosting, managed services, enterprise management to cloud services.

Their clients operate in various industries, through from the public sector to financial services. Their technology partners include IBM, SAP, CA, HP, Oracle, amongst some lesser known mainstream brands. Now you know who EOH are, and what it is that they do. They are in IT. The company does not have a particularly long corporate history, they listed in that whole boom of the late nineties, and I often say that the companies that managed to survive that subsequent wash out in the IT bubble bursting through 2001-2003, then you must have had some substance in the first place.

What is interesting is that the company continues to add smaller businesses which operate in the same space as their own, the total sales generated by the separate businesses that they bought, during the six month period, was 105.6 million delivering profits before tax of 11.2 million ZAR. So, roughly around 6 and a half percent of sales and profits through acquisitions, this is perhaps one of the few concerns that one has through this type of approach. The company have obviously seen this as part of their strategy in the past, the tricky part of course is the unknown factor, replicating corporate culture in their various new businesses.

Government business now represents around one quarter of their total sales, this has been boosted from around 15 percent, so that is where we have seen the growth. This is both good and bad. Good, because the client once in normally is a keeper, but some of the poor payment “challenges” that have been documented leave me a little lukewarm on that customer. I must be honest, as a citizen of both Gauteng and South Africa, I would much rather have EOH looking after more government business, than internally run businesses. For no other reason than I am a believer that private money allocates capital and resources infinitely better than public money, no matter where you go in the world. Because the accountability to private shareholders is immediate and real.

Is this a good investment though? The team are good, we said that. The company is small, they find themselves on the ranking tables with the likes of Cashbuild and Cipla Medpro, 137th place overall. Small, but making enormous progress. The stock for the first time now commands a slightly higher premium than in the past, meaning that there are more people who are paying attention and there are a different bunch of shareholders. The stock trades at roughly 31 ZAR, annualize these earnings at the same growth clip and you are looking at around twelve and a half times earnings. More than the less than ten in the past. Through this strategy of both organic and acquisitive growth, operating profit margins have been maintained. There is plenty that is compelling about this business, but one must appreciate the risks of the size and scale.

Byron’s beats looks at a company that I think should be an unlisted entity. But that is just my bias.

The company managed to grow revenues by 9% to R1.4bn. Headline earnings per share came in at 562c, 29% higher than last year. However following a R223 million impairment on software under development for the Systems Replacement Project (SRP) earnings per share only came in at 400c. For comparative purposes we will use headline earnings but we will deal with the impairment later because it does raise some concerns.

The company made 294c in the first half and 268c in the second half. This is no surprise as markets plummeted in August making the second half of the year very tough. Lower share prices means less value traded and less confidence in equity markets. Even though volatility was high (good for the exchange) it was not enough to counteract the lack of confidence. The share trades at R79.42 giving it a historic valuation of 14 and a dividend yield of 3.2% (R2.50 declared).

So what about operations. The performance of this company is very much dependant on global market conditions. Much of their commentary focuses on this going through last year’s crazy ups and downs. The impairment for me is an issue however because they have been working long and hard at changing their systems but that has not gone to plan. Here is what they have to say about it.

“The decision to impair SRP was taken after careful and detailed examination of the results of the software testing performed on SRP in the second half of 2011. That testing resulted in us deciding not to implement the SRP system as planned towards the end of 2011. Given the extended period over which the SRP has run and the challenges experienced with it which have resulted in the impairment discussed earlier, we are reviewing the project to ensure that it will still deliver the required benefits to the JSE and clients. Our existing systems continue to operate and are stable. We are not yet in a position to make a final decision on SRP but are working to that goal as quickly as we can. At that point we will communicate our decision to stakeholders.” Not much more I can say about it other than this is not a good outcome. The impairment was nearly 30% of earnings.

Looking forward the company is worried about local policies from regulators. This business runs a monopoly that services the rich in a country with a very high disparity issue, you can understand their concern. However they are positive about the future of the continent and South Africa as an investment destination. So am I, although I think it’s going to be quite a ride. The volatility if this stock will put many investors off. The long term fundamentals are there but I would be cautious until their new systems are successfully implemented.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. BOOM! Banks being not so stressed out, well not all of them, mostly lifted markets to multi year highs on Wall Street last evening. Plus also the Fed helped a little, well, more than a little, indicating that they would be ready to act if necessary, but indicating that “things” were improving on the ground. You can read the full statement here: Monetary Policy Release 13 March 2012. The Fed talks about the improving jobs outlook, the economy starting to look moderately better, who cares that there is going to be no more rounds of economic stimulus from the Fed. I said to the client in a long conversation, what, would you rather have, extraordinary intervention from the central banks (we were talking about the ECB specifically) or do people actually want to see central banks sitting on their hands and blinking at the situation.

Because if you needed a reminder of how that worked out, the Fed had neither the powers or the history to do anything back in 1929 and it took a whole three years before the US government did anything. Unemployment spiked to 25 percent and GDP contracted by one third. I am pretty sure that the bears and fiscal conservative types would prefer that approach, let the free market forces take care of themselves. That sort of approach does little for society now, creates civil unrest and sidelines the most vulnerable amongst us. I would like to think that we have evolved since the Great depression, and that our central banks need to act, as and when they see fit. And if that means that you are the lender of last resort, then so be it.

Time for all the armchair Fed chair folks to stop their shouting. Turns out that they have done a better job than anyone suspected. Jeff Lacker for better or worse continues to vote against the rest of the Fed voting members. For interesting reasons, he thinks that economic conditions do not warrant low rates through to 2014. Which must mean that he thinks either inflation is going to become a problem, or a stronger economic recovery is closer than his mates think. Either way, I have no doubt that the Fed will act accordingly, with perceptions of their lateness left to the peanut gallery.

The other major factor impacting on markets were the bank stress tests. And I can tell you that not everybody passed, which in the eyes of the bears and non-rally believers makes it more credible and less soft I guess. Financials rallied three percent on the good news, these bank stress test results were actually rushed to the market after it became apparent that there were some leaks. Not all the financials that rallied into the close managed to make the cut, Citi after surging during normal trade by over six percent, fell 3.2 percent after hours when getting the results that they had failed. Not an #epicfail, but hashtag fail nevertheless. Most US banks now have the correct buffers to withstand, in the words of the FT, the last crisis. And not any future ones.

And the same FT Lex column that I read suggests that returning capital to shareholders is a sign that banks do not operate in the same go-go landscape as yesteryear. Less leverage, lower margins, less asset-turn. Yip, lower ROE’s and not what they once were, I am not entirely convinced with the analysis, excess capital requirements on the part of JP Morgan (who announced a 15 billion Dollar buyback) would be used for special dividends, and not just increasing the ordinary ones. All I think that you have to know is that banks are in much better shape each and every day that we draw away from the last crisis. And there is no doubt in my mind that we head towards another one at some stage. After all, Jamie Dimon, JP Morgan Chase’s CEO purportedly replied to his daughter when asked the question: “What is a banking crisis”, with the answer, “it is something that happens every five, seven, ten years”. Of course when questioned why everyone is so surprised, by the same daughter, I would have loved to know the answer to that. Perhaps it was something along the lines that people have very short memories.

Currencies and commodities corner. Dr. Copper is slightly lower at 384 US cents per pound, the gold price is also lower at 1665 Dollars per fine ounce, whilst the platinum price is also lower at 1687 Dollars per fine ounce. But, in my opinion, much higher than the gold price is where the industrial metal should be trading. Some of the Zimbabwe overhang has been removed, although far from resolved, my question is simple. When Zimplats decides to ramp up production and needs the other shareholders to pay their way for capex, how is that going to work? Just asking. The Rand is slightly weaker to the Dollar which has been on an absolute tear. 7.56 to the US Dollar, 11.88 to the Pound Sterling and 9.89 to the Euro. We have started better here, thanks to the late second leg up to the rally last evening in New York!

Parting shot. More paying attention. Encyclopaedia Britannica are ending their print edition. Check this NYT blog post -> After 244 Years, Encyclopaedia Britannica Stops the Presses. No more sales people at the door, no more piles of outdated information, neither of which are relevant in the modern world. What is quite astonishing is that their annual sales peak was a mere 22 years ago, in 1990, in the US, where 120 thousand people were sold sets. And the majority of folks still no doubt have these lying around somewhere. Bookshelves, I am desperate to dispense with the majority of my bookshelves. Since I moved I have not put one back together for a reason.

From my point of view, I trust Wiki and the community to moderate effectively, so would you even buy or subscribe to this online information, which is available? I am talking about Britannica. Who say (this must be the denial phase) that both Google and Wiki have nothing to do with this decision, but rather that they sell digital products to lots of people. Thanks for that. Personally I would rather be a user of the “free” services, I have donated money to Wiki before when they request it, I trust their moderation service. I would rather the worldly view and masses edit history, than a bunch of editors themselves, who decide how and what angle history should take. Get my point, or not?

Sasha Naryshkine and Byron Lotter

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by sashan

Being a bull in Spain

March 13, 2012 in Uncategorized

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“My question to Paul was simple, when I went through the contract description, how many oil pit traders have ever been to Cushing, Ohio to see the delivery process? Or does that not really matter? I mean, as much as I would love to see Olympic Dam, or see Escondida, but I am unlikely to ever get there.”

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. Something huge happened yesterday. And nobody made a song and a dance about it, because it is part of their lives. Daylight saving is what I am talking about, we finally be having an extra hour of US trade, they opened at three thirty our time, instead of four thirty. That is possibly the only good thing about winter for the southern hemisphere market watchers, we get an extra hour from America and then an extra hour from Europe in two weeks Monday, or Sunday, whichever way you look at it. The last Sunday in March I guess is the last day of winter in Europe, although I am guessing that it is still more than a little cold there. But, the extra hour of trade that we get is exciting, even if trading is not really our “thing”.

Mr. Market unfortunately did not enjoy the same sunny faces as here at Vestact, we started poorly, managed to work our way much higher by midday, but proceeded to trickle lower in the afternoon. The Jozi all share index ended the session at 33902 points, a loss of 24 and a half points on the day, or 0.07 percent off on the day. Not an awful lot if you think about it.

MTN was a noticeable winner on the day amongst the bigger companies, adding nearly 0.9 percent and trading near the highest point of the year. But MTN still is underperforming the broader market which has gained just shy of six percent thus far. Sector wise the construction stocks have managed to be leaders of sorts, up just over 14 and a half percent. Retail stocks and financials have added just over 10 percent, banks just over 13 percent. Resource stocks are basically flat for the year. Gold stocks are the biggest losers, down over 10 and a half percent collectively this year. Less fear = less demand from a speculative point of view. I still buy the long term demand story for gold through higher jewellery consumption amongst a still rapidly growing middle class. But the other fundamentals of gold specifically, other than being linked to historical factors, I have no idea, sorry.

Byron’s beats deals with one of the main issues and anxieties from yesterday, Chinese data.

This is why many a commentator has seen such a deficit in a negative light. If China are importing more than they are exporting how are they going to maintain their growth and is global demand for their products slowing? There are many moving parts that affect this number. Firstly there is the issue of currency. The Yuan has been getting stronger which has influenced China’s advantage somewhat. This is not necessarily a bad thing for global growth however. It gives other manufacturing nations a chance to compete.

Average wages in China have also increased. Again this negatively affects China’s competitiveness but again this is not necessarily a negative allowing other nations to compete. On top of this it makes the Chinese consumer stronger. This I believe will be the next global growth phenomena as the Chinese shift from savings to consumption. Everyone loves to consume.

Yes, I do believe that some of this has to do with slowing demand from Europe but this is already known to investors and much of it is already factored into the market. Again this is going to take time but the world will be able to deal with it and cope.

Then we have the other side of the equation. The imports. These were really strong for the month which understandably had a big effect on the deficit. Interestingly these strong imports were as a result of large iron ore and copper shipments. The country is still expanding its infrastructure and the urbanization process still has a long way to go. This can only be seen as a positive, especially for a resource rich country like ours.

Other moving parts include the week long Chinese New Year which clearly would have slowed production. To conclude I wouldn’t be worried about this read, in fact there seems to be a fair amount of positives coming from it.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. Volumes were low and rubbish, meaning that whilst labour force participation is rising in America, equity market participation is still pretty low. Probably reflecting a reluctance on the part of the undecided folks to get involved at current levels. Perhaps they need some more convincing. I saw an interesting tweet that pretty much summed it all up: “Anecdotally, some of the strongest recoveries have been the ones that began with the most skepticism about their robustness.” As Paul said, he remembers in 2004 that various TV anchors on our favourite TV stations were sceptical about the same things, suggesting that the recovery that started in 2003 was not real. Ah well, all I know is that the companies that we like are in much better shape now that they ever were back then.

Session end the Dow managed to hang onto the session gains, clocking 37 points more at the end than where blue chips opened to close up shop at 12959. The broader market S&P 500 gained a paltry 0.02 percent to 1371, whilst the nerds of NASDAQ were the laggards, down 0.16 percent on the day to 2983. Where is my 3000? Still a long way away seemingly. Ironically the biggest draggers on the day were both energy and materials stocks, no doubt the weak looking Chinese data is having a big impact on the way that people moved yesterday. See Byron’s beats above.

There are some companies that are in industries we do not like. Industries that are champions of yesteryear and still struggling, but are in decline. According to us anyhow. This graphic and story was interesting, because it was linked to that one about declining advertising revenue in newspapers. This one however is the follow on, using LinkedIn slash US government research this was arrived at -> LinkedIn Industry Trends: Winners and Losers During the Great Recession. And the results are perhaps not as astonishing as you might possibly think: “The fastest-growing industries include renewables (+49.2%), internet (+24.6%), online publishing (+24.3%), and e-learning (+15.9%). Fastest-shrinking industries were newspapers (-28.4%), retail (-15.5%), building materials (-14.2%), and automotive (-12.8%).”

Renewable energy clearly has a strong future, understandably so too, whilst the pace of the internet jobs created is probably directly attributable to both shrinking jobs in the retail and newspaper sectors. It still amazes me that people want to start magazines. Start a website instead, the costs are much lower. Check out online publishing. All I can say is that you must pay attention and pick the correct industries to invest in.

Check out the falling newspaper subscriptions when you look at this at the bottom of this story, with that graphic that you saw last week: The Collapse of Print Advertising in 1 Graph. I was amazed that the WSJ had more subscribers than the Washington Post and the New York Times put together. And I think a lot of credit must go to Rupert Murdoch for having engineered the pay wall at the WSJ. In fact, according to Wiki they are 300 thousand subscriptions ahead of their next rival, USA Today. With 400,000 online paying subscribers (count us in on that figure) the trick will be to get those 1.7 million online. I have an idea, make the online subscription cheaper. By around ten percent. That should tip some hard copy subscribers to the online version. I like the smell and feel of the internet, it never tears, gets lost or blows away. And I don’t have to dispose of it when I am finished with it.

Currencies and commodities corner. Dr. Copper is last at 387 US cents per pound, he gold price is last at 1699 Dollars per fine ounce. The platinum price is breathing down its neck, last at 1689 Dollars per fine ounce. The oil price, the one that we watch closely, WTI Light Sweet Crude oil is last at 107.06 Dollars per barrel. That is the April 2012 contract. The contract specifications as per the CME group website is as follows -> Light Sweet Crude Oil Futures description.

My question to Paul was simple, when I went through the contract description, how many oil pit traders have ever been to Cushing, Ohio to see the delivery process? Or does that not really matter? I mean, as much as I would love to see Olympic Dam, or see Escondida, but I am unlikely to ever get there. No really. Kind of when a school friend and I came to the conclusion at university (I do not know why it never hit us quicker) as 19 year olds that we were never going to play cricket for our country. That moment sadly. On the percentages of things possible, I am guessing that the Olympic Dam and Escondida site visits are closer than the cricket thing.

But my question is valid, as a pit trader of oil servicing all your clients, does it matter that you might never visit the transfer of the final product? Yes or no, I would be interested to know your view. Ultimately almost all human beings on the planet are impacted by the movement in the oil price. New Guinea and in some South American forests there are known societies of un-contacted peoples. Or isolated tribes. Perhaps they have a great time. I am guessing they care less about the oil price and it does not impact on them.

The Rand is firmer at 7.52 to the US Dollar, 11.77 to the Pound Sterling and 9.91 to the Euro. And all the anxiety has now spread to having a look at Spanish spending cuts and how they are not meeting their deficit targets. Who cares really? Seemingly there must be something to be anxious about today, so Spain and their missing of deficit targets it is. Markets are higher at the start here.

Sasha Naryshkine and Byron Lotter

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