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by sashan

Nike cramps up!

June 29, 2012 in Uncategorized

“In other words, the Italians were stonewalling the Germans (on the field too) on their growth plan, until the idea of heading in the direction of a banking union. First, banking union, then, a non austerity growth path, and then Euro bonds maybe, unlikely though.”

Jozi, Jozi. 26o 12′ 16″ S, 28o 2′ 44″ E. We were slammed yesterday, there was little place to hide really, resource stocks once again weighed heavily on the overall index (the Jozi all share ended down 496 points to 33253), but the scoreboard also revealed that banks had taken a particularly hard knock. Down over two and one third of a percent on the day, it was pretty awful. The reasons around that? Well, Barclays got fined heavily (451 million Dollars) by both the UK and US authorities, and took a pasting in the British parliament (hear, hear!). All the other banks in the UK were hammered too. In addition to that, the JP Morgan scandal over losses associated with (poor) hedges associated with derivatives positions, has just gotten a whole lot bigger than the 2 billion Dollars that we were led to believe. Losses are expected to be larger than that, perhaps as much as 9 billion Dollars, but the current guesstimate is about 6 billion Dollars. Which is a large sum of money.

Again, there are calls for the heads of both Jamie Dimon and Bob Diamond, and someone needs to take the blame. Did you see the email trail from the Libor dealers involved in the manipulation? The whole “Big boy” line kills me really, that is crazy. Big banks are clearly under pressure globally, and shareholders in the US are starting to get vocal too, suggesting that full value would be revealed if there was a breakup of the institutions, that would serve everyone better is the thinking. Smaller and more nimble institutions, and government would be less worried about the whole idea of having to backstop banks. Although, the savings and loans crisis of around two decades ago, when roughly one in four “building societies” failed in the US. And when we are talking one in four, we are talking about 747 out of 3234 institutions, so smaller and more choices is not always better. And this crisis was directly linked to the real estate market falling over, the same as the last crisis. The solution? I do not think that there is one, but the notion that the gains in banking are privatised and the losses socialised, I am not quite sure that holds true. Ask the equity holders of Bank of America before and after TARP. They will tell you otherwise.

Telling us otherwise overnight were the keepers to the keys to Europe and their Euro project, which we have always maintained is just fine and intact. Sure there is a serious crisis in Europe, but that should help speed up the process of full integration. We sort of went a step closer last evening, and perhaps there was a sense from the Germans that too much austerity is not exactly helping in the short term. Maybe the thought was that there was nothing that was going to come out of the summit, and the fact that we got something is helping markets and European periphery yields this morning. And the Euro too. So what actually came out of this summit? Well the thought was that the money loaned to Spain, to then loan to their banks, would assume seniority to existing Spanish debt, well that notion has been set aside, because the funds are going directly to Spanish banks. The ESM is then the go to institution for capitalising European banks. And there would be a European banking supervisor, rather than each country having one. Good. Sounds like progress to me.

This came through from the official release on the European website: “But not only we have taken this very important decision on the euro area level but also there are other measures that are now possible in terms of short term stabilization for some countries that are now feeling special pressure and there is concrete reference here to the case of Spain. A memorandum of understanding that we hope that will be now concluded as a matter of urgency for the financial support for the recapitalization of the Spanish banking sector with an important decision that is that when the ESM becomes available, this financial assistance that is now going to be provided by the EFSF will be transferred to the ESM, without gaining seniority status. This was in fact one of the main points in terms of market confidence in this operation and also some other decisions that are possible for other countries that are fully complying with the country specific recommendations and also the European Semester, the Stability and Growth Pact and the Macroeconomic Imbalances Procedure.”

Wow, loads of talk, but one gets the sense that they are getting things done slowly. After all, this is the 19th such meeting in 24 months, my wise crack was that they only need another 8 to go before they have reached the full 27. BUT, also giving us a big boost is an agreement around growth, 120 billion Euro package to create growth, which was not given the thumbs up until the short term issues were dealt with. In other words, the Italians were stonewalling the Germans (on the field too) on their growth plan, until the idea of heading in the direction of a banking union. First, banking union, then, a non austerity growth path, and then Euro bonds maybe, unlikely though.

Or maybe, never Euro bonds, who knows. Paul made a good point this morning suggesting that in time Europe could look like not so Great Britain, where the regions maintain their loyalty to a specific sporting team and heritage, but share the same economy. That would be the direction we are heading. Perhaps more an American type model. We will surely find out, but this seems a lot to me like heading towards MORE integration and not a falling or splitting apart of the zone. Take note once again, that whilst the process may seem slow and laborious, the Europeans get what needs to be done, well….. done eventually. Oh, and there was the small matter of super Mario Balotelli getting super Mario Monti to smile, and Angela Merkel to concede that they were not the better side on the day.

New York, New York. 40o 43′ 0″ N, 74o 0′ 0″ W. At face value it looked like a poor day for the markets, but the last hour saw a surge of over a percent. The Dow Jones and S&P 500 ended the session off around one fifth of a percent, down a percent and a third at one stage. The nerds of NASDAQ which were down two percent with an hour and a half to go, closed down 0.9 percent. So whilst it was a poor, horrible, no good day, it could have been a whole lot worse.

Byron’s beats covers one of our stocks that reported afterhours, and I am sorry to say that the news is not that good.

    They really are brutal when it comes to earnings misses in the US. They don’t have a trading update system like we do here but I guess they do release results quarterly compared to our 6 month releases. But any surprise normally brings big share price movements be it up or down. After hours yesterday Nike released Q4 results which actually looked good but missed expectations. The stock was down 12% in after market trade. Ouch. Let’s delve into the numbers.

    For the quarter, revenues were up 12% to $6.5bn, the biggest quarter in Nikes history. Earnings per share were down 6% from last quarter to $1.17. Expectations were for $1.37, this is why the share has dropped so much. We will deal with the reasons later. For the fiscal year, revenues came in at $24.1bn while earnings for the year equated to $4.73. That puts Nike on a high historic valuation of around 20. Gross margins for the year declined 150 basis points to a still very healthy 42.8%.

    So why did we have this earnings miss? It looks like most of the criticism came from margins being crimped. I feel like I have seen this before. Last year the Amazon share price plummeted when margins were cramped because the company was looking further ahead than just quarterly results and were investing heavily. The Amazon price is now well above those levels.

    The same thing has happened at Nike. This has been a big year for sporting events with the Euro football and the Olympics. This requires huge marketing costs. Demand creation expenses increased 23% to $760 million driven by these marketing requirements. Unfortunately neither Spain nor Italy are sponsored by Nike. Regardless, these expenses will take effect this last fiscal year but the sales will be felt in the following year.

    There was also a slowdown in China for the quarter but still an 18% growth in the region for the year. Again, a clear indication that this last quarter was tough for everyone. On top of these issues Nike have had a big year in terms of innovation which of course requires capital expenditure. This includes new apparel, footwear and tech offerings. All this new apparel has also resulted in a big inventory expansion which also hampers margins.

    In terms of prospects this from their release. “Fiscal year 2012 demonstrated NIKE, Inc.s greatest strength – innovation. We delivered an amazing number of game-changing products and services that drove record revenue growth,” said Mark Parker, President and CEO, NIKE, Inc. “We also delivered solid profit growth for the year despite some headwinds in a challenging global economy, which will continue into the next year. That said, NIKE is well positioned to remain aggressive, flexible and laser-focused on the high-growth opportunities. That’s how we continue to deliver long-term profitable growth for our shareholders.”

    We continue to like the theme and the company who are at the forefront of sport apparel. Sport gets bigger and bigger as it satisfies our natural competitive instincts while we try and embrace a healthier lifestyle. This is true for developing markets too. We will use this drop in share price as a big buying opportunity.

Some fellow on the box made me laugh, but it really was no laughing matter. When asked how the future looked for Research in Motion, he said “it is grim”. Without skipping a beat, but he was right, the future for RIM looks pretty bleak. Last night the maker of the iconic Blackberry announced that they were cutting 5000 jobs and that they had made a loss. And that they were delaying the release of the Blackberry 10. 30 percent of the workforce are going to be without a job and the new phone that was supposed to rival all the cool models we see now is not going to happen in the foreseeable future.

Ahhh, nuts. As of close of business last evening, RIMM had a market cap of 4.8 billion Dollars. Minus fifteen percent in the aftermarket (down -15.12 percent actually to 7.75 Dollars), the stock is getting crushed, that comes to just more than 4 billion Dollars market cap. And that puts the Microsoft purchase of Yammer into perspective, just a few days ago, of 1.2 billion Dollars. No buyers here yet. I feel sorry for the stockholders, sorry for the employees, I guess the consumer just found a more awesome phone, from Samsung and Apple. Nokia staffers know their pain. So where does this all end up? Perhaps like Palm, someone will eventually pony up some money to buy parts. Time to get a new phone? I think not yet.

Currencies and commodities corner. Dr. Copper is last at 342 US cents per pound, higher than yesterday, that is for sure. The gold price is also higher at 1569 Dollars per fine ounce, the platinum price has also joined in the rally, up at 1408 Dollars per fine ounce. The oil price is also higher at 79.89 Dollars per barrel. The Rand is much stronger as it is risk on folks, the Europeans have saved the day. Again. Well, Buffon saved Italy, and at least the Europeans were not buffoons. The Rand is last at 8.25 to the US Dollar, 12.87 to the Pound Sterling and 10.39 to the Euro. Perhaps we would be better today than Europe is, if it were not for the strengthening Rand. But, the firmer Rand is good for all of us, or most of us I guess.

Sasha Naryshkine and Byron Lotter

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by sashan

Google goggles, iPhone turns 5!

June 28, 2012 in Uncategorized

“Since the iPhone release, the major competitor at the time, RIM, has seen its share price down 83.85 percent, Nokia down 92.11 percent. Whereas the Apple share price is up 367 percent. The markets have voted with their feet.”

Jozi, Jozi. 26o 12′ 16″ S, 28o 2′ 44″ E. We were slipping gears yesterday as the commodities complex continued to take the pain, heaviest hit were some of the single commodity stocks, Kumba Iron Ore which was down over four percent, and then the gold miners collectively lost two percent. The gold miners are down 21 percent over the last five and a quarter years, whereas the Rand gold price is up 165 percent over the same time frame. There is something sadly very wrong with that for our local gold miners, costs rising and ore bodies a shadow of their former glory days are largely to blame. So, in short there is not so much gold in those hills. Over the last five years, the gold stocks are off two and a half percent, relative to an all share index that has added nearly twenty percent, and dare I say it, the yields on the all share is probably a lot better than on the gold stocks. The platinum stocks are worse, much worse, over a five year period the stocks are down a whopping 51 and a half percent. Perhaps the time is close, but Aquarius have indicated that it is still very tough out there.

Byron’s beats has a look at an update from one of our recommended stocks, Sasol.

    This morning Sasol released a very long and detailed update for the 9 months ended 31 March. Here it is if you would like to read it otherwise I’ll give you a summary. Basically it covered 4 points, 1. Overall macro-economics supports group profitability, 2. Improved operational performance, 3. Financial performance 4. Project updates. Lets look at the highlights and some important points that stand out.

    As I said in my piece a few days ago (Sasol, the Rand and the oil price) Sasol earnings are heavily influenced by changes in the rand and the oil price. This release first looks at the macro issues which affect the moves of these prices and then looks at the stuff which Sasol can control, production.

    They mention, and this is immediately factored into the share price, that the oil price has improved over the year of operation and that the rand has weakened on average. These variables resulted in a 31% rise in average domestic fuel prices and should boost Sasol’s earnings strongly. Other than that concerning macro issues, they talk about issues in Europe and the US, which had a negative impact on the chemicals business.

    In terms of production the Synfuels division recovered nicely after some plant incidents which halted production in the first half of the year. They also plan to be 60% self sufficient in terms of electricity generation by next year. That is very exciting and once they become 100% self sufficient it will completely mitigate all electricity hikes that most companies have to deal with. I know I’m stating the obvious but it needs to be repeated.

    The Oryx GTL plant continues to break production records as it maintains an 80% utilization rate. This is important to note because the success of this project has big implications for further GTL expansion. On that note the recent shale gas assets they purchased in Canada are under pressure because of low gas prices. This has resulted in a loss for the year to date. At this stage they are just drilling gas but we think the future lies with a GTL plant in that region. In that case cheaper gas is better.

    Financially the company is sound. They say it better than I can. “Healthy cash generation for the nine months ended 31 March
    2012 reduced group debt after funding significant capital expenditure, allowing the group to maintain a strong balance sheet. Our strong balance sheet supports the funding of our capital growth programme, potential acquisition opportunities as well as our progressive dividend policy whilst providing a buffer against volatility and retaining flexibility in uncertain credit markets where the cost of funding has increased. We continue to focus on strengthening working capital management and monitoring credit exposure and counterparty risks.”

    All in all things are looking good at Sasol. Last year the company made R33.85 a share. Although there are some losses, with better production and a higher price received in the synfuels division earning will grow. At R345 a share the company looks very cheap and I would expect a very healthy dividend. We will carry on buying into this weakness.

New York, New York. 40o 43′ 0″ N, 74o 0′ 0″ W. Durable goods order for the month of May beat expectations, I guess that was encouraging and in fact helped the early buying. After two consecutive months of durable goods falling, it was pleasing to see a reversal in the trend, although the commentary that I read suggested that this momentum is likely to be short lived. Darn those haters. I guess the argument that the Chinese are slowing their exports (because the demand side is not completely clear right now) and European growth is nonexistent, then perhaps this will hold true. BUT, of course local manufacturers (in China) tapping a new market in the form of internal consumption might be telling a different story. Jim O’Neill keeps on drumming this into us, whenever he is asked the question about China slowing. His simple response is to say that the shift to internal consumption is happening, and this is a good thing for the rest of the globe.

The other real big driver and economic release for the US markets last evening was the release of pending home sales which blew away expectations, clocking a 5.9 percent increase when expectations were for a one percent increase. And we all know how much emphasis is placed on the US housing markets, this was a good catalyst for stocks. The broader market S&P 500 added 0.9 percent to close at 1331, a gain of nearly 12 points. The Dow added 92 to close at 12627 points, whilst the nerds of NASDAQ added exactly the same percentage wise as blue chips, 0.74 percent to end at 2875.

We have been discussing a stock in the office here, because we believe that if a company can crack the code to obesity, then sales of that specific company are going to fly. And that is exactly what happened last evening after a VERY LONG wait, check out the release directly from the horses mouth: FDA approves Belviq to treat some overweight or obese adults. Arena, a Swiss based business, that is listed in the US, flew up 28.7 percent on the announcement. You must know that the company is still not profitable. And the results, whilst good, are not mind blowing. Hey, this is a good start.

Perhaps the biggest corporate news of the day, no, let me rephrase, the most exciting corporate news of the day was the unveiling of the Nexus 7 tablet by Google. And at the same time two other pieces of hardware designed by Google, which must be making the old hardware producers quake in their boots. There is something called a Nexus Q, which is a home entertainment system of sorts and then perhaps the most out there product, Google Glass, you must have seen the prototype in previous messages. The glasses with an embedded computer display, which enables you to find stuff on the fly, and do all the wonderful things that tech geeks would want. Google added around four fifths of a percent, Mr. Market liked the news clearly.

Check out the reviews, here is a good one: Google Nexus 7. By the same crowd, a less flattering review of Google Nexus Q, but this could be because of the price tag, as the review points out, it is made in the USA. The last one is perhaps the most exciting, I try the Google glasses. Sort of. Awesome applications for people on the move I guess, not so much for the folks who are desk bound. I am not too sure that I would be jumping to get the glasses, but I think that they are an awesome innovation.

I am not too sure that the Google announcement was supposed to coincide with the Apple iPhone celebrating their 5th birthday yesterday. 150 billion Dollars worth of collective sales since 2007 and 250 million of them shipped over that time is nothing short of amazing. The app store will celebrate their fourth birthday next month. The iPhone 4S was released in October last year, and was a resounding success. I have seen various analysts stick a 1000 Dollar plus price on the stock. I see that most analysts still have a conviction buy on the stock, the next quarterly numbers will be a catalyst for the stock to move higher (or lower), it has had a cracking year so far, 41 percent higher, but is lower over the last three months.

The Business Insider had a really nice chart of the selling price of the device over the last five years: One Of The Most Amazing Things About The iPhone’s First Five Years. That last point is key, if Apple were losing any share, they would cut their prices. For the time being this is not happening, but I suspect that this is a company that you have to watch more closely than most. Since the iPhone release, the major competitor at the time, RIM, has seen its share price down 83.85 percent, Nokia down 92.11 percent. Whereas the Apple share price is up 367 percent. The markets have voted with their feet.

Currencies and commodities corner. Dr. Copper last traded at 335 US cents per pound, the gold price is lower at 1570 Dollars per fine ounce, whilst the platinum price has also gone lower to 1404 Dollars per fine ounce. The oil price is lower at 79.89 Dollars for WTI Nymex, 92.74 for Brent Crude oil. The Rand is weaker as Mr. Risk off steamrolls Mr. Markets house, 8.42 to the US Dollar, 13.10 to the Pound Sterling and 10.47 to the Euro. We are lower here today at the get go, Euro anxiety makes for a change. Or not.

Parting shot. Today is being touted as the make or break for Europe. The days when after the 19th such meeting in 24 months that they must deliver something more concrete. Not that everyone is hopeful of anything actually happening, because Angela Merkel has thrown down the gauntlet already, by saying that there are to be no Euro Bonds in her lifetime. Politicians obviously make those kind of statements to emphasise a point, Merkel turns 58 this year later, average life expectancy for woman in Germany are per this Wiki table List of countries by life expectancy is 82.1 years. So, on that basis we should see Euro bonds somewhere around late 2036. But the news today that is sending the Euro lower suggests that we will see less than nothing at this summit. So much for the one that was critical and was supposed to change everything. Sigh.

Sasha Naryshkine and Byron Lotter

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by sashan

Naspers needs a name change, but nothing else

June 27, 2012 in Uncategorized

“Indians consume only 12 eight-ounce bottles of Coke per year whilst in Brazil they consume 240 on average. The average globally is 90 bottles so India is clearly coming off a very low base.”

Jozi, Jozi. 26o 12′ 16″ S, 28o 2′ 44″ E. We managed to eke out a small gain on the day, the Jozi all share added just shy of 30 points to close up shop at 33851, an improvement of just 0.09 percent. But, as I have gotten to know over the years, that is a better outcome than giving those points back. Banks were absolutely smothered, those losses largely laid at ABSA’s doorstep, the stock closed the day down 8.3 percent, and the stock traded over four times its average daily volumes, there must have been some stressed out folks there yesterday who were in short term positions. I think I heard Bruce Whitfield say on his show that this was the worst price action for the stock in decades. Yip, volatility in the big caps is not something that we are used to, whereas the Americans are usually ruthless when it comes to these things. The Americans are not scared to sell big cap stocks off aggressively, but the same applies on the other side of the equation, happy to buy too if the news beats expectations.

Resources for once held it all together for us here, up half a percent on the day, the Euro noise around their pow wow still knocks around, still with mixed messages. In the US I read that some are calling an end to house prices falling, after a recent Case-Shiller release, this is good news, because in the age old(e) British saying, a (wo)mans house is his(her) castle. I think that single asset for most people is most important. Perhaps it is because I have moved often, but home is a place to live with your family. Just me. If you want to read more about this subject, housing in the US, this is an awesome middle of the road view: Real House Prices and Price-to-Rent Ratio.

I am not going to let ABSA off so lightly, I had a great interaction with a client and friend, in which the conclusion was that Barclays extraction of cash has been a little reckless to say the least. I know that Barclays have been demanding their pound of flesh. That always sounds icky, pound of flesh. This friend of mine suggested that one of the top analysts that he had chatted to said that Barclays are squarely to blame for this, as ABSA have been carrying the lowest provisions of their peer group, particularly so for the last three years. So I guess you normally get what should come to you for poor business decisions, and in this case the Barclays stake is worth over eight percent less than at the beginning of trade when we opened up yesterday.

BHP Billiton has released a presentation about their base metals business this morning, it always makes for interesting “looking” and reading -> Building momentum in Base Metals. There are always a couple of slides that catch your attention, this one in particular is a goodie, what it shows is resource usage in countries as their GDP per capita rises and they head towards developed country status. The slide is titled: Demand evolves with economic development

The point that the base metals division is trying to make is that they are more likely to be in the sweet spot later, with oil, uranium and in particular potash going to be more important as China evolves towards developed status. The example often used is close neighbour South Korea, who transitioned from developing to developed status over the last 60 years. I was interested in their copper assets part of their presentation, but it is nothing new. What I was particularly interested towards the end of the presentation was the Chile slide about costs and labour. Sounds very familiar, check out the key points on labour:

    “Availability of qualified labour for both operations and projects is a key challenge
    Productivity is lower in Chile compared to other mining jurisdictions”

When BHP Billiton say other jurisdictions here, they are referring to their other base metals projects. But then they say something about costs, which makes you sit up and take notice:

    “Increased mining and reconstruction activity has tightened the supply of key raw materials
    Our competitive position on the cost curve is important in this environment”

So what that means is that if commodity prices stay here, then at least they have the best quality assets. But that is always what Marius Kloppers says in his Nataniel type voice, about the BHP Billiton assets being Tier one. I do a decent impersonation of Marius and perhaps Nataniel as well. Comfortable? Yes, we are using the lower prices to continue to add.

Righto, Naspers have reported their full year numbers for the full year to end March 2012 this morning. This business is essentially four parts, first the pay TV part, which is DSTv across the continent with the larger home base here. Then there is the internet segment which is the fastest growing and most misunderstood part, which consists of stakes in TenCent, Mail.ru and various e-commerce businesses that are the biggest revenue generators (for that segment). The print media might be a smaller contributor than the two mentioned above and is essentially the old part of their business. The split inside of this segment consist of Media24, Abril (their Brazilian print media business) and MIH Print, which I suspect includes Jonathan Ball Publishers and Paarl Media.

And then there is a smaller part of their business, the smallest, “technology”, which is a business known as irdeto, which is headquartered in Amsterdam and Beijing and as per the Naspers website “is a global software security and media technology company trusted by the world’s leading content owners and distributors and device manufacturers to enable new forms of broadcast, broadband and mobile entertainment.”

Most of the highlights I am going to base on the presentation, which you can download here to have a look at the same material -> Naspers Financial results presentation. Revenue for the group for the full year increased by 19 percent to 39.5 billion Rand, driven by a 15 percent increase in the pay TV segment and a 59 percent jump in the internet businesses. Print media managed to grow overall revenues by 12 percent. Core HEPS (their key metric) increased 15 percent to 18.50 ZAR per share. The dividend jumped a healthy 24 percent, but is still only at 335 cents after this jump. Whilst this business is in ramp up mode, expect the dividend flow to be modest relative to the share price. EBITDA was down a disappointing 3 percent to 7 billion Rand, the biggest drop being in the SSA segment inside of pay TV, that was down 12 percent, currency related is my best guess, will get to that later. But the main reason given for the overall number being lower in the presentation was “impact of expensing growth initiatives”. Consolidated development costs clocked 2.8 billion Rand in the 2012 financial year and that is comfortably ahead of the 1.5 billion Rand for the 2011 year.

Here is a rather “nice” graphic to visualise the opening two paragraphs, this is the segment that explains the e-commerce side of their business. Here goes, all the brands and names that you might or might not know:

And then there is the explanation of why EBIDTA was lower than the prior period, they expensed much higher development projects, associated with their e-commerce businesses, which you can see are plentiful. The last two half year periods, H1 2012 and H2 2012 were the highest development spend as percentage of spend in the last five years. Koos Bekker never sits still, but we like that about him.

The valuation part is always the trickiest part when trying to determine what Naspers should, and should not trade at. For instance, what would you pay for a pay TV business that is growing profits and revenues in the middle to low teens? 10 to 13 times earnings would be a fair value to apply to these assets, the pay TV segment generated 6.331 billion Rands worth of trading profits, so roughly you could say that this business is worth 70 billion Rands, and that is a conservative valuation. I never complain about my DSTv service, they are nothing short of brilliant. Their print business has margins below ten percent, but still managed to improve trading profits significantly, a 25 percent improvement on last year to 1.09 billion Rand. So what would you pay for that business? 7 to 10 billion Rands does not sound out of order at all. Those are two parts of the business that we know pretty well, so it is fair to say that we are currently at 80 billion Rands so far.

And then the part that always seems to deliver market participants and analysts alike with a Shane Warne flipper to Daryll Cullinan (two superb cricketers, one a genius, you pick) is how to value the internet assets. I suspect it is as easy as letting the respective markets determine the value and then take the value to Naspers. Both TenCent and Mail.ru have quoted prices and as such, this should be easy. First things, probably the biggest part, and the future (for now), TenCent. The stock is listed in Hong Kong, and trades under the pretty cool ticker 0700. In Hong Kong the tickers are all numbers, confusing I know. 0700 closed at 226 Hong Kong Dollars per share, valuing the whole company at 415.8 billion Hong Kong Dollars, according to Google Finance. One Hong Kong Dollar equals 1.086 Rand. So, on that currency conversion, TenCent has a market cap of 451.56 billion Rand. And Naspers own 34.26 percent of the business, according to the TenCent annual report from 2011. The exact number of shares is 630,240,380. And that then makes it easy to work out, with the exchange rate and TenCent price available, the stake is worth 154,683,677,906 Rands. Or just 154.7 billion Rands.

On our rolling additions so far we come to 234.7 billion Rand. Let us add in Mail.ru to this list. Naspers own 29 percent of this asset (through MIH), according to the mail.ru annual report for 2011. There was a swap of an asset remember for a bigger stake in this parent company. Although much smaller than TenCent, the company still has a market capitalisation of 4.911 billion pounds as per the London Stock Exchange -> MAIL.RU GROUP LIMITED. So, in Rands, at an exchange rate of 13.15 to the GBP, that is 64.58 billion. And 29 percent of that is 18.73 billion Rands. So, add them all up to that running total and you get roughly 253.5 billion Rands. The current market cap of Naspers is around 190 billion Rands.

But the question that many people ask, does TenCent deserve to be on a 33 times earnings multiple? And that is perhaps why the Naspers discount is applied, but basically these other businesses, including the exciting e-commerce business are the cream. But the business is not without its risks, they made some serious purchases last year for blue sky (260 million Dollars in total), but if you are going to back a team, they are great. And remember that sadly they lost a core member of the team over the weekend with the passing of Antonie Roux, that was a bit of a shock for everyone.

The outlook segment basically tells me that Naspers are going to carry on doing what they do. And just be Naspers, buying nerds businesses and flattering them with the price. And to keep rolling out the DSTv business across the continent and closer to home, that business is simply amazing. It is difficult to value, but we continue to believe that the market does not appreciate the company. I am not going to use the line that it should trade higher, the level today represents the balance of buyers and sellers. And the stock price is two percent plus higher on a day that the whole market is slightly lower. We continue to accumulate the stock at current levels.

Byron’s beats is too kind to me, I don’t like it, I love it!

    Following up on my piece yesterday, here is a perfect example of what I was talking about. Coca-Cola, one of our recommended stocks in New York announced a $5billion investment in India by 2020. Sasha, who is probably the most avid cricket fan I have ever met, made a good point. Pepsi sponsors all the big cricket events so you get the feeling that Pepsi is bigger than Coke in India. But let’s be honest, everyone loves Coke. This is why the company wants to try and probably will “hook” the 1.2bn people who live in that country.

    This WSJ article points out that Indians consume only 12 eight-ounce bottles of Coke per year whilst in Brazil they consume 240 on average. The average globally is 90 bottles so India is clearly coming off a very low base. The article which quotes Muhtar Kent, Coca-Cola’s CEO also says that the company have only put $2bn into the country over the last 20 years. The lack of exposure to India stems from a choppy history where Coke actually had to leave the India all together in the 70′s.

    This is also a good vote of confidence for India who have faced a lot of scrutiny from the private world for certain policy decisions. At the same time PepsiCo have also been investing in the country. We often forget that India has 17% of the world’s population and even though they are still growing between 5%-7% the potential there is phenomenal.

    At this stage Indian GDP sits at $1.7 trillion which ranks alongside Canada, Spain, Russia and Australia. This puts them at 11th in the current world ranking tables. However on a per capita basis (PPP) they rank shockingly 129th with $3694 per person per year. That is well below us at $11000 and even countries like Namibia, Angola and Mongolia have higher GDP’s per capita.

    What I am trying to say here is that India is coming off an extremely low base, similar to Africa. That is why, when they reported 5.3% growth in the first 3 months of this year, the market was not impressed. But once the juggernaut starts rolling again like the Chinese did, we have massive growth to look forward to. The country fascinates me and I plan to visit it soon. Maybe I’ll do a bit of a market research while I’m there and will certainly report back.

Currencies and commodities corner. Dr. Copper is trading lower (the price is at least) at 333 US cents per pound, the gold price is also lower at 1568 Dollars per fine ounce. The platinum price is lower at 1406 Dollars per fine ounce. The oil price is last at 79.07 Dollars per barrel. The Rand is strangely firmer to the US Dollar, 8.38 currently, 13.10 to the Pound Sterling and 10.51 to the Euro at last check. Mr. Market is in risk off mode. There are various developments in Europe that need to be watched, including the various bond auctions. But for the moment Angela Merkel has said no to Euro bonds as long as she lives, perhaps she means politically. Crouch, pause, touch and engage and all that, OK?

Sasha Naryshkine and Byron Lotter

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ABSA bank tanks

June 26, 2012 in Uncategorized

“And that is why costs come into focus, sweat the assets a little harder, turn the screws a little tighter. At the get go here this morning ABSA is trading down over six percent. Mr. Market is clearly disappointed with this outcome, and the rest of the sector is trading down in sympathy with the weak trading statement.”

Jozi, Jozi. 26o 12′ 16″ S, 28o 2′ 44″ E. We started in the green but quickly joined where the Asian markets had closed, and slid all day long to close near the lowest levels of the day. The Jozi all share index gave up 296 points, or 0.87 percent to close shop at 33821.98 points, the main losers (L above forehead) were the resource stocks, down one and a quarter percent, banks sank nearly one and a half percent. Retailers were at the other end, “winning” (in the words of that nutter Charlie Sheen) up nearly half a percent, but perhaps the biggest surprise was MTN that really caught a bid, up over two percent on the day, on more than double the usual trade, over one point one billion Rands worth of stock crossed ‘hands’ yesterday. Interesting. Syria remains a huge concern for MTN, but Iran is still more than a little worrisome, with these Turkcell allegations hanging around like an unblocked drain with no plunger in sight. Sis, sorry.

ABSA have released a voluntary trading statement for the half year to end June, even though we only have a few days left in this half year. And perhaps the numbers are going to be slightly worse than Mr. Market as a collective expected, because the company expects headline earnings to be between 0 to 10 percent lower than the corresponding period last year. Why? Well, let me do a copy paste from the release that you can read yourself: “Credit impairments have increased due to higher cover required on our mortgage legal book, as property prices and distressed customers remain under pressure. However, early arrears on most portfolios continue to improve. Absa Group’s revenue growth was also subdued in the first five months. While our new lending volume is improving, this is only expected to become evident during the second half of 2012. In this environment, sustainable productivity improvements remain a priority and costs continued to be managed effectively.”

Ahhh, what does that last line mean? Does that simply mean that there must be less golf days and meetings and more real working that must take place. Sis Sasha, don’t be like that. But this is interesting, because whilst the South African Reserve Bank was and is a little worried about credit extension in the unsecured space, it seems that the core of ABSA’s business is still struggling, but as they indicate, improving now and expected to get better in the second half. Costs, the fellows over at Barclays are looking to get their pound of flesh. Barclays has a market capitalisation of 23.67 billion Pounds, or 312 billion Rand, roughly. ABSA has a market cap of 110.7 billion Rand, of which Barclays own a 55.5 percent stake, or in Rands and cents, 61.44 billion Rand. At the current exchange rate of 13.2 Rands to the Pound, Barclays stake in ABSA is 19.66 percent of their overall business. Not small fry, that is for sure. And I can see why they are demanding more, because HQ has been sweating under increased regulation, increased political and public pressure on costs, so there is no doubt going to be a transfer of pressure locally.

There are 718,210,043 ABSA shares in issue (at last results), a 55.5 percent stake is 398,606,574 shares. Whoa, Barclays have owned ABSA shares for longer than I thought, the deal was struck back in May of 2005, or the announcement was made back then, rephrase that. 82.5 Rand a share was the price offered to ABSA shareholders, that also included a sweetener 2 Rand a share final dividend. But that is the most important part, because regardless of the capital gain that Barclays have made on their purchase of ABSA at those low prices, the dividend flow has been nothing short of magnificent.

Since late 2005, ABSA has paid out 35.07 Rands a share in dividends. And this is how you have benefitted as a shareholder alongside Barclays who want to suck everything out that they can. But it has not been all roses of course and it could have been a whole lot better, a huge oopsie globally in 2008 and 2009 and tightening regulations have perhaps squashed the most optimistic and even middle of the road type expectations. And that is why costs come into focus, sweat the assets a little harder, turn the screws a little tighter. At the get go here this morning ABSA is trading down over six percent. Mr. Market is clearly disappointed with this outcome, and the rest of the sector is trading down in sympathy with the weak trading statement.

New York, New York. 40o 43′ 0″ N, 74o 0′ 0″ W. Rising home sales (see this piece -> Some Positive Signs in Today’s New Home Sales Report for a Significantly Improving Housing Market) were one bright spot in an otherwise rubbish market for the bulls, the broader market S&P 500 closed 1.6 percent lower to 1313 points. The Dow Jones Industrial lost 138 points to close at 12502, the nerds of NASDAQ lost nearly a whole two percent on the day to end at 2836 points, the first time that the index crossed that level was in October of 1999. Hmmmm….. that was a long time ago, I had just moved to Joburg then. The traffic was better back then too.

HOWEVER, the NASDAQ valuations are very different now to when they were back then. Some of the very big constituents now trade on very low double digit earnings multiples and some even on single digit multiples. The worlds biggest technology companies have turned from blue sky to utilities, and look very cheap. Obviously not all companies, the recently listed Facebook is trading on a very demanding multiple. But the maturity of the NASDAQ when compared to 13 years ago is easy to see, the tech companies are no longer those companies that are not understandable, but well held across all the investment managers and retail investor types. Oh, and in case you missed it, whilst we were talking about Facebook, the company’s board became more diverse overnight as Sheryl Sandberg, the COO was added to the main board. Good for her, she seems like a good operator.

Byron’s beats continues the index versus economy debate.

    The article titled Reminder: Stocks And The Economy Are Not The Same Thing from The Business Insider has sparked me to write my piece about a statistic that I bring up with clients time and time again.

    More than 50% of S&P 500 earnings comes from outside the US. So what does that mean? It means that companies are flexible and have the drive and the ability to manoeuvre around the globe seeking profits while you as a shareholder sit happily at home supplying your own competitive advantage in order to make a living. It also means that when you buy shares in companies like Richemont, BHP Billiton, Visa, McDonalds and Nike you are not relying fully on the growth of developed markets where all the troubles lie. These companies have strategically placed themselves in economies that are growing very fast. That is why we strategically place our money with such companies.

    In the article there is a Deutsche Bank analyst quote which compares the US economy to the S&P. Here goes. Manufacturing dominates the S&P, but services dominate US GDP. “Services make up more than 80% of US private sector jobs and 60% of US GDP. The slow recovery in services has been the main reason behind lacklustre US GDP growth. But S&P 500 profits have rebounded quickly and strongly owing to their bigger exposure to commodities, capex and exports. Although not big enough to make for strong overall US GDP or employment by itself, we expect manufacturing to remain a bright spot within US GDP and should be of great benefit to non-financial S&P EPS.”

    Since the financial crisis hit, it has been a lot harder to make money for everyone. It has forced companies to cut jobs, manage costs and generally be more efficient. It has also forced companies to leave their comfort zones and seek profits in more risky territories. It is not as easy anymore. The same applies to investors. You have to be very selective in the stocks you buy. Look at examples like Nokia, European banks and what ABSA is doing today. You can get your fingers burnt.

    But there are also some absolute gems out there with successful business models and fantastic management teams. Companies who have embraced the crisis as a challenge and come out better because of it. That is where we come in, ploughing the news every day, picking up trends and discussing these topics together intensely so as to find these stocks. You could probably say that because all that has happened, asset managers like ourselves have also become more efficient. In hindsight maybe the crisis was needed by all. I get the feeling that the current situation in Europe will be a huge wakeup call and that after the clean up the current nations under scrutiny will be a lot more efficient. In fact they have to be in order to survive.

    To back my thesis take this into consideration. In 2009 Latvia, one of the first European nations to fall had its economy contract by 18% in 2009. They implemented policies which cut wages and increased productivity. The Latvian economy grew 5.5% in 2011 and 6.9% in the first quarter of this year. This is all amongst a Euro zone that is struggling. Don’t underestimate human resilience.

This raised more than just a few eyebrows, Microsoft announced last evening that they would be acquiring Yammer for 1.2 billion Dollars. Yammer has nothing to do with Usain Bolt and his ability to smoke the opposition over 100 metres, but rather a plug in piece of software that was supposed to improve productivity. That probably really does that. What is Yammer? Well, we used it once here and then promptly uninstalled it, for the only reason that Yammer is actually for bigger organisations with multiple users. It is basically a closed network of users who can interact with each other on chat, replacing memos, but has file sharing abilities as well. So, if I remember right, the software runs on your desktop, and integrates your calendar, tasks and all those clever things that Microsoft has achieved in their software over the years. But, 1.2 billion Dollars? I worked it out, it is a mere 14 and a bit days of Microsoft’s EBITDA. Two weeks. That is it. And, if you forgot, Microsoft has a war chest of around 60 billion Dollars, in the bigger picture this is not a giant leap. So, expect the next patch in your new Windows operating system soon.

Currencies and commodities corner. Dr. Copper is last at 333 US cents per pound, the gold price is better on the session, last at 1585 Dollars per fine ounce. The platinum price is flat, 1438 Dollars per fine ounce is where it was last quoted. The oil price, that was last at 79.53 Dollars per barrel. I made a mistake yesterday, it was pointed out to me by a commodities dealer, who said that I had the price completely wrong on Cocoa, it should have been 2102 Dollars per ton. Whoa, that sounds like a lot. The Rand is weaker, last at 8.45 to the US dollar, 13.20 to the Pound Sterling and 10.58 to the Euro. We are marginally better here today after that selling pressure yesterday.

Parting shot. Cyprus. I don’t care that they have become the fifth country to ask the central authorities in Europe for money. In part because they do not fit into the PIIGS acronym, that is disappointing, but in reality Cyprus has an economy the size of Ivory Coast (with all respect to the turf of Didier Drogba, Byron’s favourite footballer) and in the Euro Zone is the third smallest member in terms of economic prowess. And is only 0.2 percent of the overall Euro zone economy. So, Cyprus is just a little more than half a day of the overall Euro zone economy, if the EZ economy is represented by a whole calendar year. Small. Not so small today is the Spanish Treasury auction, all very short term debt auctioned. I think that even though it is a 3 billion Euro auction, it is important for the pending European meeting on Thursday in Brussels, to test the levels of demand. That is likely to be the biggest news of the day. Tomorrow I am definitely going to write about the ANC policy conference, the stuff about miners makes me mad. The only reason that miners have benefitted hugely from an uptick in profits is because Chinese raw materials consumption has run away to levels not anticipated.

Sasha Naryshkine and Byron Lotter

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Earnings doldrums

June 25, 2012 in Uncategorized

“It is coming, just in a very slow and with European bureaucratic precision. Chug, chug, too slow for Mr. Market’s liking is all I can say, we like breakneck speed around here, not public servants talking and seemingly dithering. Although there is a realisation that not all Europeans are the same, there are political agendas that are trumping full union integration”

Jozi, Jozi. 26o 12′ 16″ S, 28o 2′ 44″ E. It was a pretty dire day on Friday, mostly the resource stocks took a caning, and in particular the single commodity stocks. Both the platinum (-3.81 percent) and the gold stocks (-3.76 percent) bore the brunt of the selling. Not too much better with the parent index, the collective resource space, the Resi 10 which sold off 2.8 percent, and that meant it was over for the broader market, down 1.2 percent or 415 points to end the day at 34119. There is a complete lack of company news around at this time of the year, the March fellows are for all intents and purposes done and dusted, although there are two big ones this week, Naspers and SABMiller, two global companies, well represented in emerging markets. And then the whole of next month, July, there is very little to look forward to from hard results, but there will be a whole lot more action as the temperature starts to hot up here. We are over the hump that is the winter solstice (or is it a dip), at least the days start getting longer. At least we have the Alcoa results and the traditional start of US 2nd quarter earnings season in about two weeks today. So, until then all the focus will be on Europe, and locally the ANC policy conference meeting.

That European policy conference that is set to take place this week, from what I can read on the wires is that French President Hollande is going to run head first into German Chancellor Merkel with the idea of Euro bonds, but that is likely to be rebuffed for the time being. Expectations are very low for any solutions from the summit, with the most likely outcome being stronger commentary around the eventual proposal, and maybe even a time horizon on greater fiscal integration. It is coming, just in a very slow and with European bureaucratic precision. Chug, chug, too slow for Mr. Market’s liking is all I can say, we like breakneck speed around here, not public servants talking and seemingly dithering. Although there is a realisation that not all Europeans are the same, there are political agendas that are trumping full union integration, but as the European commission website points out:

“The EU budget was around € 140 billion in 2011, which is very small compared to the sum of national budgets of all 27 EU Member states, which amount to more than € 6,300 billion. In other words, total government expenditure by the 27 Member States is almost 50 times bigger than the EU budget!”

But you kind of knew that, the organisation that sits in Brussels is work in progress, the individual member countries still have the largest say over their budgets. And this is the strange part for me, because we were led to believe that austerity was gripping the area: “In 2012, 24 national budgets out of 27 are due to increase according to the latest estimations.” Huh? Does that sound like austerity to you? Or is there austerity that exists in some places in Europe, but the vast majority of governments have social obligations, and those are growing. There is no other way, we are going to have to work longer in order to meet our ever expanding obligations. Austerity? Well, context I guess is needed. Just this morning there is the news that Spain has formally requested the funding to recapitalise their banks.

And then this week of course we have the ANC policy conference, running from tomorrow all the way through to Friday. According to the ANC website 3554 delegates are expected to attend. Phew, that sounds like a lot of people to manage and put across their views one way or another. These would be all branch members that are active in their respective areas that would be attending, that is how I understand it. I read Chris Gibbons counter revolutionary thoughts, to borrow a phrase from an ex vocal member of the organisation, and was kind of left deflated by it, check it out: ANC Policy Conference? Why? Good piece, I like Chris, he is of course writing for the Daily Maverick here, but is better known as the presenter of the Midday Report on Talk Radio 702 and 567 Cape Talk.

The actual document up for discussion is a rather lengthy piece titled THE SECOND TRANSITION? Building a national democratic society and the balance of forces in 2012. It has been documented last week that the deputy president was not too fond of the piece, the Mail & Guardian reports that the president himself has lashed back to the comments that Deputy President Motlanthe made. From the same publication: Mangaung Part 1: Motlanthe flexes his muscles.

OK, go back the discussion document, the main points are as follows:

    “Part A: Reflections on the last 18 years
    Part B: Characterisation of the National Democratic Society
    Part C: The balance of forces in 2012 and the motive forces
    Part D: The global balance of forces
    Part E: Thoughts on the content and form of the Second transition
    Part F: The pillars of national democratic revolution in the current phase”

Obviously much of this document contains socialist type jargon, the word revolution appears 19 times, less I will have you know than the word education, which appears 31 times. The word teachers does not appear once. Capitalism appears 22 times, the word nationalisation not a single time. Not once. So anxiety levels should be lower, but until we see a more business friendly landscape, expect the business types to be continually scratching around for excuses, which exist in reality. Ask the poor fellows over at Aquarius Platinum.

Byron’s beats has a look at the recent Sasol movements, which of course will interest you as the oil price hits an 18 month low.

    On Thursday Sasol slumped over 4% then on Friday it was down again, nearly 2%. One of the reasons for the drop was a forced clearance of the Sasolburg plant after spilled sulphur set off alarms. It doesn’t sound like the spill was serious but of course there are very strict safety standards and anything remotely threatening will result in stoppages. According to this Bloomberg article a statement from Sasol suggests that production was in no way affected.

    Sasol is a tough share to analyze because it is so heavily swayed by the Rand and the oil price. You would probably find that these variables were why the share price dropped at the end of last week. You see, Sasol’s sales are dependent on the petrol price which is completely out of their hands. The petrol price is determined by the oil price and the South African Rand. When the Rand weakens South Africa’s buying power decreases and the petrol price will have to increase. When the oil price increases inevitably the petrol price will also have to increase.

    Therefore when we complain about petrol prices increasing, Sasol shareholders are rewarded. To get a perspective, analysts reckon that a 10% change in the Rand could affect Sasol’s earnings by 25%. Historically the oil price has less of an affect but this is growing. A 10% change in the oil price would affect earnings by around 18%. Of late the Rand and the oil price have been positively correlated. When risk is on, the oil price increases and the Rand strengthens. When the world is about to end the Rand weakens and so does the oil price. This is a good thing for Sasol because it mitigates what could be a very volatile situation.

    Another variable which impacts earnings is the gas vs oil price. This is not a big part of Sasol’s earnings yet but Sasol’s future plans are heavily weighted toward Gas to Liquids expansion. In the last few years improved technologies and massive deposit discoveries have caused the gas price to consistently fall. Lack of big discoveries and unrest in many oil producing nations have caused oil prices to increase. This is a very good situation for Sasol as their input price decreases while there finished goods price increases.

    Over the last few weeks however gas has increased while the oil price has decreased, a double negative for Sasol. The gap is still huge historically and still very economically sufficient. We continue to like Sasol. The long term global demand as far as energy is concerned will remain strong. Although these moving parts have a big impact, if markets pick up, like we foresee, the natural stabiliser of the Rand strengthening along with the oil price will help mitigate the volatility while Sasol use their unique technology to carry on supplying oil.

Currencies and commodities corner. There is a severe weather system in the Gulf of Mexico, which is sending the oil price higher. I saw on Facebook, my uncle who lives in Florida posted the satellite picture, and it looked pretty hectic. Is it that time of the year already? It certainly seems a little early for that. Well, I must have missed it, because this is the fourth in the cycle already, named Debby. And then I did a little exploring, and according to the authorities, the National Hurricane Centre, Debby was just a tropical storm. And, Hurricane season starts on the first of June and ends on the last day of November, in the Atlantic. So I guess I am late, four down already in 25 days. Debby is currently in the Northern gulf. The oil price is higher, last at 79.90 Dollars per barrel for NYMEX WTI, whilst Brent crude is trading flat at 90.94 Dollars per barrel.

The gold price is slightly higher on the session, last at 1572 Dollars per fine ounce, the platinum price is up a little more in percentage terms, last at 1438 Dollars per fine ounce. Dr. Copper is slightly better at 332 US cents per pound. I could also tell you what lean hogs traded at, but that might not mean too much. Coffee and Cocoa maybe. Cocoa is priced in Dollars per ton, whereas the Coffee contract is priced in US Dollars per pound. OK, you want to know on this pretty chilly morning, so here goes, the Cocoa contract price was last at 21.02 Dollars per ton, the coffee price at 155.9 US cents per pound. The Rand is weaker today, 8.45 to the US Dollar, 13.15 to the Pound Sterling and 10.60 to the Euro. We have started lower here today, but have been marginally higher for some parts during the day.

Sasha Naryshkine and Byron Lotter

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Moody’s bank blues

June 22, 2012 in Uncategorized

Moody’s bank blues

“It is easy to feel beat up after a day of selling like that, particularly when the overall mood was starting to improve. Policy response is going to be key from here on out for the rest of the year. Germany needs to be committed to being more proactive, in a way the cracks starting to appear in their economic armour might ironically see the action more forthcoming.”

Jozi, Jozi. 26o 12′ 16″ S, 28o 2′ 44″ E. The bad news finally came and the sellers were not afraid to act. Whilst Spanish bond yields continued to fall from the high at the beginning of the week, the Spanish bond auction during the day went well. Sort of I guess, better than expectations, but at the same time the Spanish are paying a Euro era record for their five year debt, just above six percent. The demand was quite high though, the suggestion is that if Europe is “going to get the job done”, then of course these yields are attractive in the medium term. The other Spanish news on the agenda was of course an independent bank audit which suggested that Spanish banks need as much as 62 billion Euros to shore up reserves to the level that they ought to be. That news release was a pretty late one in our time zone, but it was coming nevertheless.

But the news that was impacting on us the most was quite simply another pretty dull looking HSBC Flash PMI read which showed that Chinese manufacturing was again under pressure. That was the news that moved the needle on commodity prices, with oil falling to an 18 month low, this is to a level when Kaddafi (Qaddafi?) and Mubarak were still in control in their respective Northern African countries. The one is dead and the other one is technically dead. All commodity prices also took heat not only on the Chinese news, but filtering through from the prior session and a lack of extra stimulus had a negative impact on precious metal prices. Gold bugs were, you guessed it, upset with Ben Bernanke once again. WHAT? No more stimulus? What is that about? As such the broader commodities complex sank, Sasol was hurt the most, the stock ended down 4.4 percent on the day. The broader resources ten index closed down 2.36 percent, sending the Jozi all share index 0.73 percent off, or 254 points to 34534.

Byron’s beats tries to explain that you should rather be grateful for the Chinese growth story, because it has made us all better off.

    I want to talk about a more positive story and one we are seeing less and less of in the South African environment. Today Kumba Iron ore announced the official opening of the Kolomela mine which is situated in the Northern Cape. The mineral rights for this mine were issued in July 2008 and the project was scheduled for first production in the first half of this year. Full production of 9Mtpa is expected in 2013.

    But these production dates have not happened. In fact they have been surpassed. The mine started production 5 months ahead of schedule and contributed 1.5 million tons to Kumba’s full year production of 41 million tons at the end of their year December 2011. They expect to produce 5 million tons at the mine this year.

    As shareholders of Kumba we are very pleased with this but there is a bigger story here. In 2007 Kumba had revenues of R8.7bn and profits of R2.1bn. This was from 31 thousand tons of production. Last year Kumba Made R17bn in profits from R48.5bn in revenues and paid R9.7bn in taxes. Where am I going with this? Through efficiency and a bucket load of demand from China, Kumba have more than nationalised 2007 revenues. Our government now extracts nearly 5 times Kumba’s 2007 profits. If Kumba had been nationalised in 2007 I highly doubt government would be getting close to what they make from the private company right now.

    Other than our receiver of revenue, Kumba shareholders and employees have also benefitted handsomely. Massive dividends and generous bonuses have been paid and reinvested into our economy. There are two points I am trying to make here. One, allowing a miner to operate efficiently will create more benefit in the long run for everyone. This kind of thing is not happening in South Africa enough at all and it is situation that needs to be dealt with immediately. Miners are struggling and are faced with many government related headwinds.

    My second point is that those of you who believe the Chinese are selfish and are purely focused on extorting Africa should reassess your opinion of them. Yes they may have their own best interests at heart but without their growth our economy would be nowhere near where it is today and we have all benefitted indirectly. In fact the entire globe has benefitted. Without the Asian growth story we would be living in a very different world right now, that is for certain.

New York, New York. 40o 43′ 0″ N, 74o 0′ 0″ W. When the market participants caught wind of a pending across the board ratings downgrade for all the major banking stocks across the globe, the selling activity accelerated. Moody’s stepped in after hours, the longest day of the year in the Northern Hemisphere saw them make the following release afterhours: Moody’s downgrades firms with global capital markets operations. I have already seen several of the banks themselves object to this, some saying that this is almost reactionary. There are some implications with short term trading between the banks, specific to derivatives, as far as I could understand it from the FT, but a lot of banks say that they have done a lot since 2008 to deleverage and shore up capital. So, is this a case of the ratings agencies telling everyone the obvious? Perhaps. But we will still maintain around here that these big banks are not where we want our clients funds invested, the capital requirements required by new regulation and the handcuffs placed on past lucrative business segments are going to impact future profitability. Thanks Moody’s, we knew this already.

Markets got crushed, it was one way traffic, the markets graphic was, well ….. graphic for the bulls. The Dow Jones closed down nearly two percent to 12573 points, the broader market S&P 500 lost two and a quarter percent on the day to 1325 points, whilst the tech stocks sold off one fifth of a percent worse than the broader market. Materials and energy stocks, like they were here, were sold off heavily, over 4 percent lower for the oil and gas producers. Yech. Exxon Mobil, Chevron, ConocoPhillips, and even services company Schlumberger (one of my favourites) all sank between three and four and a half percent. And if that was not enough for you to feel a little beaten up, well then, Proctor & Gamble lowered their guidance for the fourth quarter, citing Dollar strength and slower growth in developed markets. They are not the only company to do this is recent days, McDonald’s are taking strain in some of their geographies, ditto Pepsico. Soft cabbage patch here Sandton dolls, that is where we are right now.

It is easy to feel beat up after a day of selling like that, particularly when the overall mood was starting to improve. Policy response is going to be key from here on out for the rest of the year. Germany needs to be committed to being more proactive, in a way the cracks starting to appear in their economic armour might ironically see the action more forthcoming. As far as I understand it Angela Merkel is going to be attending the quarter final in Poland tonight, in the mother of all sovereign debt clashes, with the Germans taking on the Greeks. Last night, in case you missed it (like Ronaldo did on a few occasions) the Portuguese beat the Czechs one zip, with the one of the worlds best scoring a stunner. I have Mario Gomez in tonight, with the Germans edging the Greeks, any other results would be a huge shock. The G20 heads have already met, there was not too much fanfare this time around, the G20 Leaders Declaration looks like a generic document with tweaks. Commitment to this, commitment to that, working harder on this. Yeah, thanks for the politics everybody.

Currencies and commodities corner. Dr. Copper is lower, at the lowest level I have seen in a while, 327 US cents per pound, the gold price is also lower at 1565 Dollars per fine ounce, the platinum price is also lower at 1430 Dollars per fine ounce. The oil price is about the only good news for consumers here, down at 77.84 Dollars per barrel for Nymex WTI, whilst Brent Crude oil trades at 88.78 Dollars per barrel. The Rand is getting a little tap on this risk off day today, 8.37 to the US Dollar, 13.07 to the Pound Sterling and 10.54 to the Euro. We are selling off here again today, but it has been a few good weeks.

Parting shot. Awesome, I found these graphs again, they were Economist graphs published which takes the last two thousand years worth of economic activity globally and what the majors contributed at a specific time. As the Economist blog points out, this data was complied by economist Angus Maddison who died a couple of years ago. This first graph is found via the Wiki entry for Maddison:

And then on to the starting point, the Economist blog entry titled: More 2,000 years in a single graphic. I quite like that one line there, lower, with the Maddison graphs: “Among the points it presents is that in the first decade of the 21st century, the population of the world produced more economic output than in the first 19 centuries of the common era combined.”

So, think about it, the last ten years have produced more economic output than the years 0 to 1900. Yeah, you are right, things were so much better in the old days. No matter what you might, or might not think about the future of our species, I suspect continued progress will continue to see output globally rise in the coming years. And with that prosperity will grow, and there will be fewer pariah states. How many of those can you count? I guess also it depends who you are. Current Pariah states are fewer than they were in the past. I look forward to the days when North Korea finally emerges from that category. Do yourself a favour, look at the last graph in that Economist blog and ask the question, do you think that a more spread global economic pie is better or worse for all of us? The simple answer is yes, it is better.

Sasha Naryshkine and Byron Lotter

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Ben and Oliver twisting

June 21, 2012 in Uncategorized

“I often think that not enough credit is given to the FOMC for their work in negotiating the mine field, most folks have an Oliver Twist porridge yearning and always want more.”

Jozi, Jozi. 26o 12′ 16″ S, 28o 2′ 44″ E. Wow. Another day, another record close for the Jozi all share index. Financials led the charge, collectively up nearly four fifths of a percent, the overall market closed marginally in the green, up 74 points or 0.21 percent better on the day to 34788 points. There was news in the form of the Greeks actually forming a government, but that was expected, the fellow that you need to know now is Prime Minister Antonis Samaras. Who actually warned more than a year and a half ago that the austerity measures were going to have a dire impact on the Greek economy. Samaras is 61 years old, he is an economist by trade, but has been in politics for over three decades, so it is fair to say that he is a politician. If nothing, at least we have learnt about the Greek political landscape and know that there are crazies in all politics with harebrained ideas about the way the world should work. More worrying I suppose is the fact that there are people out there that seem to think that they are right. I am talking about the far left, who seem to want everything, isn’t that how you got here in the first place? Probably.

There was something interesting yesterday in the form of South African inflation numbers, which fell back into the comfort zone (5.7 percent was the headline CPI annual inflation rate for urban areas) and in fact beat economists predictions. Here is the full release: Consumer Price Index – May 2012. Excellent, fresh numbers, I know that they are from 21 days ago, but StatsSA used to take slightly longer to release these numbers, back slaps are in order. Well done and stuff to Statistician-General Pali Lehohla and team! The food and non alcoholic beverages index decreased 0.2 percent month on month. Did you get that sense in your basket? Cheaper food is a good thing, in particular fruit and meat got cheaper, but not sweets and desserts nor cold beverages. Well, you should not be buying that sort of stuff. But don’t let me stop you from enjoying yourself, eat those awesome Woolies deserts!

Year on year though, you are paying 6.6 percent more for your food. That is mostly being driven by fish, which has clocked an astonishing 11.2 percent increase. Turns out there are not plenty of fish in the sea. I am happy to report that for vegetables you are only paying 2.2 percent more. Food is a pretty big component in the CPI basket, 15.68 percent in total. Alcohol beverages and tobacco sadly makes up 5.58 percent of the basket, LESS than clothing and footwear, which make up 4.11 percent of the overall basket. Housing and utilities make up the largest part of the basket at 22.56 percent, it will come to you as no surprise that the electricity (and other fuels) component has risen 17.1 percent since this time last year. And since 2008, when the base was 100, has risen to 196.8. In other words, in the last four years your electricity bill has about doubled. The single biggest item in the sub sector, Housing and Utilities is Owners’ equivalent rent, which makes up 12.21 percent of the overall index. Since the beginning of 2008 (base of 100) this has risen to 117.8. Which I guess is not bad at all.

The other big component of the CPI basket is transport, which has as much as 18.8 percent weighting overall, with the biggest part (of that sub set) being purchase of motor vehicles, 11.25 percent of the OVERALL Index. That has decreased month on month, but for the last four years, again the base of 100 being applied, the index is at 102.6. Which basically means that the price that you are paying now is the same as you paid four years ago, but that obviously consists of a different motor vehicle mix in 2012 when compared to 2008. Probably because of cheaper motor vehicles in the market. Good news for the consumer I guess.

The other big component in the overall basket is “Miscellaneous goods and services” which is a pretty wide measure of “stuff” makes up 13.56 percent of the overall basket. Insurance is in there, and makes up 7.71 percent of the bigger basket, which means of course you are covering that house and motor vehicle, as well as life insurance of course. “Education” sadly makes up a small portion of the overall basket, a mere 2.19 percent, less than “restaurants and hotels” at 2.78 percent.

It is pretty simple I guess, Home, motor vehicle and then food. It is good to see the rate back inside of that 3-6 percent range, although as far as I can see from what I have been hearing and reading, the Reserve Bank is unlikely to budge rates from here. I guess caution remains the watchword. Yeah, let’s watch it!

Oh dear. Not again Joe, oh no Joe, not again. There was a song that went something like that, I think it was a comedian who sang it, I could not find it online with my internet skills. Slippage. But this unfortunately is of absolutely no laughing matter, this morning Aquarius Platinum have announced that they are placing their Everest mine on care and maintenance. It is happening people, Aquarius are not going to be in the position of running mines that are unprofitable. The official announcement does not make for pretty reading:

“The ramp-up at Everest has encountered challenges resulting from poor ground conditions and on-going disruptive industrial relations over an extended period and these issues, coupled with the present low PGM price environment, have rendered the mine uneconomic.”

It makes me feel a little nauseous really. The company goes on to say that they think that the market will be in surplus by around half a million ounces this year, and point fingers squarely at the issues in Europe. And the official announcement also says that rising costs and lower labour productivity have not helped matters at all. So, how big is Everest. Bigger than you think, this represents 21 percent of the total groups PGM production. 100,252 PGM ounces produced in their 2011 financial year. Check out from their website: Everest. I think if that we were outraged about a painting we should be more outraged here. 1681 folks without a job now, waiting for things to improve. And all we do is talk.

New York, New York. 40o 43′ 0″ N, 74o 0′ 0″ W. Markets were pretty wild yesterday, even though the point where we ended was basically flat, that does not really tell the days story. Waiting for the Fed, and when they came, a selloff, and a repeat of that again. I suppose that the hot short term money knows that the nearly five percent rally in a month has been nothing short of very good. I just checked it out, if you sold in May and went away, you looked clever, but you probably missed this rally back and now are only three percent better on the S&P 500. So now what? Paul said yesterday something that I liked, when you hear people say things like, the market looks overbought, oversold, waiting for Europe to sort their stuff out, waiting for a confirmation of higher global growth rates, that is nonsense. The market is the aggregation of buyers and sellers in different sectors and companies, and the level today is what it is. And those levels are not likely to be at the same levels tomorrow, or next week. So, don’t try and fight it, or think that the collective are right, or wrong, the levels are what they are. End of story.

I caught the second half of the press conference last evening, with Fed chairman answering the questions shot at him from the press. Man, the guy is an incredible articulator, and although there is lots of Fedspeak in the answers, a lot of it makes complete sense. For the record, here is the statement firstly from the FOMC meeting: Press Release – Release Date: June 20, 2012. There is nothing too new in there, growth is not quick enough, there are risks, they will act, unemployment not falling fast enough, rates are most likely to stay at these levels all the way through to late 2014. So expect rates to be here for a while still. I often think that not enough credit is given to the FOMC for their work in negotiating the mine field, most folks have an Oliver Twist porridge yearning and always want more. There is not too much more that the Fed could do, they indicated that they were continuing to employ operation Twist to the tune of 267 billion Dollars.

What is operation Twist? Well from the statement: “…the Committee intends to purchase Treasury securities with remaining maturities of 6 years to 30 years at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately 3 years or less.” So, in simple English, the Fed will sell the shorter term debt, and buy the longer term debt and look to flatten the curve. And by doing that, they are trying to making longer term borrowing more attractive. And at the same time the short term yields less attractive to folks parking their funds somewhere, forcing those same folks to invest more to get a higher return.

Of course Euro land still looks like a problem for everyone, and this has forced the Fed to downgrade their growth forecasts. Check out the table hacked from the release Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, June 2012.

As you can see, the projections from the last meeting have been lowered which suggests that the Fed did not see this current bout of weakness. Which brings me to the last point I wish to make on the smartest economic policy makers in the world, if their view of the future is as clouded as ours, then what is to say that they cannot be surprised to the upside too? I suspect of course they can, and invariably the future always turns out better than you think. I unfollowed a fellow on twitter yesterday because he compared 1931 conditions in Europe to the current. Hogwash. Did they have the incredible efficiencies of mobile phones, the internet, global air travel via jet engines, cable and satellite TV, the BRIC’s as contributors to the global economy (still small really, but growing fast), microwave ovens, fuel efficient and safe vehicles, broad home ownership, as there is now? No. And are monetary policy makers better advised with all the information that they have available, in order to make better decisions? Yes!! So, what would you say now? Asleep at the wheel, or being the best folks to steer? No, not asleep, and yes, yes, yes, the best people to steer!!! Sit down all you armchair Fed members.

Currencies and commodities corner. Dr. Copper is last at 335 US cents per pound, the gold price is also lower at 1597 Dollars per fine ounce. The oil price is also lower, in fact the lowest level since January 2011, in the time before the Arab Spring, 80.49 Dollars a barrel for NYMEX WTI, 91.65 for Brent Crude oil. The Platinum price is last at 1456 Dollars per fine ounce. The Rand is weaker in the face of some selling pressure here today, last at 8.21 to the US Dollar, 12.96 to the Pound Sterling and 10.45 to the Euro. We are slightly weaker here at the start.

Parting shot. A Chinese Flash HSBC PMI number has come in below 50 again, indicating that Chinese manufacturing continues to contract, but I guess with the European issues that continue to dominate the headlines this is likely to dampen demand. Check it out here: Manufacturers report modest deterioration in operating conditions during May. Not good, and this has been the trend. But, there is no sign of it falling hard, hard landing or whatever you want to call it, but again this morning we are seeing folks talk about landings and a weaker global economy. True. But markets are predictors of the future, not the present.

Sasha Naryshkine and Byron Lotter

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The big Ben wait

June 20, 2012 in Uncategorized

“I can see you shaking your head already. How is it possible that unit labour costs in Greece are higher than they are in Germany? The logical conclusion to come to is that Greece workers must be a whole lot more productive than their German counterparts. Although you know already that cannot be true.”

Jozi, Jozi. 26o 12′ 16″ S, 28o 2′ 44″ E. Records! That is where we closed last evening, the Jozi all share index printed an all time high, 34622.93 is where we closed, a gain of 184 points on the day, which is a percentage gain of 0.53 percent. There was of course the news of is-it-or-is-it-not Telkom re-nationalisation, which was sort of squashed, but it is not as if it is not up for discussion. Sort of. Yes, no. But probably impossible, especially if you are only a 40 percent shareholder, regardless of what the business is, or is not. Phew, venting here. The platinum stocks sadly were not winners yesterday, down 1.8 percent in total, perhaps the firmer Rand impacting on their progress, with Mr. Risk-on visiting Mr. Markets house again, in the same way that Mr. Messy (not the footballer, he is with an i) gets a visit from Mr. Neat and Mr. Tidy. I prefer clean and tidy to messy.

One particularly bearish local CNBC market anchor continues to be astounded that markets are going up, he is a self confessed bear, so I guess that tells half the story. But, me, as a self confessed bull, continues to not be surprised that markets head higher, even though at face value the news seems bad. We both call ourselves realists strangely, except my reality involves investing clients money on a daily basis and our firm continues to make those decisions for clients based on how we see the future. And a bearish view from people who do not manage any money at all, and that includes Niall Ferguson and Nouriel Roubini might have consequences in the real world, i.e. people might make investment decisions based on their really useful insight, because they are both geniuses, they just happen to be of bearish cloth. But, they don’t actually make any investments themselves on behalf of clients of any sort. See what am I saying? It matters more to me what Bob Doll of Blackrock says, because his firm manages money in the trillions of Dollars. In fact, you can read his weekly piece here: Will Policy Response Follow Policy Rumor?

Whilst some may be left believing that the worst is yet to come, I am with the song, the best is yet to come, humans innovate and solve issues. So, whilst the Spanish and Italian debt issues might be front and centre, they can be solved and everyone is getting the sense that German Chancellor Angela Merkel might be softening her (of course the ruling party in Germany supports this) stance on extreme austerity in Europe. But the “truth” according to the statistics suggests this, first of all, unit labour costs statistics from the European Central Bank from the Statistical Data Warehouse which you can find here -> Home > Economic Concepts > Prices, output, demand and labour market > Costs > Unit labour costs.

Here is the first graph, which is all of the 17 Euro Zone countries, those are fully fledged members who use the common currency.

Unit Labour costs as per the definition from the OECD: “Unit labour costs (ULC) measure the average cost of labour per unit of output and are calculated as the ratio of total labour costs to real output.” For a more detailed look at the definition check it out: OECD Unit labour costs. The base, 100 was set in 2005, as you can see costs across the zone have increased to 110 over the last seven years. But the next graph is even more fun to look at, it is the same time frames, but measures Germany against Greece.

I can see you shaking your head already. How is it possible that unit labour costs in Greece are higher than they are in Germany? The logical conclusion to come to is that Greece workers must be a whole lot more productive than their German counterparts. Although you know already that cannot be true, check this, first the whole zone, the 17 members, Euro area 17 (fixed composition) – Labour Productivity

That seems like a fairly good looking graph, that tells me that the average European zone member worker is a lot more productive than they used to be. But again, let us measure, Greece against Germany. This is Greece first.

And then finally, Germany. I guess for the purposes of this piece, all you have to know is that the Germans work harder and get paid less for the same work ethic.

So, all Europeans are not the same and you reap what you sow. As we have said many a time, Greece has defaulted many more times than you think, because of a culture of non-compliance and bad governance. And now that needs to change. But first, Angela Merkel has to deal with this line of thinking, from a very unusual source, for me anyhow: What Part of ‘Austerity Isn’t Working’ Don’t People Get?

Mad, no, let me rephrase that, crazy mad. I am talking about this news from yesterday: Countries Boost Emergency Funding for IMF to $456 Billion, taken from the horses mouth. I heard garbage spewing from a whole host of sources which suggested that we were bailing out the colonialists, the European masters. No. We are a contributing member of the IMF and we have pledged 2 billion Dollars as South Africans, out of a total of 455.9 billion Dollars pledged already by 37 member countries that represent 60 percent of the organisation quota. South Africa, as a percentage of the total pledged so far, is a mere 0.4387 percent. Which by the way, according to the IMF Members’ Quotas and Voting Power, and IMF Board of Governors is too little. WHAT? So you mean we have not contributed enough, or pledged enough? Well, no, as far as I can understand it, I took our little box from the long table there:

We are short, see that? And the USA has not waded in, if you see from that release, the link above. So excuse me for being rude towards the headlines and insinuations that we are bailing anyone out, it is what you sign up for as a member of the IMF. If the IMF needs funding, you are supposed to stump up your quota. Otherwise if you ever need the IMF (which we have in the past), they are not there. This is not a donation COSATU, it is another form of membership fees, if you will. I kid you not, that is what COSATU said: COSATU condemns gift to IMF.

I remember finding a trade union form in a South African context which suggested that you pay one percent of your annual income per annum to the labour union that you are affiliated with, so that they can broker a deal on your behalf. For you to get a better salary when it comes time for collective bargaining, because obviously the interests are aligned. So, one percent does not sound like a lot, but it is more than a money market account, which by the way costs around half a percent per annum. And one percent is more than our IMF quota which we are obliged to contribute as a member, in the same way that union members are required to contribute as members. But it was not just COSATU that made me mad, all the newspapers and my twitter stream lit up, and happily the presidency corrected all and sundry, saying that it was a LOAN and not a gift. Perhaps the presidency should have said that this was also an obligation too. But I am well aware that this could equally be a masterstroke by COSATU, who of course are fighting with Public Service and Administration Minister Lindiwe Sisulu. Who quite publically has said that the union demands will cost the government 30 billion Rand more a year, and was over 8 billion more than the treasury had budgeted for of course. But COSATU would point out that we are “giving” this money away. Obligation is the right word, and judging by the numbers, we are a little short.

Byron’s beats looks at the most important decision today. An no, it is not whether Hashim Amla wins the toss in Harare in the most/least important cricket match of the day and decides to bat first. It is not that, but rather that the FOMC and Ben “the measured” or Ben “the bearded” Bernanke telling us what next.

    It’s a big day for markets globally as the US fed makes its interest rate decision (it’s currently at 0.25% so not going anywhere) and releases the FOMC statement. Other than cutting interest rates the fed has other monetary options to stimulate a market that has shown some weakness of late. The last 2 GDP reads were weak while the momentum in the jobs numbers has also pulled back. Although the FOMC (Federal Open Market Committee) is independent do not forget that this is an election year which will certainly have an influence.

    Bob McTeer who writes one of my favourite blogs has some interesting things to say about tonight’s decision. He was on the FOMC for ten years so I would take his opinion pretty seriously. Here is his piece which looks at the state of the economy and all the possible actions. Lets pick it apart and see what he says and what to expect.

    I’m sure you’ve heard the term Operation Twist. Its a policy where the fed sells short term securities and buys longer term maturities so as to flatten the yield curve (decrease long term rates). Lower long term rates are supposed to encourage banks to lend more. The Fed have been implementing this policy since last year and it is about to end. The question is whether they will announce a continuation. Bob (I read him so much I feel I have the right to call him by his first name) reckons it doesn’t make much of a difference going forward because it does not actually add to bank reserves.

    He makes a point which I strongly agree with. Many naysayers have criticised QE2 and Operation Twist saying that they resulted in no growth. But how do they know what would have happened had these policies not been implemented? As far as I am concerned the US is still growing which is more than I can say about Europe.

    Another option is to do nothing and let the market steer itself after all this assistance. For me this is not a bad option. The growth is still filtering through and there is ample liquidity out there. I Guess it is a matter of confidence however and some sort of stimulus might not have a direct affect but will install confidence in banks to lend and companies to spend. For that reason I do hope the Fed will be proactive.

    To conclude Bob comes up with the following. “I could probably be persuaded to go along with the do-nothing option. However, going into the meeting tomorrow morning, I would be inclined to support a statement along the following lines: While we are not proposing another formal program known popularly as QE3, or even a formal continuation of the maturity extension program, known popularly as operation twist, we do expect to resume normal open market operations with a view to preventing a contraction in total Federal Reserve assets and promoting modest growth in bank reserves and the money supply. To the extent that this requires purchases of securities, we will probably choose the longer-dated maturities and will opportunistically purchase guaranteed mortgage backed securities. We do not view this as a major campaign, but as a return to normal discretionary open market operations.”

    Again I agree. Like I mentioned above, come across as proactive without actually doing much. In Bob’s conclusion he emphasises flexibility just in case things go haywire. We’ll wait in anticipation for the speech tonight.

Currencies and commodities corner. Dr. Copper is last at 341 US cents per pound, the gold price is last at 1618 Dollars per fine ounce. Watch the whole commodities complex closely there, the FOMC decision is expected a little later today, see Byron’s beats above here. The oil price last traded at 84.28 Dollars per barrel. The platinum price is lower at 1473 Dollars per fine ounce. The Rand is still firming up a touch, last at 8.22 to the US dollar, 12.93 to the Pound Sterling and 10.43 to the Euro. We are about flat here today, as Byron pointed out, it is all about that exceptionally smart bearded professor and now policy maker Ben Bernanke.

Sasha Naryshkine and Byron Lotter

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Did it even scratch the surface?

June 19, 2012 in Uncategorized

“The best performing stock is the unlikely Bank of America, up an astonishing 39.5 percent YTD. But, over 10 years, Bank of America is down an astonishing 78 percent. Most of that was over the last five years. HP on the other hand is up only 12.6 percent over the last ten years. IBM over the same time frame is up 153 percent, crushing the dogs of the Dow.”

Jozi, Jozi. 26o 12′ 16″ S, 28o 2′ 44″ E. Wow, I did not really expect such an astonishing rally at the end, although there was great Grelief, there was anxiety about Spanish bond yields again spiking to Euro era highs. Spanxiety? Urban dictionary suggests that the word is way too rude, I had no intention of being rude, so perhaps we should call it what it is, Spailout. And who knows, Italy might be looking for cheaper credit sooner rather than later. All of this going on in the midst of the most important football tournament in Europe, which is exciting, and at the end of the week possibly the most anticipated match in an absolute age. The irony of it all, Germany against Greece on Friday evening. As we speak (write?) the new not yet formed government of Greece are asking Germany for more time for implementing the austerity measures. Which must leave the Queen of Europe shaking her head, in a match that we must term, the mother of all sovereign debt struggles.

Back to markets here locally, the Jozi all share index added a whopping 478 points, or 1.41 percent to close up shop at 34438 points, with gains across the board for all of the major indices, the banks roared over two percent, the retailers a more muted 0.29 percent better, the all important resource stocks added over a percent and a half, whilst the only noticeable losers were the construction stocks, down just shy of a third of a percent and the gold miners which sank just shy of a tenth of a percent. General industrials added nearly 1.2 percent on a generally good day for all and sundry. We closed on the ALSI a mere 43 points away from the early May all time highs. Tough going? Seems like it, but hey, the numbers tell a different story.

Naspers released a trading statement yesterday, it is complicated, because there are three different measures. That is often not a good sign, but be that as it may, the company considers what they term “core headline earnings” to be the true measure. And by that measure, on a per share basis, the company expects to increase core earnings per share by between 10 to 20 percent from the last years 1612 cents. So, in the middle of that range, 1853 cents per share. So, at the current share price of 46760, the price looks completely stretched. But. But. Not so fast, the valuation is in part earnings, and in part an NAV type valuation. We have covered this before in results, check it out: Naspers valuations, that was from last year, almost a year ago, that coincided with the results there. Results are in 8 days time, that would be the true test again of what the company should actually trade at, or be worth. Because often, and I hear this, folks suggest that the Multichoice business and the just less than 35 percent stake in TenCent make up the rest of the entire market cap. So, basically, you get the rest. But that is a simple and easy way of valuing what is a complex business.

Telkom, still trying to touch tomorrow, but at yesterdays share price. The BusinessDay has a story that suggests that the state are going to discuss this one in their policy pow-wow as to whether or not the asset is strategic. And whether or not it should be re-nationalised. Phew, that is why the share price is up a lot today, around four percent better. But what would they have to pay? Well, there are 520,783,898 shares in issue and government own a 39.76 percent stake which translates to 207,063,678 shares. So, if that were the case, government would have to buy the other 313,720,220 shares that they do not own in order to take the whole thing off the market. Let us suggest for a second that government pays 23 Rand a share, and I am not too sure that minorities would accept that, then the price tag for the rest would be 7.21 billion Rand. That would come from where? Total GDP at market prices in 2011 for South Africa was 1.895668 trillion Rands. So, this is not big, but our total budget is one trillion Rand, why would you blow around .75 percent of the total budget on buying this? And the way that we see it here in the office, the mobile entrants, of which two are dominant here in South Africa, are rolling out their infrastructure faster and with less red tape. Fewer meetings about how to do it, just plain old doing it. Execution and not talk, we are pretty good at that in South Africa.

Byron’s beats is again focussed on the construction sector. I must be sure to buy him some Lego for Christmas.

    Cees Bruggemans Chief Economist at FNB comes up with some very interesting material. Here he covers some data called the FNB/BER construction confidence index which of course looks at the health of the construction sector in South Africa. Here it is. Now this is a sector that is very important for the economy and especially our jobs market. We are also invested in the future of this sector via PPC and Cashbuild.

    So what does the report tell us? This is the 3rd consecutive quarter where the index has risen and is the highest it has been since the end of 2009. “The 2Q2012 results suggest that the recovery is gaining momentum with construction activity in particular picking up noticeably. Despite this, there is still reason to believe that this recovery remains fragile.”

    That is good news. We saw signs of this near the end of last year where we saw a turn in cement sales. The construction index is up over 12.5% for the year so far which means the market believes in this recovery to. It is off a low base however. Just as a reminder the sector was down 43% in 2008, up 8.2% in 2009, flat in 2010 and down 25.6% last year. Let’s carry on with this report.

    “Capital expenditure (capex) from provincial governments remains robust. During the 2011/12 financial year (ended on 31 March 2012) provincial capex was 21.7% higher year-on year. This momentum likely continued with a number of projects focused on the healthcare sector and water and water waste management being initiated.

    In contrast, municipalities continue to struggle. Only 41% of the total municipal capex budget had been spent during the first 9 months of the financial year (until March 2012). However, some work could have flowed from municipalities as they push to spend more in the last quarter.

    Public corporations saw an increase in civil construction activity with new projects from the TCTA and ACSA in particular coming on line.

    However, construction activity from the private sector likely contributed less with mining production slowing and some mining firms holding back on expansion plans.”

    Unfortunately the sector is still very dependent on the public sector. With rumours of bankruptcy amongst municipalities and story’s like the Sanyati one who are insolvent because they have not been paid by government, you can see why they say this recovery is fragile. We have to see a pick up in the private sector. PPC did mention in their results presentation that private housing, which is responsible for 50% of cement sales, was starting to pick. With interest rates at historic lows and a growing middle class I tend to agree. There are still many headwinds for this very cyclical sector but having read this report I remain confident that we have seen the bottom of the cycle.

New York, New York. 40o 43′ 0″ N, 74o 0′ 0″ W. After opening much lower, stocks proceeded to pare losses and then mostly hang onto some slim gains. The S&P 500 managed to just eke out a gain, up nearly 2 points or 0.14 percent on the day to close at 1344 points. The nerds of NASDAQ had an even bigger gain, adding nearly four fifths of a percent, driven by a strong move from Apple, the stock was up over nearly two percent. The Dow Jones Industrial average bucked the trend, losing 25 points on the day to 12741, banks and energy lagging there. Plus also some technology giants, HP sank nearly three percent, the stock is now down all of 18.3 percent year to date and is the worst performing stock in the Dow this year. The best performing stock is the unlikely Bank of America, up an astonishing 39.5 percent YTD. But, over 10 years, Bank of America is down an astonishing 78 percent. Most of that was over the last five years. HP on the other hand is up only 12.6 percent over the last ten years. IBM over the same time frame is up 153 percent, crushing the dogs of the Dow.

Strangely, the Dogs of the Dow is an investment strategy that suggests that at the end of the year, you must take the top ten best yielding stocks in the Dow Jones, and buy those. The idea is that blue chip companies included in the index will pay higher dividends over time and you therefore are getting a bargain, over the longer term. Check it out, somebody actually maintains a daily table and spreadsheet to help folks make these very easy decisions: Dividend Yield for Stocks in the Dow Jones Industrial Average. All 30 stocks in the index pay a dividend, which was not always the case. IBM I am guessing are going to have to think about a stock split soon, their price is nearly double that of the next most important stock, because the Dow Jones is a price weighted index.

Do we even want to talk about the Microsoft Surface tablet? I guess we should and we must, the “Surface” was unveiled by CEO Steve Ballmer. The device weighs slightly more than the current iPad (the new iPad) but has a bigger screen, 10.6 inches compared to the iPad 9.7 inch screen. The pricing will be similar to that of other options out there, and by that I suspect that Ballmer means the Samsung Galaxy and the Apple iPad. What is quite cool is that there is a magnetic cover that doubles up as a fold down keyboard. And it can connect with printers, and it has a USB port. But, the expensive part will be that it runs a version of Microsoft 8 and office, so that licence part will have to be paid for by the user, which could mean that it might be more expensive that an iPad. As the WSJ points out though, if this is meant to replace the PC at home, then how do the manufacturers of PC’s feel about this hardware muscling by Microsoft? Not too sure how they feel, but my thinking is that they do not feel altogether excited by this, HP, Dell and the like. I guess the good news for Intel is that their chips will be used in these products.

Microsoft is still a beast, with a market cap of 250 billion Dollars, over five years the stock is flat, but has paid a regular dividend, the current quarterly dividend is 20 cents per share, up from 10 cents five years ago. You would have got 182 cents if you had owned them over the same period. I swear to you that I ran a simple one year valuation model assuming that a growth rate of 8 percent was acceptable and got to about the current share price, in fact just below at 28.37 Dollars. The stock currently is at 30 Dollars in the pre market, indicating that whilst there might be haters for the device, Mr. Market thinks this is about neutral. Check out the presentation, which was live blogged by the fellows over at the Business Insider: Microsoft Announces Its Own Tablet, The Surface. Am I sold? No. But the stock still looks cheap man.

Currencies and commodities corner. Dr. Copper last traded at 340 US cents per pound. The gold price is last at 1631 Dollars per fine ounce, the platinum price has crept up to 1485 Dollars per fine ounce. The oil price is last at 83.03 Dollars per barrel. The Rand is last at 8.25 to the US Dollar, 12.93 to the Pound Sterling and 10.46 to the Euro. Stocks in general are being sold off today, after having touched an all time high earlier in the session.

Parting shot. Check it out, as Randy Jackson would say, he might add dog to that, but it is an endearing dog. The Jozi all share index touched an all time high, 34561.99. It would have been better if it was at 34567. But there you go, in the face of what is still poor news, we continue to see the indices head higher. Because Europe will solve their problems, they are not insurmountable, they are dire at present, but so were many moments in history. In five years time we will look back at the European sovereign debt crisis in the same way that we look at the subprime mortgage mess in the US, that period there. And Europe will be a more united place, not less so. Question: Is Greece still in the Euro zone? Answer: Yes.

Sasha Naryshkine and Byron Lotter

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by sashan

Greased up and ready to go

June 15, 2012 in Uncategorized

“I am of the opinion that if Greece “goes”, which I still think has the lowest odds, then there might be some relief of sorts. Equally if the base case applies and Greece stays in the Euro zone, then there could equally be a rally. Worst case scenario would be if there were another stalemate.”

Jozi, Jozi. 26o 12′ 16″ S, 28o 2′ 44″ E. Not the best day ever, the same old anxieties come back time and again. It feels like trying to start exercising again, and being hurt by a niggling injury that just won’t go away. And that niggling injury is Europe and their sovereign debt issues. We feel your pain, but at the end of the day these are rich people problems, just this morning I saw that 91 day Kenyan T-bills are yielding 10.537 percent, according to an interview done on CNBC Africa. The comparable rate in the US is 0.1 percent. Portuguese ten year debt currently yields 10.65 percent. So, whatever you think in terms of whether one economy is finished or not, that is what people are prepared to pay.

So, I often suggest that the problems of Europe are rich people problems, because to borrow the Spanish Prime Ministers text message, Portugal is not Kenya. Portugal has an economy roughly the size of the Nigerians, and seven times the size of the Kenyan economy. Kenya, according to Wiki, has a population of 42.7 million versus Portugal of 10.5 million. Don’t take this the wrong way, but if you had to ask 10.5 million Portuguese and an equal number of Kenyans where they would like to live and adopt the relative lifestyles, what do you think the answer would be? And Portugal have Nani and Ronaldo, Pepe and Meireles. Kenya has McDonald Mariga. Have I missed anyone? I still maintain that the “problems” in Europe are rich people problems. And they have the resources to deal with them, if not now, then sooner than we think.

The Jozi all share index closed down 211 points to 33826, a loss of 0.62 percent on the day, there were a few spots of green across the board, Sasol, the platinum shares and general retailers all closed a little higher, in the negative column there was the broader sector resources down three quarters of a percent, banks off nearly a percent. Not too much from a companies or earnings point of view yesterday, Sentula released results which saw their price higher on the day, but that said, the stock is trading near the five year lows, and over that same time frame are down a whopping 91 percent. Yech. Numbers of shares in issue at Sentula are up four and a half fold over 9 years. Not good. Although it is a different business of course now, than it was then, but having said that, turnover is down 16 percent from 2009. Perhaps they have turned the corner. But there is still a small matter of a civil judgement(s) against the former CEO and CFO, that hangs over the business like a bad smell. The NPA and the FSB sniffed around and raised numerous red flags (danger, communism I guess, or perhaps the athletics usage applies) that have been dealt with. Phew, too much baggage.

It is back! The Mooi River Index went missing for a while, Byron actually knows the fellow who compiles them, I think he was just very busy moving up to Joburg from Mooi River. But the reading is back, thanks to the settling of the compiler of this very important piece of our puzzle. What is it? Well, the Mooi River Index was thought up by a logistics chap by the name of Adam Kethro. He thought that heavy trucks, those with five axles or more, travelling on the national highway between Jozi and Durbs would be a good measure of state of the economy. The more traffic means that the wheels of the economy are moving faster than anticipated.

Strangely however, we are not too sure if this is as a result of the Transnet numbers falling. I have heard from several sources that Transnet is struggling, on the railways side, and in fact I was told yesterday that the last month’s coal volumes through to Richards Bay was NOT GOOD, not because the demand was not there, but because of derailments and poor performance from the supplier of rail services. Which is a business that is 100 percent owned by government, so effectively, you and I, the people of the country that we live in, own this asset.

But that is another piece of the puzzle, something that I do not have access to unfortunately. If I did, I would put it all together and get a sense of whether this explosion in road traffic is as a direct result of a worsening in rail services. Here goes the Mooi River Index, for the last six years, since the beginning of 2007.

As you can see, the year on year improvement is slight, 1.6 percent better. I decided to take a leaf out of the cement stats book and introduce two sets of extra data to this, the moving annual total (MAT) and compare that to the prior twelve months and then of course the year to date statistics, and see how that is going. First, moving annual total, which will compare the second half of the last 24 months, to the first half. So, for the last 12 months the volumes of five axle trucks through Mooi River toll plaza has totalled 1,784,710. Or roughly 4889 trucks a day, 203 an hour! The 12 months prior to that, June 2010 to May 2011, registered 1,502,634 heavy trucks, or roughly 4116 a day, 171 an hour. That increase is a pretty remarkable 18 percent. Moving annual total. Now, onto the year to date numbers! 702,038 heavy vehicles went through the Mooi River toll plaza from Jan 1 to May 31 2012. The number for the year 2011, fitting the exact same dates were 687,115 heavy vehicles.

So, that is an increase of just over two percent so far this year. And I guess it tells you something, that whilst we have recovered to pre crisis levels, the going lately has been fairly stodgy. Europe, slower growth rates in China, fairly ropey local looking economy, it all adds up I guess. There is cause for being optimistic, this is the BEST May ever, for the data that goes back to 2004, and in fact over 80 percent better than in 2004. That tells you that there is a lot more trucks on the road now, than there was then.

Byron’s beats today must be a yearning for his youth, when he built structures with Lego. Sigh, we were all engineers back then!

    I often talk about a YouTube clip I saw which shows a 15 storey hotel being built in six days. This of course takes place in China and is a great tribute to their work ethic and efficiency.

    This WSJ article has indicated that the company which made this viral video has made more clips and is now using it as a fantastic marketing tool. Good on them.

    The next clip they made is one where a 30 storey hotel is built in 15 days. Here it is. I strongly urge you to watch it. It is absolutely fascinating, starting from the foundations to the installation to the interior. I am far from an engineer so this kind of thing is almost mind blowing for me. When I walk through any CBD around the world and look up at the buildings I am astounded and dumbstruck by these structures. Yes Joburg that includes you. How we as humans manage to put up such an amazing structure with such precision is phenomenal. To do it in 30 days is even more impressive.

    The next step for this company is plans to build the tallest building in the world in 9 months. The building will be a whopping 838m high, 10m higher than the current tallest building, the Burk Khalifa in Dubai and nearly double the height of The Empire State Building. That is whole lot of iron ore, copper, cement, labour and many many more inputs.

    Where am I going with this? We are getting more efficient which means we consume things faster and therefore more of it. That’s how humans work. Look at the iPhone. Because it works better and quicker than all the others the average iPhone consumes 3 times more data than any other smartphone. That is why innovation is so important for economic growth. And the more we innovate the more room is made to innovate, if you get my just. Because I can use my iPad and the internet to get so much information across to you so quickly I have more time to do other productive things. So basically the more efficient we get, the more efficient we get. And the more efficient we get the more we consume. McDonalds, Starbucks, Wal-Mart, Visa, Amazon and many other great companies are good examples of this.

    So you see why I love stories like this and why I get frustrated that we sit and watch negativity on our TV’s all day. I guess bad news is what sells and for some reason by sounding bearish you seem very clever. It is in our nature to be cautious but if you ask any successful person, breaking out of your comfort zone is key.

New York, New York. 40o 43′ 0″ N, 74o 0′ 0″ W. Stocks benefitted late from the rumour mill running at full tilt again, this time on the whiff that central banks are ready to act in full force against any uncertainty. And that announcement could come Monday, or so it is thought, that was what the rumour mill was doing. Session end the Dow Jones closed a whole percent and a quarter higher.

Currencies and commodities corner. Dr. Copper last traded at 339 US cents per pound, slightly higher on the day, but noticeably higher than yesterday. The gold price is about flat on the day, last at 1623 Dollars per fine ounce. The platinum price is creeping up, the last traded price is 1489 Dollars per fine ounce. 84.69 Dollars per barrel is where the oil price last traded, that is for WTI as per the last NYMEX quote. The Rand is slightly firmer today, 8.36 to the US Dollar, 13.01 to the Pound Sterling and 10.61 to the Euro. We wait for the Greek elections on Sunday, I do think that the distraction of the Euro 2012 is much better for my health. Because, whilst I do not really have any allegiance, the French are who I am backing there!

Parting shot. I am not too sure why people are fascinated with the worst case scenario, and why people who are bearish always get more attention. I guess it is the same morbid fascination of how someone met their demise. Probably. I am just saying how I see it. Those who bring bad news are revered, because they somehow know something that we don’t. I remember seeing a tweet from a journalist friend in which he said coming back from a Nouriel Roubini talk that he was going to put his money under his mattress. Make no mistake, I have heard this from many people who have heard Roubini talk, they all say that he is very smart and very compelling, and as such sucks you in. And in fairness, thus far he has been right about the European debt issues. But is it completely awful? Spanish yields might have topped 7 percent yesterday, but it was much worse in the 90′s, in the pre Euro common currency era, so I guess there is a whole lot of room for great concern. And clearly the banks creaking and requiring more money (and the unsold properties which top 1 million) in order to shore up reserves, are a huge issue. Are these problems insurmountable? Can Spanish and Italian debt issues be solved?

Well, you can take a quick scan through this, you will be left being completely deflated: The End of the World as We Know It. And the comments on the side are full of praise for such an insightful piece, what insight, these predictions.

Last evenings rally in the US was founded on a rumour that globally central banks are setting up a coordinated manoeuvre post the Greek elections. So, what to expect on Monday? Well, I found via the eFX, the scenarios from Bofa Merrill Lynch:

    “Base case (high probability): election result allows Greece to form a pro-EU government; limited European policy response

    Bull case (low probability): election result means Greece does not form a pro-EU government; substantial ECB & European policy response

     

    Bear case (low to medium probability): election result means Greece does not form a pro-EU government; limited ECB/ European policy response”

Thanks for that, I am of the opinion that if Greece “goes”, which I still think has the lowest odds, then there might be some relief of sorts. Equally if the base case applies and Greece stays in the Euro zone, then there could equally be a rally. Worst case scenario would be if there were another stalemate. Do not count that out. Do I care about the inventors of democracy struggling to form a government, because the political landscape is so fragmented? Perhaps not. In the ultra short term, I do, in the long term, I don’t.

Sasha Naryshkine and Byron Lotter

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