Money with a dash of Funny

Talking Polony

2018-03-05T23:27:00.000-08:00

To market to market to buy a fat pig. When Viceroy's short of Capitec and Steinhoff came to market, it was the first time that many investors had heard of the concept of 'short selling'. The initial reaction for many people was some form of outrage; the thought that someone can benefit when others lose money didn't sit well with them.

Short selling is more common than many people think. Most companies that you own have what is called a short interest in them. For example Tesla currently has around 169 million shares in issue, 30 million of those have been shorted. Having 17% short interest is much higher than most companies have. Because investors in Tesla have such polar views on the company, it has attracted many short sellers. If you were short Tesla over the last 2-years, you have watched the stock more than double. Ouch!

Short sellers take their chances just like everyone else, their job is actually harder than most. On average stocks go up more than they go down, short sellers are betting against that trend. No for me thanks!

If you have Netflix, you might have seen the documentary Betting on Zero. Bill Ackman shorting Herbalife, is probably the most public short position of the last couple years. Ackman put $1 billion on the line, as he pushed for Herbalife to go to zero because his research pointed to the company being a pyramid scheme that preyed on poor people. After being in the position for 5-years, and fighting the rising tide Ackman celled it quits on Herbalife.

I think short sellers have a role to play in the market. They help keep management honest and help keep a lid on inflated share prices. Maybe we should think of them with less disdain, and remember not all short sellers make money.

Market Scorecard: Last night the All-share closed up 0.29%, the Dow closed up 1.37%, the S&P 500 closed up 1.10%, and the Nasdaq closed up 1.00%. Yesterday Tencent announced that their WeChat platform now has more than a billion users. The news has pushed the stock up 3% this morning.

Linkfest, lap it up

One thing, from Paul

JP Morgan Chase is another core holding in the Vestact (New York) portfolio. It's the largest US bank and operates across retail and commercial banking, investment advisory and financial trading. Our basic theory is that rising interest rates and lowered costs (from greater use of fintech) will fatten up their margins.

The company recently announced that they would rebuild their headquarters, at 270 Park Avenue, in midtown Manhattan, New York City. The current building was erected in 1961, has 52 floors and was previously known as the Union Carbide Building. It's between East 47th and 48th Streets.

Interestingly, that building was heavily renovated in 2011, at considerable cost, to the US Green Building Council's highest environmental rating, LEED Platinum. Now, just six years later they will demolish the building and start again. It currently has about 6,000 employees crammed into a space that was built for 3,500.

During the demolition and construction process the banks bigwigs will be accommodated in nearby buildings — 237, 245 and 277 Park Avenue, as well as 390 Madison Avenue.

The new building will be a 70-storey world headquarters for 15,000 employees.

Out With the Old Building, in With the New for JPMorgan Chase

Michael's Musings

The skills needed to survive living in caves and running away from lions, are very different from the survival skills needed to survive modern living and investing. Here are some of the mental biases that served us well when we were cave men but are not so great when it comes to the stock market - 18 Cognitive Bias Examples. It is interesting to note, research has shown even being well versed in these cognitive bias doesn't prevent us from being directed by them.

Click on the link to get a full screen, clear picture.

Vestact in the Media

Bright gets a nice mention in this Business Insider piece - Why Tiger Brands' CEO couldn't say sorry

As you can imagine, Tiger Brands was big news yesterday. Michael gets a mention in this Reuters article - Tiger Brands, RCL Foods lost R5.7 billion in one day.

Home again, home again, jiggety-jog. Our market has kicked off into the green this morning, thanks to Naspers being up 3%. The only major data out today is RSA 4Q GDP. The data only covers to the end of December 2017, so we won't see much impact from renewed confidence, we will have to wait another three months to see that.

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Peering into the Portfolio

2018-03-05T03:52:00.000-08:00

To market to market to buy a fat pig. Listening to the Animal Spirits Podcast on Friday, Michael and Ben were talking about how most people don't know what their financial advisors investments look like. I have always wondered what some of the more prominent market commentators hold. When on TV, it is very easy to talk, especially if you don't have skin in the game. To give you an idea of what I (Michael) personally hold, here is my portfolio below.

As you will see, my portfolio contains companies not listed on the Vestact homepage; some people collect spoons or rare books, I like to collect companies. Part of the process of selecting new companies for clients to invest in, is for one of us to own the company first. What better way to stay on top of a company than to have a stake in their future? Nvidia is an example of a company where we bought it first, then after doing further research, we released the potential of their GPUs (graphics processing units )for AI (artificial intelligence) and self-driving cars.

So there you have it, the companies that I am putting my hard earning money into. If you are a Vestact client and have any questions about my holdings, feel free to send in the questions.

Market Scorecard. US markets started in the red due to Trump's trade comments, and then headed slowly higher over the day. At the close, the Dow was down 0.29%, the S&P 500 was up 0.51%, the Nasdaq was up 1.08%. Earlier in the day the Johannesburg All-share index had closed down 0.31%..

Company Corner

As you were probably made aware of over the weekend, the listeria outbreak in South Africa has been partially traced back to facilities owned by Enterprise, a division of Tiger Brands. The stock is getting beaten down a bit this morning, currently down 8%. Here is the SENS announcement from the company - Tiger Brands To Recall Identified Enterprise Products. This is an extract from the company statement:

"Since the confirmed outbreak of Listeriosis by the Department of Health in December 2017, the company proactively amplified its testing for Listeria of raw materials and finished goods and also introduced additional hygiene monitoring of our processes, equipment, storage and waste areas at our facilities. Although our testing had detected listeria at low levels (<10 Colony Forming Units (CFUs)), which is well within the current industry guidelines (SANS 885), in a batch of one product on 14 February 2018, the presence of the ST6 strain had not been confirmed by our tests. The relevant samples have been sent to an external laboratory for the identification of the strain, and results are expected back on 5 March 2018."

This sounds like something that is going to be expensive for Tiger Brands? Apart from the cost of product recalls and brand damage, there have been 180 deaths linked to the listeria outbreak. There may be legal claims from the families of the deceased? Tiger isn't the only company mentioned as a source of the outbreak, but they may have to foot part of the bill if some some kind of restitution settlement is agreed.

The Value Added Meat Products division contributes about 7% of revenue and only 2.2% of group profits. The Tiger Brands market cap loss this morning is about R7 billion.

We will monitor this situation and keep you posted. For now, we are holders of Tiger Brands shares.

One thing, from Paul

We have all been very patient with MTN. The JSE-listed telecommunications giant has been a core holding in local portfolios since 2003. Here's what the share price looks like over that period.

As you can tell, it was a good one to hold from the get go, until 2014. At that point, the stock traded at over R250 per share. Now it trades at R124, half of the all-time high!

What went wrong? MTN's major business in Nigeria sagged when falling oil prices undermined a consumer boom in that populous nation. Sadly, it was then mugged by the Nigerian government, who imposed a US $ 5.2 billion fine on the company for not disconnecting customers who had failed to validate their IDs and proof addresses by an arbitrary deadline. After much bleating, the fine was reduced to $3.2 billion, to be paid off over a few years, from Nigerian profits. That debacle even has its own Wikipedia page, if you are interested:

MTN $5.2 billion fine

In any event, we are still holders and buyers of MTN shares. They operate in 21 countries across Africa and the Middle East and serve over 232 million subscribers. The product that they sell is connectivity. They have the customer base, and smartphones are more and more desirable.

We like the current company leadership too. Former CEO Phuthuma Nhleko is the chair of the board. Rob Shuter is the CEO.

The company put out a trading statement on Friday evening, noting that it expects headline earnings per share to be in the range of 170 to 190 cents per share for the full 2017 financial year. Not as high as we would like to see, but getting there. We look forward to the day when the share price makes new all-time highs.

Linkfest, lap it up

Bright's Banter

Apple Music is now growing faster than Spotify. In the U.S, Apple Music is gaining subscribers at a rate of five percent per month versus Spotify's two percent growth. Spotify still has twice as many subscribers (see graph below), but Apple Music has a built-in advantage as it comes pre-loaded on 1 billion iOS devices.

You get in your car and Apple Music begins playing automatically; Apple Music has helped me enjoy old school hip hop again #staywoke! Apple takes a 30% cut of all subscriptions sold through its App Store. Spotify decided to avoid the charge by preventing new customers from subscribing to Spotify Premium through the App Store. Apple retaliated by blocking the Spotify update.

This does not make me feel comfortable! When you're building a platform, and you unfairly restrain the competition, surely that's abuse of monopoly power?

You will find more infographics at Statista

The Apple vs Spotify fight is symptomatic of a bigger trend in technology startups. Budding entrepreneurs probably don't try to compete with Microsoft, Amazon, Apple, Facebook or Alphabet/Google. Mind you, they would love to be bought out later by these mega companies!

This sounds like an oxymoron. You can raise billions of dollars as long as you don't compete with he giants, but you want them to buy you out? As Prof. Scott Galloway said in his book "It has never been easier to be a billionaire and never been harder to be a millionaire."

Disclosure: we hold Apple, Amazon, Facebook, Alphabet in our client portfolios.

Home again, home again, jiggety-jog. Talk of quicker interest rate increases in the US, has made the Dollar stronger and the Rand weaker. Looking ahead during this week, MTN and Aspen release numbers, and then South Africa's GDP number is out tomorrow.

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Buy Bidcorp, Not Bitcoin

2018-03-02T00:19:00.000-08:00

To market to market to buy a fat pig. The 'Trump rally' seems to have come to an end thanks to the interest rate concerns; February was the first down month since Trump was elected. I can't say that I am a fan of the term 'Trump rally'. In my opinion, if Hilary had won markets would have also done well. Maybe markets would not have run as high, without the Republican the tax cut benefit, but higher none the less.

What makes this recent run of gains amazing is how long it lasted, without an interruption. Global markets went higher for 15 straight months, the longest streak ever! Since 2009, the market has been on the up. There have been a few hiccups along the way but many more up days than down days. The problem with that is we now have a generation of investors who think that markets only go up. We have seen high returns and low volatility (the calm waters of the last 15-months).

Found at Global stocks end a winning streak that's never been seen before

Market Scorecard. The US market wasn't sure which direction it wanted to go yesterday, bouncing between red and green for most of the morning. Then at around mid-day Trump announced that he was going to implement trade tariffs on steel and aluminium, pushing markets firmly into the red. The Dow ended up down 1.68%, the S&P 500 was down 1.33%, the Nasdaq was down 1.27%, and the All-share was down 0.69%. As Larry Summers said to Bloomberg yesterday, there are far more people in the US using steel and aluminium, than people who produce those metals.

If you live in the US and make use of any of the following products, you are about to pay more. Also, if you work in an industry that produces any of these products, your job security just dropped a few points.

Company Corner

Bright's Banter

On the 21st of February I went to Bidcorp's results presentation which was held in the beautiful Standard Bank head office building in Rosebank. The company was reporting their half year results to the end of December 2017. Just a quick refresh, this business has diverse food service operation across 30 countries. 90% of Bidcorp's earnings continue to be offshore. Only 10% is earned locally, making it another useful Rand-hedge.

We've seen the Rand strengthen in recent times, so that's not helpful. Notwithstanding that headwind, the company reported total revenues of R61.4 billion, that's up 7.7% from the previous year. Headline earnings per share were up 8.6% to 640c and the company increased the interim dividend by 12% to 280c.

The segmental analysis below shows that the Australasian region continues to be largest contributor to both the top and bottom line. Food inflation was mixed and muted on average (never forget the 6-foot-tall man who drowned crossing the stream that was 5 feet deep on average). Wage inflation has been relentless across the board, management worry about that.

The company confirmed that they were reinvesting in their business and expanding capacity in Australia & New Zealand in order to fill territorial gaps and be closer to the consumer. In those two countries Bidcorp is expanding from one distribution centre each to about three to five smaller, more manageable urban facilities.

Trading in Europe was fantastic with revenues up 16.2% and trading profits up 32.9% in constant currencies with improving margins from 3.6% to 4.2%. Overall the businesses in Europe are making steady progress notwithstanding some avian flu outbreaks which led to a shortage in eggs and dairy products. The disruptions were temporary.

They business continued to make small bolt-on acquisitions as a way to enter new regions or to supplement existing capacity for broader reach. Emerging markets revenues were up 0.7%, trading profit was up 1.7% but the margins stood at 5.9%. The business entered the Vietnam market and Malaysia is starting to contribute. The Greater China region was also affected by the dairy and poultry situation.

The CEO Bernard Berson was asked if the likes of Uber Eats and Delivery Hero were eating their lunch? He explained that in order for a restaurant to deliver food directly to the customer, they still need Bidcorp for the ingredients. Ex-restaurant or ghost/shadow kitchens use platforms like Uber Eats to get the food to the customer but they need food ingredient suppliers. Bidcorp will benefitting from more eating out and more takeout food delivery. Sounds good! #KaChing.

I would argue that Bidcorp's edge is their complex infrastructure, and "routes to market". They have spent billions over the years to develop the infrastructure to reach their customers. Adding more customers to that system is easy and adds to margins. I don't want to get too excited here but management mentioned that they are using "big data analytics" to better understand their customers. They have all the data already! This tech spend makes good sense.

The food services industry remains fragmented with only a few big players spread across the globe. Bidcorp is a consolidator and sees more opportunities to grow. The company trades at a historic PE of 21 which is cheaper than its peers. Bidcorp believes that a low-debt balance sheet is a strong competitive advantage. For the moment, the strong Rand is a bonus when considering capital purchases.

Linkfest, lap it up

One thing, from Paul

Boston-based Harvard University has an endowment fund worth $37.1 billion. That's permanent capital that they have saved up, or received from alumni grants. The university uses the income that the fund generates to supplement student financial aid and develop its infrastructure and teaching programmes.

The management of that portfolio has always been the subject of much debate. In addition to conventional equities and bond holdings, the fund has huge bets on natural resources. It accumulated a $4 billion portfolio of Californian vineyards, Central American teak forests, a cotton farm in Australia, a eucalyptus plantation in Uruguay, and timberland in Romania.

The current endowment chief, Narv Narvekar, decided to write down the value of that natural resources portfolio last year by $1.1 billion, to $2.9 billion.

Over the past decade, Harvard's fund posted a 4.4 percent average annual return. That's worse than its university peers, and worse than a market-tracking index fund (60/40 equities/bonds) which would have earned an annual 6.4 percent. Vestact's all equity US portfolio generated average returns of around 10% per annum!

So much for the best brains at the world's top university. Read all about it here:

Harvard Blew $1 Billion in Bet on Tomatoes, Sugar, and Eucalyptus

This week on Blunders: Xi Jinping is now Chief for Life in China, Cape Town is Superdry, Egypt is awful and Snapchat has a Kylie Jenner problem - Blunders: Episode 90

Michael's Musings

As your smartphone becomes your most important possession, having access to the internet is something you can't live without. Here is how each South African network ranks in terms of coverage - The mobile network with the best coverage in South Africa.

When times get tough humans adapt to get stronger and more efficient - How this 78-year-old Cape Town company became one of the most water-efficient manufacturers of Coke in the world.

Home again, home again, jiggety-jog. As expected, our market is down this morning, in line with global markets. The most important thing on our screens today will be day two of the test between the Proteas and Australia; not much out today in terms of key market data.

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My Banana is Bigger Than Your Cucumber

2018-03-01T00:19:00.000-08:00

To market to market to buy a fat pig. I (Michael) am reading Thinking, Fast and Slow by Daniel Kahneman. I have been since December; a recent reading test told me that I read at the speed of a high school student, a few words a minute slower than the global average. Kahneman is a Nobel prize winner, for his work on behaviour economics (cognitive biases). Basically his work proved that people are irrational and economists need to come up with better models for how the world works.

One of the experiments spoken about in the book is how unhappiness can derive from comparing. Researchers took two chimps, in separate cages. First, they gave each one a cucumber and then observed. Both Chimps ate the cucumber and were content. Then the researchers gave one chimp a banana and the other chimp a cucumber again. As you can imagine, one of the chimps was happier than the other. The chimp with the cucumber went as far as throwing the cucumber at the other chimp.

It is amazing what happens when we feel that we are being treated unfairly. What the experiment demonstrates is that unfairness and unhappiness is relative. If the second chimp never saw the first chimp with the banana, there wouldn't have been a problem. Imagine if the first chimp got wilted spinach instead of the banana? Apply this to a very emotive subject, income inequality; has social media made the problem seem worse than it is? The graph below is one of the arguments presented for the rich getting richer and the middle class going sideways.

My argument is that focusing on real wages is the wrong metric. Surely what is more important is what you can do with what you earn? If your salary doesn't go up in real terms, but thanks to technology things get cheaper, that is progress? These below tweets show how far we have come in the last 100 years.

I agree that there is no point in having a society build tremendous wealth that only benefits a few, but at the same time, things probably aren't as bad as the media would have you believe?

Market Scorecard. Tuesday's tough time continued on Wednesday. The Dow was down 1.50%, the S&P 500 was down 1.11%, the Nasdaq was down 0.78%, and the All-share was down 1.19%.

Company Corner

Yesterday after the market closed, Steinhoff released its Quarterly update, for the three months ending 31 December. Meaning the post-implosion period only accounts for three weeks of these numbers. The first thing I looked for was an update of when PWC would release their findings.

"It is not possible at this stage to provide any definitive timing for conclusion of the PwC investigation, but the company will provide regular updates on any material developments and clarity on timing as soon as possible"

Here is a look at their top line performance.

As you can see, Mattress Firm (US operation) is hurting while they are in the process of revamping the business. Here is what management had to say:

"During the quarter under review, 99 stores were closed, while eight stores were opened. Management aims to close approximately 175 stores and open 75 new stores"

"Furthermore, management has identified that the change in major supplier has resulted in gaps in the product range that are being urgently addressed."

"Mattress Firm's like-for-like sales being down by 10% for the period under review, largely driven by lower average unit selling prices. Like-for-like unit sales for the group declined by 3%."

It all still looks rather ugly. To make matters worse, German media and Moneyweb are reporting that incriminating emails between Jooste and senior management have been uncovered (#SteinhoffLeaks Part 1: 'Some big mistakes'). If you are still holding the share, the end to this sh*t show doesn't look to be any closer.

Linkfest, lap it up

One thing, from Paul

Strikes by organised labour are on the decline (in developed countries at least). The collapse of unions in the private sector is the principal reason. Globalisation of manufacturing and services is also a factor, as enormous companies with worldwide operations simply adjust to avoid work stoppages.

This trend seems true of South Africa too? We have high levels of unemployment, which further strengthens the hand of companies. Trade unions only really have much traction in the state sector, where their employer is a pushover?

Here is a link to the article (might require a WSJ subscription) which contains that graph:

Why Workers Are Striking Less Than Ever

Michael's Musings

If you are on Twitter you need to follow Wandile Sihlobo. His blog post from yesterday has a look at the unused land which can be used for agriculture, the low hanging fruit for land redistribution - These Provinces Have Unused Land Suitable For Agriculture.

Todays chart from Visual Capitalist fits perfectly with what I wrote above - These 6 Charts Show How the World is Improving.

The mind still boggles a bit, when you think about how much China has changed over the last 30-years. It shows what can be accomplished when the government is focused on the people and not their own benefits.

Vestact in the Media

This an interesting question to think about. Michael gets a nice mention when talking about the impact of our currency on the stock market - Does South Africa really need a stronger rand?.

Home again, home again, jiggety-jog. Our market is slightly down on the open. A strong Dollar means the Rand is heading back to the $/R 12.00 level. Local data today, we have manufacturing PMI and vehicle sales numbers; how big will the impact of the renewed optimism be?

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Loud and Cloud

2018-02-28T01:27:00.002-08:00

To market to market to buy a fat pig. Chatting with many clients, most people hate buying at all-time highs. The feeling is that a correction is coming or at the very least, you have already missed the opportunity. Their proposed solution, keep your gunpowder dry and sit on cash. Ready to deploy at a moments notice, during the next correction.

Kicking off this year, markets went into correction territory; "A stock market correction is when prices fall 10 percent from the 52-week high". If you were on the sidelines, sounds like a perfect time to buy right? What happens in reality though, is that when the market is down 10%, it looks certain that the market will drop further in the coming days. Then a few days later, when things have settled and the market is only down 8%, you promise yourself that you will buy when the market gets back to being down 10%.

Yes, you guessed it. While you were worrying about how far the market will fall, the market dropped and then recovered all without you deploying a single cent. We have seen it many times, where clients have cash on hand to buy the dips, but when it comes time to buy the dip nothing happens. This Tweet from Byron sums things up nicely.

Its far easier to accept that you can't predict where the market will go tomorrow; just buy when you have long-term capital available. As the market adage goes, "It is time in the market, not timing the market".

Market Scorecard. The market didn't like what Jerome Powell had to say to Congress yesterday. The Dow was down 1.16%, the S&P 500 was down 1.27%, the Nasdaq was down 1.23%, and the All-share was up 0.27%. Unless US markets have a rip-roaring day this afternoon, February will be the first down month in 13-months! It has been good to be an equity investor.

Linkfest, lap it up

One thing, from Paul

I've heard that getting divorced can be really bad for your finances? That makes sense, since usually a couple's savings are split and immovable assets have to be sold in a hurry. Setting up two new homes can be really expensive.

The problem is, marriages seem to be ending sooner. Here's a chart which shows the percentage of people who are divorced, separated or in a second or later marriage in America in 1960, 1980 and 2016. In other words, these are people who are probably trailing a number of financial "ex-dependents". That number now peaks at over 40% of the total population.

Here is a link to the the article which contains that graph:

Here's when you're probably getting divorced

Byron's Beats

Imagine the billions of photos, videos, songs and files that get stored on Apple devices. These days, not even 256GB phones can handle all this content. Then this needs to get backed-up onto a computer which duplicates the storage requirements. Step in Apple iCloud. I cannot even comprehend the amount of storage capacity iCloud requires.

I was always under the assumption that iCloud was done in-house. Apple has the capital available. But this CNBC article titled Apple confirms it uses Google's cloud for iCloud suggests that Google has secured a massive cloud storage deal with Apple. The details in the article are a little "cloudy" because these businesses tend to be secretive about their deals with each other. They are supposed to be fierce rivals after all. It seems that Amazon Web Services and Microsoft's Azure used to be the cloud providers, but Google has replaced Azure over the last two years. AWS still seems to be involved.

I recently spoke about Google's cloud business as the next big thing for the business. This is certainly a step in the right direction.

Michael's Musings

Eddy Elfenbein has a great piece this morning in his blog post called, Crossing Wall Street. He speaks about how market guru's make forecasts that they can not be held accountable for. At the start of each year there are a set of people who get wheeled in-front of the cameras to talk about all the reasons the market is going to do badly. Their claim to fame is calling the 2008 crash. As the saying goes, even a broken clock is right twice a day - "A 40% Chance"

Home again, home again, jiggety-jog. Following the path set by the West, our market is down this morning. Added to that, the idea of interest rates rising this year has resulted in a stronger Dollar, currently at $/R 11.74. International data out later today is EU CPI and then US GDP.

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Buffett, Bekker and Bezos

2018-02-27T01:16:00.000-08:00

To market to market to buy a fat pig. If you do any form of long-term investing, Warren Buffett is the man you aim to emulate. As such there are two big 'Buffett' events investors look forward to, the first is the annual Berkshire AGM and the second is Buffett's annual letter to shareholders. The man has an amazing ability to make complex matters sound simple! Here is an awesome example of his way with words and concepts.

"That last requirement proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far from spectacular, businesses hit an all-time high. Indeed, price seemed almost irrelevant to an army of optimistic purchasers.

Why the purchasing frenzy? In part, it's because the CEO job self-selects for "can-do" types. If Wall Street analysts or board members urge that brand of CEO to consider possible acquisitions, it's a bit like telling your ripening teenager to be sure to have a normal sex life."

I came across this WSJ article on Friday, Investors' Zeal to Buy Stocks With Debt Leaves Markets Vulnerable, which ties in rather well with another point Buffett made. Using debt, backed by the stocks (margin) is a sure fire way to blow up at some point. Someone who comes to mind, is Christo Wiese, he used margin to increase the size of his Steinhoff holding. The result is that he was a forced seller, locking in huge losses (not to mention the losses to the banks!).

Anyone would agree that buying Berkshire 50-years ago would have been an inspired purchase, one that would set you up for stress-free retirement. If you used debt to buy them, you probably would have sold them in the early 70's. The below table shows the four biggest pullbacks in the Berkshire share price over the last 51-years. Note that even great investments over the long-term can lose half its value in the short term.

"This table offers the strongest argument I can muster against ever using borrowed money to own stocks. There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren't immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions."

Lastly, here is a breakdown of their top stock holdings. Note how big their Apple position is, not bad considering that they only started buying it during 2016. Buffett was asked when he is going to buy an iPhone. His reply was along the lines of, for as long as he doesn't own one, the market is not saturated; there is scope to sell more phones.

One thing, from Paul

Our most important local stock holding, by far, is Naspers. Its our largest holding in almost all JSE portfolios. In our view, it should be trading at twice the share price that it is today. The aggregate value of its various Internet and media assets far exceeds its current value on the market.

So it's pleasing when we see other market participants who hold the same view. London-based Goldman Sachs analyst Lisa Yang had this to say about Naspers in a short note issued overnight (I have lightly edited her comments, and spelled out abbreviations, to improve the readability):

In our view, Naspers' recent underperformance was mainly driven by technicals and currency moves, overshadowing several positive developments surrounding fundamentals, transparency and improvements in the political and macro environment in South Africa. With the stock down 15% relative to JSE All Share Index over the past three months and its net asset value discount back to 41% (near all-time highs), we see a compelling entry point and reiterate our Buy rating (on our conviction list).

We believe local selling pressure has largely played out and Naspers should benefit from an increase in foreign inflows into South Africa.

While currency moves may be a further headwind for the stock, we note a lack of relationship historically. Additionally, a stronger Rand would benefit Naspers' Pay TV division, (22% of 2018 earnings, >100% excluding Tencent and Mail.ru).

Disclosure and transparency have improved, and we also see management optionality to navigate technical headwinds through increasing the liquidity of their depositary receipt listing in New York, or a full dual listing.

Fundamentals are showing a positive inflection as demonstrated by interim (6 month) results, and we expect further improvement and potential corporate action to crystallise the value of the private assets. Overall, our sum of the parts-based 12-month price target changes by around 10% to R4,198, mainly due to currency issues.

Naspers is currently trading at around R3,300 per share, so this target of Yang's at Goldman Sachs is almost 30% higher. Consider buying some more here! Of course, the trick with successful investing is to own stocks before everyone else starts liking them.

Market Scorecard. Green on the screen all around. The Dow was up 1.58%, the S&P 500 was up 1.18%, the Nasdaq was up 1.15%, and the All-share was up 0.26%. Looking at the list of companies at 12-month highs, it is packed with retailers and banks. Pointing firmly to local consumer and business confidence. The cabinet re-shuffle last night, was a bit of a mixed bag. Reputable people are in the key positions though, which should boost confidence further. In time, the list of ministers will shrink as departments are removed, which will probably see some questionable appointments removed? The one thing that the re-shuffle shows though is that change takes time. It also means that this song will make a comeback - Stomach in Chest out.

Linkfest, lap it up

Byron's Beats

I have always enjoyed reading Business Insider USA. They have a unique style which keeps things interesting. It may not always be deep analysis but they do manage to find facts and stories which demand my attention.

Business Insider SA is now up and running. Subscribe to their newsletter or follow them on twitter. You will enjoy their articles. Like this one about our new (and returned) finance minister, Nhlanhla Nene.

He farms cabbages and sold life policies - 8 things you didn't know about Nhlanhla Nene.

Bright's Banter

Amazon A Monopoly Or Nah?

The latest sector that Amazon has put in jail? The shipping sector! Amazon announced it was getting into delivery of goods. Immediately, the share prices of UPS and FedEx tanked five percent on opening bell or around $8 billion in market capitalisation, continuing a pattern of cascading stock prices within hours of Amazon announcing interest in any given sector.

Analysts claim the threat is overblown, pointing to UPS and FedEx's complex infrastructure. Amazon accounts for approximately just five percent of total revenue and pointing to all the CapEx expenses of about $5 billion each for FedEx and UPS in the most recent year. Last year after seeing Amazon lease delivery jets and buying tractor trailers, my colleagues alluded to the fact that Amazon might be planning on taking some of the delivery burden in-house and maybe taking over the sector once they understand it's ins and outs.

However, Amazon's Spokeswoman Kelly Cheeseman said "Our own delivery efforts are needed to supplement that capacity rather than replace it" referring to the surge in holiday demand and basically brushing off any speculation of Amazon becoming a full-time player in the delivery sector. Well it would appear that FedEx and UPS should get ready to be supplemented. It doesn't matter what the reality is — the perception that Amazon will win is a self-fulfilling prophecy as they will begin choking access to the mother's milk of business: capital.

FedEx and UPS, regardless of the reality, will lose a big chunk of their value as analysts begin to sharpen their pencils and look at a new gangster in the town of shipping: Amazon!

Below is an article which is the total opposite of my argument.

Here's why Amazon isn't a monopoly

Vestact in the Media

Bright chats to SAFM about Sasol's 6-month numbers yesterday - Sasol's liquid fuels volume down.

Home again, home again, jiggety-jog. Asian markets started well in the green but have since slipped into the red, Tencent is down 0.7%. On the data front, it is a rather quiet day. New Fed Chair, Jerome Powell, will appear before congress later. Given how Fed sentiment has been driving markets this year, I'm sure every word he says will be scrutinised.

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Batting for Batteries

2018-02-26T03:05:00.000-08:00

To market to market to buy a fat pig. Last week Paul spoke about the rise of Lithium, this week we will talk about the sister metal Cobalt. Like Lithium, it is a key component of the modern battery, and as a result has also seen its price sky rocket.

As the infographic below shows, cobalt is an important raw material in the iPhone battery. If Apple wants to continue selling 200 million phones a year, they need to make sure they can get enough of the metal. Here is their solution - Apple in Talks to Buy Cobalt Directly From Miners.

One of our readers last week pointed out that the commodity industry has a way of balancing itself out. At the moment demand out strips supply, and the expected growth in battery powered technology is enormous. If the Cobalt price continues to rise there are a couple scenarios to consider. The most likely scenario is that the global mining houses double down on their efforts to find more of the metal and find clever ways to bring down the price of mining it. Just like with oil and the frackers, high oil prices forced business to go in search of new reserves and new ways to extract it.

Another scenario is where the high prices of cobalt forces the use of an alternate metal. Then lastly, there have been over a billion iPhones sold, recycling the materials in those phones becomes more feasible as commodity prices go higher. The beauty of the free market at work. You will probably find that the future will be composed of a bit of all three scenarios; that goes for all the metals used in batteries.

Market Scorecard. The US markets had a good day on Friday, with a big rally going into the close. The Dow was up 1.39%, the S&P 500 was up 1.60%, the Nasdaq was up 1.77%, and the All-share was up 0.96%.

Company Corner

Spur has been in the news for all the wrong reasons recently. Given how important entrepreneurs are to job creation, I feel that we need to pay tribute to those people who start and grow businesses - Spur Corporation Limited - Retirement Of Spur Founder And Executive Chairman.

"Mr Ambor (76) founded Spur when he opened the first restaurant in Newlands, Cape Town, in 1967 and has served as executive chairman of the board since the company's listing on the JSE in 1986."

Wow!

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One thing, from Paul

This week on Blunders: KFC runs out of chicken, Iberian ham prices run wild, MiWay agent calls Zulu king and disaster strikes in Hulene (Maputo) - Blunders - Episode 89

Michael's Musings

The days of Diesel engines may be numbered, a German court is ruling on the legality of driving diesel cars in the cities - German court delays ruling on diesel ban to next week. In South Africa, the big impact will be felt in the platinum price. Here is a piece from last year talking about the subject - Will The Death Of Diesel Ruin Platinum?.

Bright's Banter

In my last piece on Facebook I said the following "Facebook is going back to first principles by revamping the News Feed and prioritising posts from friends and family over advertised viral videos/content from publishers with an agenda. This will help avoid hurtful content (aka "fake news") that goes viral from time to time and dilutes the user experience. Most importantly, it'll help curb the invisible hands that have been swaying election results all over the world by perpetuating fake news on the platform. This move could see Facebook's advertising revenue growth slow in the interim, but it'll boost the company's growth long-term, as advertisers/brands will value and trust the platform more, and engagement will be more meaningful for users.

This sounds all good and well but advertisers are now skeptical of the average time spent by people on Facebook. According to a report by a crowd called Shareaholic, traffic on the Facebook platform is starting to decrease at a fast pace in the second half of 2017. This will not directly link to a fall in ad sales for the company because advertisers are still keen to have the attention of the +2 billion Monthly Active Users. To be honest Facebook and Google still own over 80% of all ad revenues worldwide. The infographic shows the decrease of Facebook traffic compared to other social media platforms.

You will find more infographics at Statista

Home again, home again, jiggety-jog.

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Bonding with your Shares

2018-02-23T00:14:00.000-08:00

To market to market to buy a fat pig. At the start of the year, there are often clients asking if they should invest in the stock market or their bond. If the subsequent year had strong market returns, normally we have people saying they are dipping into their bond to send money. The opposite is also true, during lacklustre years, we see clients selling shares to pay down their home loan. So what is the best route to go?

If we don't take emotion into consideration, having money in the stock market is a much better long-term return than having money in your house. Having a look at the recent FNB House Price Index, if you bought property in January 2000, on average it is now worth just over four times what you paid for it. Over the same time period the JSE All-share is up over 11 times! See the graphs below of how each sector has done over the years.

Found at South Africa's FTSE/JSE All-Share Index Returns By Year

We are not comparing apples to apples though. The real choice you need to make is - put spare capital into your home loan and pay less interest, or put it in the stock market and hope for superior returns. Do you remember the late 90's and early 2000's when interest rates were around 20%!? Between the period 1 January 2000 and 31 December 2008, it was better to have your money in your home loan than the stock market. Expanding the time frame though to 1 January 2000 until the 31 December 2017, stocks beat your bond. So when people say stocks are a good long-term investment, they mean LONG term.

For many people, it is worth something knowing that they own their property. Knowing that if you hit a financial speed bump, the roof over your head is not going to be taken away by the bank. That is worth giving up a few percentage points of return. The ideal situation is having enough capital to pay a bit extra into your home loan and still have some money to top up your share portfolio. My strategy is to have spare funds sitting in my home loan that I can draw on during market pullbacks. I still put something into stocks monthly though; dollar-cost averaging is a very powerful weapon in the arsenal of long-term investors.

To conclude, generally keeping your life simple is the best strategy. Don't stress about where you will get the best return, rather focus on making sure that your budget leaves room for monthly saving.

Market Scorecard. New York kicked the day off, seemly forgetting all about the Fed minutes from the day before. The Dow was up 0.66%, the S&P 500 was up 0.10%, the Nasdaq was down 0.11%, the All-share was down 0.77%.

Company Corner

Michael's Musings

Yesterday Woolworths released their 6-month trading statement. Off the bat, you can see the company is in a transition phase. Locally they no longer have the luxury of taking market share from Edgars and Stuttafords, coupled with three years of poor economic growth. In Australia, the David Jones turnaround is still in full swing and still has another 18-months to go before tangible results will be seen.

The David Jones purchase is part of a string of poor international purchases by South African CEO's. Poor South African growth and cheap debt, were excellent reasons to spread their wings on the international stage. For Woolworths shareholders, the David Jones asset was bought for A$ 2.1 billion and has now been written down by A$ 712.5 million. Not to mention the R400 million odd spent on the rights issue needed to raise the funds.

Here are the headline numbers, Sales are up 2.5% to R38.8 billion, HEPS are down 15%, and the dividend is down 18.4% to 108.5c. The pain has come from 'Fashion, Beauty and Home' where sales were down 3.4%, this was compounded by operating profit margin dropping from 16.5% to 14.4%. In Australia, with all the changes being made, David Jones saw sales decline 3.3% and its operating margin drop from 9.6% to 6.9%.

The bright spot is the food offering. Sales were up 9.4% and operating margins grew from 6.9% to 7.4%. That is the beauty of the Woolies business model, there is some diversification. It is not like a TFG that is purely clothes or a Shoprite that is mostly food retail. In our view, the biggest short to medium term threat to the Australian business is the recent arrival of Amazon. Ian Moir on CNBC last year said he wasn't concerned about Amazon; maybe he was just putting on a brave face? In the next two years David Jones wants to have 10% of their sales coming from online, the company definitely acknowledges the importance of being online.

The stock was up 2% on these results. Going forward there is RSA optimism, which should be good news for retailers. Added to that the David Jones turn around should start showing in the Woolies share price in the not too distant future. The stock market is forward-looking, if profits are expected to rise in the next 18-months, it will be featured in the valuation today.

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One thing, from Paul

Chinese people really like fast cars. China accounted for almost 90% of sales growth at leading luxury automakers in 2017.

The top global luxury brands are BMW, Mercedes-Benz, Lexus (part of Toyota), Jaguar Land Rover, Volvo, Cadillac (part of General Motors), Infiniti (part of Nissan) Audi and Porsche (both part of Volkswagen).

According to a report by Nikkei, that group of companies increased sales by 5% to just under 10 million vehicles last year. All but Lexus logged their highest-ever annual sales, while the Japanese brand scored its second-best year on record.

China made up 27% of overall global luxury vehicle sales. Growth in that country was 17% year-on-year, compared to a sputtering 1% rise in the rest of the world. German models did especially well.

They should call 2018 the year of the car, not the year of the dog!

Here is a link to the report summary: https://asia.nikkei.com/Business/Trends/Chinese-buyers-spur-rise-in-global-luxury-car-sales

Byron's Beats

If you read my recent commentary about Discovery's latest results you may have picked up my passion for preventative healthcare. This Business Day article titled Discovery offers aid in public health got me thinking about how this could be implemented.

Clearly, this needs to be targeted to the poor. It should be implemented along with the social grant's network. If you qualify for social grants, you qualify for a special Vitality programme. Discovery can offer their networks and manage it for a fee (they have shareholders, they cannot do it for free). It needs to be subsidised by the government as part of government's healthcare spend.

The first target should be consistent healthcare screening. Members can be rewarded with incentives for getting their blood screened for all sorts of potential ailments including diabetes, cholesterol and HIV.

Eating healthy should also be rewarded. A simple card swipe or phone scan can reward members for buying fruits and vegetables. Rewards can include Shopping vouchers and airtime. You can even get more specific like school uniforms or electricity vouchers. Incentivising people is easy.

Virgin has opened a few low-cost gyms. Subsided contracts that rewards exercise can also be implemented. In fact, any small gym can join the program whereby members can check in their workouts.

Judging by the data Discovery have gathered over the years, this will save much more money than it will cost over the long run. We just need private and public to cooperate.

Home again, home again, jiggety-jog. Byron is really excited about Super Rugby being in full swing this morning. The biggest data out today are CPI numbers from the EU, the expectation is that it will remain stable at 1.3%. Still well below the 2% target. The rumours are we will get a new cabinet next week? I have learnt that when it comes to politics, it will happen when it happens.

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Now we Grow

2018-02-22T00:47:00.002-08:00

To market to market to buy a fat pig. It was budget day yesterday, which made many people nervous. Back in the days of Trevor Manual, the anticipation was around how big your tax cut would be. The market reacted favourably to the budget, with the All-share swinging from red to green and our bonds dropping below 8% for the first time in three years (read 'before Nenegate'). The reason for the positive reaction from the equity and bond market is due to the government showing they are willing to do what needs to be done by raising VAT.

Step one has been completed, we have avoided a debt downgrade. There is very little room to raise taxes further. Going forward, the government needs to be more effective and SOE's need to send corrupt employees to prison. Let's not kid ourselves though, there is still a monster hole in our budget. We desperately need growth, to get back to a balanced budget and to bring our debt to GDP ratio under control.

A VAT increase means less money for both rich and poor. The reality however is if we did not have a VAT increase, we would as a nation be in an even worse position down the line. A debt downgrade and potential bailout from the IMF won't stimulate the economy. Zero economic growth hits the poor the hardest.

An unintended consequence of raising VAT or a tax on consumption, may be increased savings. There are studies that indicate taxing consumption, leads to less consumption and higher savings. As you can imagine though, trying to predict people's spending habits is fraught with assumptions.

Market Scorecard. It was a very mixed day for US markets yesterday. Things were going along swimmingly until the Fed minutes were released, then all fall down. The Fed noted that the US economy is in its best shape since the crisis. What the market heard was that there are going to be more interest rate hikes than currently assumed. The Dow was down 0.67%, the S&P 500 was down 0.55%, the Nasdaq was down 0.22%, and the All-share was up 1.17%.

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One thing, from Paul

One of our core holdings in New York, Priceline, is changing its name to Booking Holdings. The company will begin trading under a new ticker symbol on the NASDAQ: BKNG from February 27. Remember that the group is made up of these six primary brands: Booking.com, priceline.com, KAYAK, agoda.com, Rentalcars.com and OpenTable.

The CEO Glenn Fogel said yesterday, "Over the last two decades, our business has expanded from just priceline.com, operating solely in the United States, into six primary brands with headquarters around the globe, operating in more than 220 countries and territories in over 40 languages, fulfilling one unified mission of helping people experience the world. Today, our largest brand is Booking.com, which has more than 1.5 million properties, averages over one million bookings per day and produces a significant majority of Booking Holdings' gross bookings and operating profit."

I approve of this kind of thing! Investors like simple names, simple business models and simple corporate structures. Some of my favourite companies have names made up of letters that you can count on both hands. Like Amazon, Netflix, Discovery, Google, Aspen, Naspers, etc. Oh, and Vestact too!

Michael's Musings

With all the concern about rising interest rates, what does history tell us about how markets react? It seems that when interest rates come off a low base, rising interest rates are coupled with higher stock returns. It is only when interest rates are above 5% that an increase in rates has a significant negative impact on the stock market. History is not the future, interesting numbers none the less - Are We Out of the Woods Yet?.

How can a disease that requires an inexpensive shot, be returning ? - The return of measles in Europe is "a tragedy we simply cannot accept"

Home again, home again, jiggety-jog. After the finish for US markets, it is no surprise that the Alsi is lower this morning. The prospect of higher interest rates from the Fed has also strengthened the Dollar, currently we are at $/R 11.66. Data out later today is GDP from the UK, the expectation is for YoY growth of 1.5%.

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The World is Discovering Vitality

2018-02-21T03:53:00.000-08:00

Market Scorecard. After their long weekend, US markets were red yesterday. Walmart, a player in both the Dow and S&P 500 was down 10% after poor results! (Walmart just saw $30 billion in market cap destroyed by Amazon fears) The Dow was down by 1.01%, the S&P 500 was down 0.58%, the Nasdaq was down 0.07%, and the All-share was down 1.32%. Bidcorp released their six-month numbers this morning, which the market seemed to like. The stock is currently up 2%.

One thing, from Paul

I always view Budget Day with trepidation. The state has a vital role to play in a healthy society, taking on many functions which are more efficiently handled by public entities. It is vital to save the lives of the poorest of the poor with ongoing social grants, and to provide basic healthcare, schooling, infrastructure and security services. All this has to be funded by taxes, and I'm OK with the idea that rich people should pay more, as often they have had the benefit of generations of state support. I'm also OK with the idea that the democratically elected government of the day should get to decide on its main priorities, within the bounds of the constitution.

However, public entities are seldom run well, and many people go into politics and public service for the money, or to gain control of state resources, and to divert public funds in corrupt ways for their own personal gain. In South Africa, it's hard to find an organ of state which isn't in a state of crisis.

Tax revenues have slipped badly in the last decade, and SARS's credibility has plummeted, but state spending has roared ahead. Our public sector wage bill is huge and rising (but productivity is poor). Add to that the ghastly capital spending overruns at Eskom, and we are facing a dire fiscal shortfall. South Africa's debt to GDP ratio has spiralled out of control.

Spending needs to be cut, but that is hard for politicians. So, expect tax hikes today. That's on top of last year's unfortunate hike in the top marginal income tax rate to 45%, and the recent increases in both dividend withholding taxes and capital gains taxes.

This is really Cyril Ramaphosa's greatest challenge. It's very nice to go walking in the morning with the people, but can he take the hard decisions that are required to put our country back on a sustainable fiscal path?

Company Corner

Byron's Beats

Yesterday Discovery released their interim results for the six months ending 31 December 2017. As expected from the trading update, the numbers looked good. Operating profit increased by 19% while normalised headline earnings per share increased by 31% to R4.11. The big drivers behind the growth in earnings was a solid showing from the UK business as well as profits coming through for the first time from the short-term insurance business as well as the Ping An joint venture.

The image below shows the contribution of each segment.

As always, Adrian Gore was very confident and passionate. He didn't skip a beat in his presentation. You can see he truly believes in his product and is genuinely proud that it is making the world a better place.

The local businesses all did well in a tough environment. Discovery Health and Life are the bread and butter of this business. As you can imagine, growth has slowed, but they are still stealing market share. If our economy goes through a growth spurt, these businesses will thrive. That includes Discovery Insure and Discovery Invest who have both leveraged off a good brand and some great incentive schemes.

Vitality UK is finally doing well. They now have over 1 million lives insured in a country where healthcare is mostly free. When your friends are getting free Apple watches, Starbucks coffees and discounted gym contracts because they exercise three times a week, the clients become the best salesmen. The preventative healthcare model is genius. It is cheaper and far better for your standard of living, to prevent than being cured.

Vitality Group. This is the part of their business that sells the Vitality model to third parties. This is what excites me most about Discovery. Selling on the preventive healthcare model to other insurers who have millions of clients has huge potential. This also includes corporates who have large employee bases. It benefits the insurers and their clients and it certainly benefits corporates and their healthy employees. Vitality Group now has 1.7 million members. Could this become the biggest healthcare membership in the world? The product certainly has the potential.

Ping An Health has been a slow process but the growth coming through in this last six months is very encouraging. Membership grew by 60%, and the business finally made a decent profit of R36 million. Within this joint venture, there are over 3 million people on the rewards program. They have a great partner in a tough country to crack. The potential here is huge.

These numbers represent good progress in the Discovery story. So many of the goals are becoming realities. We are very happy shareholders and clients of Discovery. This must be the only insurer on the planet that actually has happy clients!

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Michael's Musings

Do you know that in Japan, only around 10% of houses sold are used houses? Most houses lose their value after 15 - 30 years, as a result Japan compared to the US, has four times as many architects - Why Are Japanese Homes Disposable?

Bright's Banter

Ryan Coogler's Black Panther grossed around $235m at the box office on opening weekend across North America making it the biggest solo superhero, non-sequel, black directed movie of all time. It doesn't end there, it's also the 5th biggest movie debut of all time and the second largest Marvel debut after The Avengers (2012) and the list goes on. This movie is not done breaking records as non-US sales keep flying in.

If you haven't watched the movie yet, stop everything right now and buy tickets tonight for yourself and your loved ones (it's half-price Wednesdays at NuMetro today). Don't forget to dress up and have fun! #WakandaForever. This movie is worth every penny and the reviews such as this one (spoiler free) speak volumes.

Let's see if all this success translates to the well-deserved awards.

You will find more infographics at Statista

Vestact in the Media

Byron gets a mention in a recent Forbes article - How To Lose $2.1 Billion In One Day.

Home again, home again, jiggety-jog. Our market has been bouncing between red and green, ahead of the budget speech this afternoon. Good news for consumers, our CPI read for January was 4.4%, lower than the corresponding period and economist forecasts. Then expect some currency movements this evening, when the FOMC minutes are released.

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Will Gigaba be the VAT Rat?

2018-02-20T02:00:00.000-08:00

To market to market to buy a fat pig. As we get closer to the budget speech, the two key questions being asked at the moment are, "Who will deliver the speech?" and "Will VAT be raised?". Twitter is convinced that we will have a new Finance Minister. Our current debt to GDP ratio is over 50%. If we like it or not. the people who are lending us money need to feel secure in who is appointed to oversee the coffers.

VAT is a far more touchy subject than who will be finance minister. When change hurts your back pocket, people pay attention. It seems that there is very little alternative than to raise VAT in tomorrows budget speech though. I get grumpy about having to pay extra tax due to corruption and the billions spent on blue light brigades. The low-security, morning runs taken by the new president is hopefully a sign of how things will change. Reading this article, Cosatu warns against VAT hikes, austerity measures ahead of Budget, Cosatu has some good points about government cleaning up its own act instead of burdening the people with extra taxes. Housecleaning takes time though, time we don't have.

In terms of the fairest way to increase tax collections, in my opinion VAT is the answer. It is targeted on consumption and you can't avoid it by lying to the tax man. The following slide from treasury shows which items are VAT zero-rated, they are the necessities needed for survival. Items that are VAT exempt include, transport and education.

"Cosatu will not support any attempt by government to balance budget shortfalls and deficits upon the backs of struggling workers. Workers are not the ones who have looted Eskom, SAA and the state."

As a country, workers, management and the unemployed, we elected the people who were responsible for Eskom, SAA and the state. As such, surely we all carry the responsibility and burden when those leaders loot?

Market Scorecard. It was a very subdued day yesterday due to the US being closed for presidents day and the Chinese market being closed for their new year. The All-share was down 0.71% on the day

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One thing, from Paul

Did you miss the Blunders last week? I get disappointed if we can't get at least 1,000 views within five days and we are currently on 922. Go and watch it now!

This week: Jacob Zuma OUT; Valentines Day in India; Iceland runs short of electricity due to Bitcoin mining; and Kruger National Park lions eat poacher - Blunders - Episode 88

According to a research firm called Global Market Insights, the worldwide seaweed industry will surpass $87 billion by 2024. I hardly knew that it existed?

The major uses are food and beverages, fertilisers in agriculture, cosmetics and pharmaceuticals. There are also applications in the manufacturing of biofuels, biomass and wastewater management.

Significant global companies in the industry are Aquatic Chemicals, Seasol International, Indigrow Ltd., Algea AS, Yan Cheng, Pacific Harvest, Chase Organics GB Ltd., Mara Seaweed, Acadian Seaplants Ltd. and CP Kelco.

Here is a link to the report, if this seems interesting? - https://www.gminsights.com/industry-analysis/seaweed-extracts-market

Michael's Musings

Ask most people, what was the first financial bubble, and they will more than likely tell you 'Tulip Mania' - Tulip mania: the classic story of a Dutch financial bubble is mostly wrong.

"I was able to identify only 37 people who spent more than 300 guilders on bulbs, around the yearly wage of a master craftsman. Many tulips were far cheaper."

Bright's Banter

Carl Icahn has been very sceptical about investment products that buy and track the markets mindlessly and he's dead certain that it's the next bubble, as he explains in his short movie here titled Danger Ahead. Basically the gist of the story is that BlackRock is gonna cause the next market meltdown. Larry Fink (CEO of BlackRock) is the one driving the markets to the edge of the hill and the bus is gonna hit a "BlackRock" and that will be the end. It is worth noting that the video is from 2015.

Below is his most recent comments on index trackers and it seems like his mind is set with a determined resolution!

Carl Icahn Says There's A Dangerous Bubble In The Hottest Investment Product On The Market.

Home again, home again, jiggety-jog. Locally, we are down this morning. On a data front, there is very little out today. As South African's all eyes will be on parliament today. Discovery came out with their six-month numbers this morning, they look solid and are in line with what the market was expecting. Their results will be broadcast from their new head office in Sandton this morning. Exciting times!

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Is Lithium Lit?

2018-02-19T01:20:00.000-08:00

To market to market to buy a fat pig. Local markets continued to take a breather after the absolute scorcher on Wednesday. SA inc, which was leading the pack last week was hardest hit on Friday. But all in all it was a great week for markets and a great week for SA. All topped off by an inspiring SONA.

US markets had another great start as the "massive correction" of February 2018 slowly fades away into memory. I would say that the volatility will still be around, especially relating to news about inflation.

The good start unfortunately faded away as news about Russian interference in the US elections reared it's ugly head again. Trump went on another Twitter rage about the issue. Interesting times indeed!

Market Scorecard. Both the Dow and the S&P 500 had five straight days of gains last week, not bad considering the volatility at the moment. The Dow closed up 0.08%, the S&P 500 closed up 0.04%, the Nasdaq was down 0.23%, and the All-share was down 0.69%.

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One thing, from Paul

Investors who like physical commodities are often excited when demand seems to exceed supply, prices are rising. Tulips! Whale oil! Platinum! Crude oil! Lithium! Easy money to be made!

Well, this article by Bloomberg correspondent David Fickling (based in Australia) takes a different view. His argument is that commodity markets never really stay in deficit for very long. Suppliers find ways of bringing more of what's needed on line. Consumers find ways of using the stuff more efficiently, and recycling where possible. If they don't, production innovations are sought to bypass the commodity altogether.

To be specific, he says that the current fixation with shortages of lithium for electric batteries is unlikely to last, so speculators loading up on lithium stocks might not make the quick fortunes that they hope for? Its not as if these elements are really rare, in the earth's crust.

Fickling uses the example of Platinum in the mid 1970s. Demand for catalytic converters was going through the roof, and all of the supply was trapped in apartheid South Africa and the Soviet Union. Prices spiked. Over time though, supply rose and prices calmed down. You can see this in the next two charts:

Here is a link to the article: Platinum's Lesson for Lithium-Ion Batteries

Michael's Musings

I really enjoy watching the Olympics, the skill levels of the athletes is amazing. These robots are at the cutting edge of robotic technology, they still have a far way to go though to reach the impressive feats of olympians - Robots skiing reminds us how far away the apocalypse is.

For anyone who has done a forex payment recently, you will know that the bank you used made a tidy profit. The reason for the crazy transfer fees is because to send currency you need to use the SWIFT system. Blockchain (the system behind crypto currencies) is trying to change the monopoly financial institutions have - Saudi Arabia's central bank signs blockchain deal with Ripple. Having a central bank involved is pretty big.

Vestact in the Media

Byron gets a mention in CNN Money, talking about the renewed optimism in South Africa - Is now the time to invest in South Africa?.

Home again, home again, jiggety-jog. Our market followed the negative tone going into the close of the US market, we are down around 0.5% this morning. It is a very quiet day on the data front, both the US and China have public holidays today.

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He Gone

2018-02-15T01:04:00.002-08:00

To market to market to buy a fat pig. An hour before the US market opened, we had as one analyst put it "The most highly anticipated inflation number for the last 10-years". The expectation was for inflation of 1.7%; it came in at 1.8%. Confirming market fears, inflation is coming and so are interest rate hikes. Futures immediately dropped over 1%.

You will then be surprised to hear that yesterday was the fourth straight day of gains for US markets. Why the gain then? At the same time as the inflation number release, US retail sales came out; Retail Sales in U.S. Decline After December Revised Down. Huh? The biggest part of the US economy went backwards and stocks went up?

As you might have guessed, it has to do with interest rates again. Weak retail sales today, means that demand push inflation dissipates tomorrow, and the concern of increasing inflation is gone. So there you have it, bad data is 'good' data again. Until it isn't, but you will only find that out after the fact.

Market Scorecard. Our market spent the day in the green, until 15:30 when the US inflation data sent global markets crashing. Luckily with only minutes left of trading our market managed to squeak into the green again. The Dow was up 1.03, the S&P 500 was up 1.34%, the Nasdaq was up 1.86%, and the All-share was up 0.33%.

Company Corner

Michael's Musings

Last week one of our smaller holdings, Cerner released their FY numbers. They are the guys that are trying to remove all the paperwork you have to fill in every time you visit a medical professional. The goal is to create a network where you complete your information once, then from there, all doctors have access to it. Saving trees and saving you time. More importantly though, having the data in digital format, lowers the risk of bad handwriting leading to wrong diagnosis or the wrong procedure being done.

Built on to that is Cerner's management system, where hospitals can then use the information to easily see revenue and expense figures. It also allows them to see what operations are in the pipeline, meaning accurate forecasts can be made. Probably the most exciting part of the business is where they unleash AI onto the data. The clever algorithms take the data fed to it from all your medical tests, and at some stage in the future from your smartwatch too, and issue early warning signals around potential health issues.

Due to the time required and the capital-intensive nature of revamping a hospital group's computer systems, Cerner has a 'book' similar to that of construction company. For the 4Q, they had a record number of bookings, $2.3 billion, up 62% YoY. Over the last year, their revenue came in at $5.1 billion up 7% YoY. From that revenue they made a profit of $867 million.

Cerner ticks all the boxes, it is a technology company in the medical space. It is also defensive because once a hospital chooses Cerner, it is not easy to move to a competitor. Thanks to those characteristics, it trades on an 'expensive' 24 times earnings. Management expects earnings to grow by 11% over the next year so the multiple isn't going to unwind in a hurry. With many things in life, you get what you pay for. Paying up for Cerner is one of those things in our opinion.

Byron's Beats

When Aspen released their full year results last year, the second half of the year was much better than the first half. Stephen Saad, at the results, mentioned that he expected this momentum to continue into the financial year 2018.

This morning we received a trading update which indicated as such. Here are the numbers.

This is all the info we have access to but let's delve a little deeper into each 6 month number over the last 18 months. To be consistent let's look at the normalised headline earnings per share (NHEPS). Last year this time the company made 692c for 6 months. For the full year they made 1463c which means they made 771c in the second half. This trading update suggests they have made 860c (middle ground) which shows an 11.5% improvement on the second half of last year.

The first half of last year was off a low base but the growth off a very solid second half base still looks strong. The market has reacted very positively to the news, the share is up 6%. The detailed numbers will come out on the 8th of March, more details then.

Linkfest, lap it up

One thing, from Paul

Finally, Zuma is gone! Under his leadership South Africa slipped very badly. He says that he doesn't know what he did wrong? Well, apart from anything else, the country faces a dire fiscal crisis, thanks to his bungling.

His involvement in the gross mismanagement of public enterprises is well known, and the debts of a looted and bankrupt Eskom will doubtless be added soon to the sovereign debt mountain.

The ANC leadership crisis had already derailed the State of the Nation Address, and the postponement of the Budget Speech was next.

The Moody's Baa3 rating is the only thing keeping our bonds debt in the Citi World Government Bond Index, given that the grades from S&P Global Ratings and Fitch Ratings are already below investment grade.

The rules of the index require that a borrower can no longer be included once it's rated junk by all three rating companies. Moody's deadline is 23 February. They are probably waiting to see if the Government has the guts to do what must be done: raise the VAT rate from 14% to 16%.

Bright's Banter

My favourite academic Prof. Scott Galloway has been singing this song of breaking up big tech i.e. Apple, Amazon, Google/Alphabet, Facebook and Microsoft. Here's his reasoning on why we should build em and break em up!

Bust Big Tech Silicon Valley

Apple's smart speaker, the HomePod is now available for purchase, the sales went live this past Friday and the reviews are flying in! Apparently its a great quality speaker but is not in the same league as the competition when it comes to being "smart".

I think the problem is not the speaker, but Siri. Siri's had the first mover advantage but never really grew from there. On the other hand Alexa just lapped Siri on her amazing ability to learn.

The graph below shows how these speakers (Google, Amazon Echo, HomePod etc.) perform head to head.

You will find more infographics at Statista

Home again, home again, jiggety-jog. The Rand is stronger this morning, trading at $/R11.68. No, not because we no longer have a president but because of the US inflation data. We know who our future president will be, the question that the market will be asking is who will be delivering the budget speech next week Wednesday? With the Chinese New Year, Chinese markets are closed today and tomorrow, and Hong Kong had a half day of trading today. After a busy news data day yesterday, there is nothing major out today.

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Google's Head in the Clouds

2018-02-14T01:42:00.001-08:00

To market to market to buy a fat pig. Yesterday Stats SA released our labour stats for the last quarter in 2017. The headline number compared to last year is marginally worse, but compared to last quarter it is one percentage point better at 26.7%. It is never nice reading that we have 5.9 million unemployed people and a further 2.5 million people who are classified as discouraged work seekers but not unemployed. To be classified as unemployed you have to have looked for a job recently.

In total there are 16.2 million South African's employed, which includes Stats SA's estimate of 2.8 million people in our informal sector. Here is how they are employed:

The stat I enjoyed the most was that over the last year, employment in Gauteng dropped by 121 000, but employment in the Western Cape was up by 106 000. What! Does that reflect people were leaving the city of gold for the mountain and no water?

Market Scorecard. Yesterday was another day when US markets were both red and green at some stage, to a lesser extreme though. The Dow was up 0.16%, the S&P 500 was up 0.26%, the Nasdaq was up 0.45%, and the All-share was up 1.78%.Our market had a strong day, which included a surge during the home stretch. MTN was up 3.2%, Tiger Brands was up 3.5% and Naspers was up 2.9%.

Linkfest, lap it up

One thing, from Paul

I'm a big fan of holding steady and carrying on doing what works. This is definitely a good idea in markets, where over-reacting to the latest headline is generally a bad idea.

So I enjoyed this snippet in a blog post I read recently. An analysis of football goalies facing penalty kicks revealed that they dive to the right or the left 94% of the time. They guess correctly 40% of the time and save about a quarter of the correct guesses. It turns out that if the goalkeepers didn't move at all their chances of saving the penalty increase from 13% to 33%.

So they pick a strategy which looks good, and feels right, because "at least I'm doing something", but that strategy ensures they have a lower success rate. Apparently this is called "action bias" by behavioural experts.

Byron's Beats

Much is spoken about Amazon Web Services but Google Cloud does not get nearly as much airtime. According to estimates AWS revenues are about four times that of Google Cloud which is the third biggest cloud services provider. AWS is the biggest and Microsoft's Azure is a close second.

According to reports however, Google Cloud is the largest driver of increased headcount at the parent company, Alphabet. They also have established partnerships with big names such as Salesforce, SAP, Dell and Cisco.

Because the Google search business is so profitable, the potential of the cloud business sits in the cloudy shadows. This should not be underestimated. Cloud services are still coming off a low base and are essential creators of efficiencies for businesses all over the world. Not to mention the explosion of AI. Google has the brand strength (a lot of trust is required) and the capital to turn this into their second big trick pony.

Michael's Musings

Iceland is a great country to host crypto-mining operations. The electricity is cheap and is mostly clean, and the weather outside is cold, reducing the need for cooling - Iceland will use more electricity mining bitcoins than powering its homes in 2018.

5G will be a game changer for consumers, it is 100 times faster than current 4G technology! At this rate, fibre is going to be obsolete by the time it is fully rolled out - 5G Is Making Its Global Debut at Olympics, and It's Wicked Fast.

Home again, home again, jiggety-jog. Politically, the changing of the guard seems to have reached its climax today. The JSE is also in the green this morning, which is good to see after a rough few weeks for equities. At 13:00 today, we will get the retail figure read for South Africa. Remember our last read shot the lights out thanks to South Africans embracing Black Friday.

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Correcting the Correction

2018-02-13T01:38:00.000-08:00

To market to market to buy a fat pig. This week marks the start of the biggest human migration of the year, the Chinese New Year. It is estimated that around 710 million people will be on the move! The holiday starts on Thursday and will last all the way through to next week Wednesday. Here are some interesting facts about the tradition - 21 Things You Didn't Know About Chinese New Year.

To give you an idea of the scale of this holiday, Statista has compared the numbers to the US's Thanksgiving weekend - How Chinese New Year Compares With Thanksgiving

You will find more infographics at Statista

Market Scorecard. It wasn't smooth sailing yesterday, but at least we finished in the green. The US market opened around 1% higher, then weakened to be flat an hour into trading. From there it was a steady rise to 2.3% higher, and finally finished off with a slight weakening. The action during the day shows that volatility is back; the bull and bear tussle continues. The Dow was up by 1.70%, the S&P 500 was up by 1.39%, the Nasdaq was up by 1.56%, and the All-share was up by 0.54%. Resilient was in the firing line again yesterday, down 7.42%. I can't say what the fair value of the company is, looking at the price action though I think that this is a case of sell first, ask questions later. Short-term the price is being driven by fear, long term though it will all come down to fundamentals.

Company Corner

Byron's Beats

It has been a tough few years for Woolworths. Their purchase of David Jones has not gone as planned. The global clothing retail market has been turned on its head by super fast retailers like Zara and online disrupters. The initial David Jones purchase was to access the Australian clothing market, but it seems that the strategy has also shifted to food more recently.

The Woolworths team have found a gap in that market for high-end grocers. It seems this gap also occurs in New Zealand. The following article talks about the new David Jones store in Aukland, how the business is growing its presence online and how they are opening standalone David Jones grocery stores. It is an interesting article from an Australian publication/perspective.

David Jones expands to New Zealand as commitment to food strategy stays strong.

Linkfest, lap it up

One thing, from Paul

Coverage of last week's stock-market mini-selloff was pretty excitable. One thing I have noticed over the years is that the prices move, and the explanation follows later. In other words, the market indices spike or tank, and then financial journalists scramble around finding reasons to explain the move.

To be fair, the news media has its own challenges. They operate in a competitive market for ears and eyeballs, so they like to crank it up a bit. Here's a good cartoon which makes that point, that's been circulating in the last few days.

Michael's Musings

As I write more, I have become aware of subtle (sometimes not so subtle) grammatical improvements I can make. I only learnt about the Oxford comma last year, lucky my ignorance didn't cost Vestact millions! - A lawsuit over the absence of an Oxford comma was settled for $5 million.

One of the best ways to combat poverty is quality education. It was interesting to see that the entrance exam to the one school was a blind test, so that any biases around the person or their family would not form part of the admittance decision - Russian Billionaires Are Building Mega schools to Rival Eton and Exeter.

Bright's Banter

According to a research firm called Canalys, 2017 was a year to remember for the Apple Watch. It had the best quarter ever in the history of all luxury watches. The company shipped around 8 million watches between the first day of October to the last day of December which led to a total of more than 18 million Apple Watch units sold for the year! This is more than the entire Swiss watch industry combined!

You will find more infographics at Statista

Home again, home again, jiggety-jog. Our market is following the lead of the US and Asian stocks, the All-share is currently up 1.2%. Relevant data out today is; UK unemployment and CPI, and locally we have unemployment figures at 11:30 and then the ANC NEC has their press briefing at 14:00. Whatever happens, we need to remember that change is slow, even if the market's default reaction is to assume all the wrongs will be righted.

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Caught by the Shorts

2018-02-12T03:22:00.000-08:00

To market to market to buy a fat pig. Activist short sellers are something that we are not used to in South Africa. In a market like the US, it is commonplace thanks to all the capital looking for a home, and the large number of listed companies.

Just to make sure that we are on the same page, a short seller is someone who profits from share prices dropping. Here is the 101 on how the mechanics work. A short seller will identify a stock (Company X) that they think is overvalued, they will then approach long-term holders like ETF providers or pension funds and ask to borrow some stock of Company X. In exchange for the stock, they pay the pension fund or ETF provider a small fee. Once the short seller has the stock, they then sell it, hoping that when they repurchase it in the future the stock price has dropped.

We do have short sellers in South Africa; generally it is part of what is called a long/short strategy. For example, a hedge fund might go long Shoprite and short Pick n Pay, based on the assumption that Pick n Pay is overvalued for the sector. Activist short selling is a completely different beast though. Activist short sellers go after companies where they feel the company has something systematically wrong with it. Due to the limited number of stocks on the JSE, and the general high regard we hold for our business leaders, activist short selling hasn't been a feature on the JSE.

With the Steinhoff saga and Viceroy going after Capitec, the age of big short sellers has arrived. Toward the end of last week, the Resilient group of companies came into the spotlight again, this time from local company 36ONE. You might remember that they were rumoured to have been the target of the Viceroy report before Capitec. Moneyweb have a nice breakdown of the allegations - What is the Resilient stable accused of?.

People sometimes bemoan short sellers because they profit off of other people's loss. The argument can be made that due to short sellers the share price of defunct companies won't rise as high, meaning that when it comes crashing down to earth it doesn't fall that far. Short sellers take the same risks as ordinary buyers, normally more risk. They have a role to play in keeping management honest and helping prevent bubbles from forming.

Market Scorecard. Friday epitomised the market over the last week. It first started up over one percent, then dropped to be down over two percent then bounced to be up over two percent and finally closed up one percent. The Dow was up 1.38%, the S&P 500 was up 1.49%, the Nasdaq was up 1.44%, and the All-share was down 1.29%.

One thing, from Paul

Stephen Pinker is a Professor of Psychology at Harvard University. He wrote a book in 2011 called "The Better Angels of Our Nature" where he made the case that violence in human societies has steadily declined with time.

He is out with a new book now called "Enlightenment Now: The Case for Reason, Science, Humanism and Progress". This weekend the Wall Street Journal ran an excerpt from the book in a longish article. It's well worth a read:

The Enlightenment Is Working

Pinker notes that through most of human history a newborn was expected to live around 30 years. Now its 71 years globally, and 81 in the developed world.

Poverty is also declining rapidly, a point that deserves more attention (despite the ongoing fixation with income and wealth inequality). Progress has been relentless, and it's not farfetched to suggested that it will be eradicated altogether in the years ahead.

Pinkers' key point: "To what do we owe this progress? The Enlightenment is working. Our ancestors replaced dogma, tradition and authority with reason, debate and institutions of truth-seeking. They replaced superstition and magic with science. And they shifted their values from the glory of the tribe, nation, race, class or faith toward universal human flourishing."

Of course, its to be expected that major global corporations would do well against this backdrop.

Michael's Musings

It is the week of love. Valentine's day is on Wednesday, have you bought something yet? The below infographic shows what the average spend is! - Valentine's Day 2018 - The Cost Of Love

You will find more infographics at Statista

Home again, home again, jiggety-jog. The question of who will lead South Africa should be put to rest by the end of today? We will have to wait and see. It is a rather quiet day on the data front, both locally and internationally. Out of the gate, our market is up, Naspers is back into the R3 000's and the Rand is below $/R12.00 again.

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Tesla Shoots for the Stars

2018-02-09T02:05:00.000-08:00

To market to market to buy a fat pig. The US has just missed their deadline to pass a new debt ceiling bill. It is currently 00:05 in Washington, where the Senate is expected to vote at 02:00 and then the House is expected to vote between 04:00 - 06:00. Assuming both sides of Congress vote in favour of the new bill, Trump can roll out of bed at 07:00 to sign it into law, just in time for federal workers to be at work on Friday morning. At the moment, there isn't any noticeable impact from the shutdown.

You may be asking why there are these shutdowns? At the heart of the matter is the current US deficit, where they are spending more than they collect in taxes. Roughly speaking the US federal government spends $4 trillion a year and only collects $3.5 trillion from taxes. As they keep racking up deficits, the debt reaches self-imposed limits, the debt ceiling. Below is a table of the deficit over the last few years, note how huge it was during the financial crisis!

Found at US Government spending

I have been asked before, why does it seem like investors care more about South Africa's deficit and less so about the US deficit? As it stands, the US 10-year yield is 2.8%, and the RSA 10-year yield is 8.4%. Roughly speaking our debt is 3.5 times more expensive, so even a small deficit costs us much more!

Market Scorecard. It was one-way traffic for the US market yesterday. The Dow was down 4.15%, the S&P 500 was down 3.75%, the Nasdaq was down 3.90%, and the All-share was down 0.44%.. Asian markets are down over 2% this morning, with Tencent down 3%. Market slumps like this only matter if you are planning to sell your stocks in the near term, which is why you should never have money in stocks that you will probably need in the next 12-months. If you plan to only need the money in the next five, ten or twenty years, what the market does today is largely inconsequential.

If you are someone who has a few decades to go until retirement, dips like these are good things. I would much rather be putting my retirement savings into the market when it is lower rather than higher. Due to dips like these being insignificant for long-term holders, there is no need to look at my portfolio regularly. Watching your investments go through the gyrations of volatility creates unnecessary stress. Below is one of my favourite cartoons for when the market goes through periods of uncertainty. Are we up or are we down?

Company Corner

Byron's Beats

Tesla reported fourth quarter and full year numbers two days ago which always sparks excitement. At the same time, Elon Musk had just launched his Roadster into space and images like this were floating around the internet.

He really is a marketing genius!

2017 was a busy year for the company. They started delivering the model 3, unveiled the Semi truck, launched the new Roadster (and one into space), installed the world's largest battery in Australia and delivered 101 312 Model S and X vehicles.

Revenues grew 55% for the year to $11.8bn. For the full year, the company lost $2.2bn. But because so many people believe in the story, the company has access to a lot of capital. Currently, the company is sitting on $3.4bn in cash which should keep it flush for at least another year.

It is very hard to look at fundamentals for this business. I saw some report that suggested if Tesla meets all it's production targets it could be making $20 a share in 2020. The share currently trades at $315. I can almost guarantee they won't meet their targets but it still has the potential to become very profitable in the future.

Having said that, I wouldn't be surprised if Elon Musk constantly launches new products and constantly expands in new regions (Jeff Bezos style). Which means this company won't be profitable for a long while to come.

But once they manage scale, as the best electric, mainstream car in the world, they could be absolutely massive. I haven't even mentioned the energy supply side of the business.

It is volatile and is still pinned up by faith in the story. We like the share but only as a small allocation to a well-diversified portfolio.

Linkfest, lap it up

One thing, from Paul

This week on Blunders: Volpocalypse - the trend is your friend until the bend at the end, El Chapo promises not to murder his jurors, US Treasury uses Forbes magazine to complete its homework assignment, and man vs. dog eating contest in China: Blunders - Episode 87

Michael's Musings

It is amazing what we can do when we put our mind to something - A memory champion has memorised 10,000 digits of pi.

Vestact in the Media

Bright chatted to PowerFM about Twitter and MTN - PowerFM - MTN listing in Nigeria.

Home again, home again, jiggety-jog.Our market is down 1.5% on the open, following global markets. The US Senate has just approved the budget bill, so it moves onto the House now. The Winter Olympics opening ceremony is today, I see that some of the events kicked off on Wednesday already. We currently have curling on the in the background to get into the spirit of things; and people call cricket boring? Instead of watching the market and your portfolio today, watch that.

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Double Tap

2018-02-08T01:13:00.002-08:00

To market to market to buy a fat pig. Markets are all over the place at the moment; volatility is on the up. There are not many days when you see so many companies in the Top 40 moving higher by more than 3%. Some of the big movers yesterday were, NEPI Rockcastle up 16.8%, STAR up 10.9%, Investec PLC up 7.5%, MTN up 4.5%, Tiger Brands up 4.2%, and Discovery up 3.5%. In total, 16 companies in the top 40 were up over 3%!

Our large dual-listed companies haven't been fairing as well, partly due to their primary listing coming under pressure but also our strong Rand. Over the last three months, Richemont is down 16% on the JSE and only down 5% in Switzerland. Looking at Naspers, the gap between its value and Tencent continues to grow. I suspect the reason has to do with Naspers's complex holdings structure, coupled with the Multichoice saga and a stench hanging over South African business because of Steinhoff.

Market Scorecard. On US markets, the bulls and bears were in a constant fight for supremacy. On the open, the bears were winning. The bulls then banded together to push the market into the green by 1%. From lunch until around 40 minutes before the market close, things bumbled along. Then just before the market close, the bears staged their counter-attack. The Dow was down 0.08%, the S&P 500 was down 0.50%, the Nasdaq was down 0.90%, and the All-share was higher by 0.90%.

One thing, from Paul

If your investing strategy involves funds with strange names or letters of the Greek alphabet, there is a strong chance that you don't know what you are doing. Or that you are playing with firecrackers!

We saw an amusing example of this on Monday, where a Frankenstein financial product called the Velocity Shares Daily Inverse VIX Short-Term ETN (code: XIV) literally exploded. XIV is an exchange-traded note underwritten by Credit Suisse that gives "investors", roughly speaking, negative 1 times the return on the CBOE Volatility Index (the VIX) each day.

Wait what? Ok, slowly. The CBOE Volatility Index is a measure of the stock market's expectation of near-term volatility implied by S&P 500 index options, calculated and published by the Chicago Board Options Exchange (CBOE). It is sometimes referred to as the fear index or the fear gauge. Volatility has the greek symbol σ. That's the lower case of Sigma. You still with me?

All you need to know is that recently, the VIX has been low and declining. Markets had been very calm. So people made lots of money owning the XIV, because it delivered the opposite of the VIX, and went up almost every day. Plus, people owning it got to say cool sounding things like "I'm killing it right now, 'cos I'm short vol". The fund had almost $2.0 billion in units in issue at the start of the week.

See the chart of what happened next:

Company Corner

Bright's Banter

Facebook had a stellar 2017 year when it comes to earnings as they have managed to beat expectations relentlessly without fail. Here's is what the Zuck had to say about the year:

"2017 was a strong year for Facebook, but it was also a hard one," He went on to say: "In 2018, we're focused on making sure Facebook isn't just fun to use, but also good for people's well-being and for society. We're doing this by encouraging meaningful connections between people rather than passive consumption of content. Already last quarter, we made changes to show fewer viral videos to make sure people's time is well spent. In total, we made changes that reduced time spent on Facebook by roughly 50 million hours every day. By focusing on meaningful connections, our community and business will be stronger over the long term."

We saw the shares go down around 5% when the news above was made public, but the shares then recovered sharply to be up around 2% during the earnings call when management gave more information on how they are going to make the platform more meaningful to the users.

Now lets take a look at their final quarter and full year numbers:

- Revenues: grew by 47% for the quarter to $12.97 billion bringing the total revenue for the year to $40.65 billion.
- Net Income: grew by 20% for the quarter to $4.27 billion bringing total net income for the year to $15.9 billion.
- Monthly Active Users: 2.13 Billion, up from 2.07 Billion last quarter.
- Daily Active Users: 1.40 Billion, up from 1.37 Billion last quarter.

However, the reduction in Facebook's net income fell $3.19 billion from Q3 to Q4 due to a once off charge tied to changes in the US tax system. This comes as no surprise at all as we have seen other companies reporting similar tax charges.

You will find more infographics at Statista

We like the fact that Facebook is going back to first principles by revamping the News Feed and prioritising posts from friends and family over advertised viral videos/content from publishers with an agenda. This will help avoid hurtful content that goes viral from time to time and dilutes the user experience. Most importantly, it'll help curb the invisible hands that have been swaying election results all over the world by perpetuating fake news on the platform. This move could see Facebook's advertising revenues grow slower in the interim, but it'll boost the company's growth long-term, as advertisers/brands will trust the platform more, and engagement will be more meaningful for users.

We are not really worried about the slowing user growth on Facebook itself. Instagram is becoming more relevant; since it introduced Stories, which was the feature Snapchat was created around (RIP Snap). Engagement keeps increasing and advertisers are recognising this, joining in on the action. Corporate accounts are growing by high double digits per month, especially those which trade directly to consumers. They do product deals with influencers to promote their product, a strategy that has helped the likes of Adidas flourish in recent times.

For the first time, Facebook admits to dragging its feet in response to the Russian hacking reports. This is wonderful news as it is what ultimately led the company to revamp its news feed to prioritise friends and family. This is reassuring to the people of the U.S.A and the rest of the world; that this will never happen again as they're finally regulating themselves as the media company that they are! We think this will help ease the regulatory scrutiny and management can focus more of their time exploring other growth avenues.

Let's not forget the fact that this machine still has more relationships than Islam, Capitalism, and Communism. These relationships are proving to be more and more meaningful as they're not going to be spammed with viral videos and unnecessary content that's targeted to change the way they perceive certain political candidates for example. With WhatsApp now being Facebook's second-biggest property followed by Messenger and Instagram, we think the company is finally doing the right thing in society and as a result we hold and buy more!

Linkfest, lap it up

Michael's Musings

Imagine going to the supermarket and then freshly picking the herbs that you want? With urban/vertical farming, you can now do just that - Balderton Capital leads $25M Series A in 'urbanfarming' platform Infarm

When Jobs made his comeback to Apple, the company was weeks away from going bust. I stumbled across this article which reminded me that it was Microsoft who threw them a lifeline. I wonder if Microsoft regrets helping Apple? - Aug 6 1997: Apple Rescued - By Microsoft

Home again, home again, jiggety-jog. Our market is slightly down on the open, rather boring compared to how the rest of the week has gone. Tesla's numbers last night showed that they burnt through $675 million during their last quarter, not much of a reaction from the stock though. We will have a more detailed breakdown of the numbers in the next couple of days. Then later today, it is the weekly initial jobless claims read from the US. Considering how the market was spooked last week by a strong labour market, the data this afternoon might have a bigger impact than normal.

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Clouds Raining Cash at Amazon

2018-02-07T02:06:00.002-08:00

To market to market to buy a fat pig. Whoa, we are going to need a neck brace after that market whiplash. Yesterday was carnage for global markets, Asian stocks were down over 2%, our All-share opened down over 3%, and the US markets opened down 1.5%. By the time I went to bed though US markets were handsomely in the green!?

Market Scorecard. Thanks to the indecisive market, the VIX, a measure of volatility, was at its highest level since the middle of 2015. The Dow closed up 2.33%, the S&P 500 closed up 1.74%, the Nasdaq closed up 2.13%, and the All-share closed down 1.29%. The best reason I have seen for the market recovery is, "buy the dip" rhetoric from many brokerage firms. Even with this bounce, many stocks can still be thought of as being on sale. We can't control or even predict the short-term movements of the market. We can control what companies our money is invested in, and make sure that we are regularly saving.

I had a good chuckle this morning, reading a few articles on yesterdays market movements. You can see many of the articles were written before the market opened, while futures were still pointing toward a very red open. The bulk of the article is about why the market will continue to drop, they then do an abrupt turn, talk about a bottom being formed and then say the market is bouncing. The truth is that most reasons given for market movements are thought up after the fact. It will be something that can explain movements in one sentence, and fits into our mental need to create easy to imagine stories.

Company Corner

Byron's Beats

I remember a time when Amazon used to stumble on to a profit every once in a while. These days, with Amazon Web Services (AWS) printing cash, profits are becoming the norm. Amazon reported 4th quarter and full year numbers last week Thursday which pleased the market and smashed expectations.

The image below paints a decent picture of what happened in the quarter. It also indicates how the more mature North American online retail business is now starting to make money. After all those years of growing scale and reinvesting profits, Amazon is finally reaping the rewards.

For the full year, the group recorded a whopping $178bn in sales. This showed an increase of 31% from 2016. Net income came in at $3bn which equated to $6.15 a share. It is still not about earnings just yet for Jeff Bezos. Amazon dominates 40% of the US online retail market, but they won't stop there. India, Australia, Europe and South-Eastern Asia are in their sights. Please come to South Africa?

Operating cash flow is probably a better number to look at. It came in at a healthy $18.4bn. The AWS division has been incredible for this business. It has a 40% market share of the global cloud business and is extremely profitable. It has allowed Amazon to expand the rest of its businesses even quicker than even they ever expected.

The results report included some 2017 highlights. Below are a few that stood out to me.

- In 2017, more than five billion items shipped with Prime worldwide.
- Fire TV Stick and Echo Dot were the best-selling products in 2017 across all of Amazon. Customers purchased tens of millions of Echo devices last year.
- Amazon hired nearly 130,000 employees globally in 2017, excluding acquisitions.
- Amazon announced that the Prime Video app is now available on Apple TV in over 100 countries. Prime members now have more ways to stream award-winning and critically-acclaimed titles, including Amazon Original Movies and Prime Originals.
- NFL Thursday Night Football on Amazon Prime Video saw a total of 18.4 million views in 11 games. Prime members in more than 200 countries and territories streamed games on living room devices, including smart TVs and Fire TVs, as well as the Prime Video mobile app and the web.
- Amazon acquired the global television rights to The Lord of the Rings, based on the novels by J.R.R. Tolkien, with a multi-season commitment.
- Amazon launched two furniture brands: Rivet, offering affordable and versatile mid-century modern furniture ideal for smaller spaces; and Stone & Beam, offering durable and stylish furniture for the modern household.
- Amazon Go, a new kind of store with no checkout required, is now open to the public in Seattle. The checkout-free shopping experience is made possible by the same types of technologies used in self-driving cars: computer vision, machine learning, and sensor fusion.
- Amazon launched its retail and third-party marketplace offering in Australia with fast delivery on millions of products, including items from thousands of small and medium-sized businesses.
- Prime selection in India now offers members more than 25 million local products from third-party sellers.
- Amazon Web Services (AWS) announced several enterprise customers during the quarter: Expedia, Ellucian, and DigitalGlobe are going all-in on AWS; The Walt Disney Company and Turner named AWS their preferred public cloud provider; Symantec will leverage AWS as its strategic infrastructure provider for the vast majority of its cloud workloads; Expedia, Intuit, the National Football League (NFL), Capital One, DigitalGlobe, and Cerner announced they've chosen AWS for machine learning and artificial intelligence; and Bristol-Myers Squibb, Honeywell, Experian, FICO, Insitu, LexisNexis, Sysco, Discovery Communications, Dow Jones, and Ubisoft kicked off major new moves to AWS.

It is a lot to take in but you get why there is so much excitement and hype around this business. They are growing in the right areas. Still targeting markets in sectors that are coming off a low base. Their scale and expertise allow them to dominate within these sectors. We continue to hold and buy Amazon as a core holding in our portfolios.

Linkfest, lap it up

One thing, from Paul

So, after a shocking sell-off on Wall Street on Monday, we had a brilliant bounce last night. After a session full of wild movements, the Dow Jones Industrial Average ended up 567 points (or a move up of 2.33%). What a mug's game! Who is driving this bus?

Well, exactly. Everyone is clueless. As I said yesterday, the best thing to do is to watch from the sidelines. Or buy the dips, if you are brave.

I saw a fun analogy of the randomness of all this in a tweet by Morgan Housel. It's about a man walking a dog across the southern part of Central Park in New York City. I liked it because I know that area very well, having run around those roads many, many times.

Michael's Musings

I wasn't around during the space race, but watching Musk's rocket launch this morning, I got a small taste of the excitement. The goal now is to get to Mars! - SpaceX's Falcon Heavy Rocket Launch. Maybe the reason for the market recovery was due to the excitement around humanity going deeper into space?

This is a big for Tesla. Homeowners love making home improvements, so having a presence in stores where there is large foot traffic is a good thing - Tesla will sell its solar power products at 800 HomeDepot stores.

Bright's Banter

The lesson from that last few trading days is that markets don't go up in a straight line, there will always be gyrations in the process. Howard Marks is known for his famous mantra that "Trees don't grow to the sky, and not everything goes to zero. And if you take care of the losers, the winners take care of themselves".

This chart below shows how some of our model portfolio favourites performed on this said "Flash Crash".

You will find more infographics at Statista

Home again, home again, jiggety-jog. As expected our market is off on the front foot this morning. The business confidence read yesterday was the highest it has been for two and a half years; confidence leads to growth! Company data out today, Tesla releases their FY numbers. All eyes will be on their cash burn and projected figures - or just the roadster cruising through space!

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Blood on the streets!

2018-02-06T01:17:00.002-08:00

To market to market to buy a fat pig. You know that it was a tough day out when CNBC showed the top 5 'gainers' of the S&P 500 for yesterday, as stocks who lost the least! Not even cryptocurrencies have survived the current market sell-off, Bitcoin is down 24% to $6 200 a coin, ouch!

Market Scorecard. After the carnage on the market yesterday, US indexes are now red for the year. The Dow was down 4.60%, the S&P 500 was down 4.10%, the Nasdaq was down 3.78%, and the All-share was down 2.63%. Having a look at Asian markets this morning, our market is going to open very deep in the red! Tencent in Hong Kong is down 6%, which means Naspers will be down a similar amount too. If that happens Naspers will be trading around R2 900 a share, a far cry from the R4 000 plus a share in November last year.

Why is it so 'easy' for the market to fall 4% in a day, but it is almost unheard of for it to gain 4% in a day? You can blame our cave-dwelling ancestors for the irrational thought process of Loss aversion. In simple terms, a loss hurts more than the pleasure you get out of a gain. Roughly speaking, to balance out the potential of a 5% loss, the other side of the equation needs to be the potential to gain 10%.

Added to that, our minds are generally lazy, so they latch onto the stories that are easiest to imagine. What is more natural to imagine, the stock market dropping to levels it has been at before or it pushing higher into uncharted territory? When people talk about stock market history, the landmarks are usually the periods of stock market crashes, not the periods of record highs. As such, after a small drop in stocks, it is not hard to jump directly to the 'this is a crash' scenario.

Add those two mental tendencies together and 'Sell first, ask questions later' becomes our go-to strategy.

The following graphs from mainstream media don't help the situation either! (Here are the biggest one-day point drops in the Dow's history)

As Paul points out below, when ranking yesterdays drop in percentage terms, it would be lower than Bafana Bafana on FIFA's global ranking.

One thing, from Paul

Well, last night was a tough trading session on Wall Street. As you will have read above, the Dow saw it's biggest points decline (1175 points) in history. However, at 4.6% off, it was only the 108th worst percentage drop of all time. So there were lots of days that were worse.

According to Josh Brown, the last time we had a Dow drawdown this big in a single day was in August 2011. He notes that the Dow was at 10,700 points then and today it closed at 24,345. That puts things into perspective.

The intraday slump was even worse, almost 1,600 points before a slight rally into the close. Again, big numbers (the rally of the last eight years) begets big numbers (the slump in nominal terms).

If you feel bad about all this, I wonder how poor Jay Powell is feeling? It was his first day on the job as Federal Reserve chair. Mind you, one of the reasons advanced to explain the sell off was that strong US employment numbers on Friday last week might lead the Fed to hike rates too fast this year. Well, that's easy to fix! No inflation, no need to hike rates aggressively, right?

So the market went lower because people think that the global economy is too strong? We shall see what happens next, but I 'd rather that we were complaining about a strong economy, than one which was too weak.

The right thing for you to do at this time is nothing. Ride it out! Equity markets do this sort of thing from time to time. Its part of the deal. I have been in this business for most of my adult life, and I've lived through many similar dramas. If you jump ship now you lock in poor exit prices and are out of the market when the rally comes. If you feel like being brave, it can be a good idea to buy these dips.

Company Corner

Bright's Banter

On the 1st of February, Alphabet/Google blessed us with financials for the last quarter of the year, as well as the full-year numbers for the year ending on 31 December 2017. The company missed earnings expectations, with $9.70 per share coming in just under the $9.98 forecast. Shares were down 5% in after-hours trading when those numbers came out.

The amazing and not so new Ruth Porat, CFO of Alphabet, opened by saying the following on the earnings call:

"Our business is driving great growth, with 2017 revenues of $110.9 billion, up 23% year on year, and fourth quarter revenues of $32.3 billion, up 24% year on year. Our full year operating income growth continues to underscore our core strength, and on top of this, we continue to make substantial investments for the long-term in exciting new businesses,"

Now in English, "The business is growing from strength to strength. 2017 was our record year and record quarter, and we will continue to seek out more complimentary opportunities to continue to grow our business."

This amazing one-trick pony posted an all-time record for advertising sales which is now 85% of revenues. These ads are the ones we see on our smartphones and at the beginning of a YouTube video. The only problem with the smartphone ads is that they bring home less bacon than the traditional desktop/laptop ads. This will change over time as engagement increases on mobile due to larger screens. Google's cost-per-click, what advertisers pay each time someone clicks on an ad, declined 14% for the quarter, this will stabilise over time.

However, Alphabet posted a net loss of $3 billion for the quarter due to a $9.9 billion once off charge tied to changes in the US tax system. This is not a surprise at all as we have seen banks reporting similar tax charges. Thank you Trump?

Google is still the largest, most dominant search-engine by miles thanks to its positioning as the default search engine on Chrome and on mobile phones. Sometimes Google has to pay the likes of Apple to be the default search engine on their Safari browser and this payment is referred to as traffic-acquisition costs or TAC. TAC was 24% of Google's advertising revenues, which was up 33% year-on-year. According to the lovely Ruth Porat, Mobile Search and something called "Programmatic advertising" carry the highest TAC.

"Other revenues" which include sales from Google's Cloud Business, The Pixel Phone, YouTube Red, Google's Smart Speaker, Google Play Music etc. came to $4.7 billion for the 4th quarter, up 37% year-on-year and was 15% of Google's overall revenues thanks to the strong holiday sales.

Alphabet's "other bets" which include their self-driving car business Waymo, smart-home hardware provider Nest, and their fibre-to-home business Fiber, are still loss-making businesses.

Alphabet's shares were up just over 30% for the year of 2017, they're up 6.5% year-to-date at time of writing, valuing the company at $775 Billion. The company continues to buy back more shares, the board has authorised to buy-back a further $8.6 billion worth of its Class C shares. If you strip out the once-off tax item, the historic price-to-earnings ratio of 35 and a forward price-to-earnings ratio of around 29 is still relatively cheap for a high-growth technology company.

Linkfest, lap it up

Michael's Musings

Putting the market crashing aside. Today humans get one step closer to going to Mars, Elon Musk's Falcon Heavy rocket is scheduled to launch this evening - SpaceX has received permission from the US government to launch Elon Musk's car toward Mars.

Home again, home again, jiggety-jog. Our market is down 3% this morning on the open. The morning after Brexit is the last time I can remember such a poor start to the day. Later today, is the South African business confidence number; given all the positive chatter around I expect it to be smartly up.

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Swipechain

2018-02-02T01:52:00.000-08:00

To market to market to buy a fat pig. Phew, we survived super earnings Thursday. Given their huge growth rates, coupled with high expectations, tech stocks are always the most exciting earning events. It has been known to happen where a tech stock, particularly those belonging to 'FANG', can rocket 20% or slump 20% after reporting. Here is how they did compared to analyst expectations:

- Apple beat on revenue and on earnings, stock is up 3.4%
- Alphabet beat on revenue, but missed on earnings, stock is down 2.2%
- Amazon beat on revenue and a strong beat on earnings, stock is up 6.3%
- Amgen missed on revenue and on earnings, stock is down 1.7%
- Alibaba beat on revenue but missed on earnings, stock is down 6%
- Visa beat on revenue and on earnings, stock is down 1.1% (sometimes you can 'beat' and still disappoint the market)

Over the last few weeks, there have been concerns about the number of iPhone X's sold. I read a comment where one user was asking if they are going to stop producing the phone because of weak sales. I think this tweet sums up the iPhone X and Apple in general.

Market Scorecard. It was a red day for most markets yesterday and an even worse day for Bitcoin. Byron joked in the office saying that the 2% drop in Bidcorp, is out of sympathy for the 15% drop in the Bitcoin price. The Dow was up 0.14%, the S&P 500 was down 0.06%, the Nasdaq was down 0.35%, and the All-share was down 0.42%

Company Corner

Byron's Beats

I get the hype around Bitcoin and blockchain technology. The notion of an unregulated, fee free, community-based network sounds great. The problem is people will always misbehave. It is human nature. Even more importantly, governments need to track payments so that they can gather taxes. No one likes paying taxes, but they are very necessary. Yesterday India expressed a will to regulate cryptocurrencies. Can you blame them? They have been working exceptionally hard to eradicate a cash based society in order to track payments and raise taxes. If Bitcoin went mainstream with no regulation, then that would have been in vain.

Visa reported earnings last night which looked fantastic. In a way, Visa aims to achieve the same goals as cryptocurrencies. They provide an easy, trustworthy and efficient medium of exchange. Of course they do not do it for free. But why should they? They are offering an exceptionally useful product. The difference here is that regulators love Visa! Swiping plastic can be tracked through the banks. Tax evasion is bad for economies and most notably, the vulnerable people in society. Governments ability to track payments is a good thing.

Ok, let's look at the Q1 numbers. Net revenues grew 9% driven by strong international revenue. Total payment volume increased 12.4% in constant currencies to a whopping $2.030 trillion. International (outside the US) grew volumes by 15.2%. This is good news as the developing markets start adopting plastic transactions. The picture below shows how many transactions took place using Visa cards and with what cards.

Earnings came in at $1.08, well ahead of expectations. The company expects earnings for the full year to increase by more than 20%, helped by a $7.5bn share buyback program. Earnings for the full year are expected to come in at $4.40. The stock trades at 28 times earnings which may sound expensive but remember they have operating margins of 68% and are growing earnings north of 20% per annum.

There are so many tailwinds for this business. I already mentioned the regulatory environment but consider the changes in the way we consume. Uber, online retail, app-based rewards programs, music streaming services, video streaming. They all support credit card payments. We continue to add to Visa as a core Vestact holding.

Michael's Musings

Last week, Johnson & Johnson released their 4Q and FY numbers, beating market expectations. One of the reasons why I love the company as an investment is because it is basically three companies in one. Investment bankers have been licking their lips at the prospect of breaking the company up, arguing it unlocks value for the shareholder. A breakup probably will add value in the short term, over time though I think having a strong brand and some diversification across sectors is more important. Here is a breakdown of the company:

Reading through all of their brands and the therapies that they own, you realise how huge this company is. Unlike something like Alphabet, where over 90% of profits come from one product, JnJ has many products in different life stages. For example their diabetes division had 16% lower sales due to increased competition, but the electrophysiology and atrial fibrillation divisions registered growth of 20% and 13%, respectively.

Diversity is what you want in a healthcare company. One day you could wake up to find that your drug does more harm than good, not good if you are a 'one trick pony'. Due to JnJ's size and diversity, the stock is not going to shoot the lights out. Over the last 10-years the stock is 'only' up 120%, Amazon is up by more in less than 2-years. With that size and diversity comes strong cash flows. JnJ boasts a record of increasing their dividend every year for 55-years! We think this is a great anchor stock for your portfolio.

Linkfest, lap it up

One thing, from Paul

This week on Blunders: What really happened at Steinhoff, China spying in Africa, airlines have had it with your "emotional support" animal, and Volkswagen hit by Dieselgate 2. - Blunders - Episode 86

Vestact in the Media

Michael chatted to The Eusebius McKaiser Show on 702 about Capitec - [LISTEN] 'More research needs to be done into allegations against Capitec'.

Home again, home again, jiggety-jog. Not so highly anticipated non-farm payrolls are released this evening, US unemployment is expected to stay at 4.1%. During the financial crisis, this data was huge. It indicated how bad things were, and then how quickly things were recovering. Enjoy the weekend, hopefully the Proteas can return to winning ways at Centurion on Sunday.

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These Big Names need Vitality

2018-02-01T01:39:00.000-08:00

To market to market to buy a fat pig. As expected Janet Yellen announced no change to the US interest rate last night. Inflation over the next 12-months is expected to get to the target of 2%, which signals we are still on for three small rate raises this year.

During the Fed's 105-year history, Yellen is the first woman to lead the organisation. She was at the Fed for 14-years, four of which was as the Chair, where under her watch the US unemployment rate dropped from 6.7% to the current 4.1%. Many factors are at play when unemployment drops; business friendly interest rates are a key cog. Running the economy 'hot', which prolonged a low-interest rate environment has not been everyone's preferred path. It is the path Yellen and Bernanke chose, time will tell if it was the correct one.

Market Scorecard. US markets bounced back from three days of losses, with some very modest gains. The Dow was up 0.28%, the S&P 500 was up 0.05%, the Nasdaq was up 0.12%, and the All-share was down 0.07%. Capitec had another tough day out, dropping 13%, now trading at R800. It is now down 27% since the start of the year. Regardless if the allegations are true or not, the problem for shareholders is that the company was trading at comparative values of two or three times that of other South African banks. The more stretched your metrics, small hiccups can have a big impact on the share price. A problem for the company itself is that depositors are worried to use them now. Their amazing record of opening around 100 000 new accounts a month has probably come to an end, impacting future growth potential.

The only stock currently sitting at a 12-month high, is former JSE star, Mr Price. Since the start of November last year, the stock has surged 67%! South African's are feeling positive about South Africa again. A market commentator pointed out that yesterday Amazon became the most valuable listed company in the world. In this case he is not talking about the market cap but enterprise value (EV). To calculate EV, you subtract cash on hand from the market cap and then add on the debt. The logic is that if you bought 100% of the company, cash sitting in the company's bank account would be yours, effectively reducing what you paid for the company. In other words, the market is valuing Amazon's actual business excluding cash more than Apple's actual business excluding cash.

Linkfest, lap it up

One thing, from Paul

US equity markets have had a terrific year. In the last 12 months, the S&P500 is up 23%. That is not normal. You have to be fully invested to benefit from such moves. That's one of the most important things that we do here at Vestact – keep our clients optimistic and in the market. Don't get distracted by the naysayers and all the noise!

Of course, not every single stock has delivered equal performance. A few tanked, most advanced, and then some did exceptionally well. Take a look at this graphical representation from Finviz. The size of the block is correlated to market capitalisation, and the deeper the green the better the increase. Amazon stands out, with a 76.19% rise since February 2017. The biggest loser is General Electric, with a decline of 45.56% over the last calendar year.

Follow this link to check it all out for yourself: Finviz - Financial Visualizations

Byron's Beats

Jeff Bezos, Warren Buffett and Jamie Dimon. What a powerhouse team! On Tuesday they came out saying that they were exploring a joint venture which would try and fix the US healthcare system. Warren Buffett, in particular, has been very vocal about how expensive healthcare is in the US and how that expense creates a lag on the economy. When these guys speak, people listen. Healthcare stocks as a collective have dropped two days in a row since the announcement.

Preventative healthcare is all the rage these days. It makes sense. It is far cheaper to prevent a disease than to cure it. I may be biased here as a proud South African and Discovery shareholder but these guys should seriously contact Vitality and implement the incentive-based, preventative health insurance model.

Berkshire Hathaway, Amazon and JP Morgan have a million employees combined, who can immediately be put onto the Vitality system. It get's people exercising, eating correctly and constantly screened. That is how you bring down the cost of healthcare. They already have the data to prove it.

Someone please tell Adrian Gore that these guys need him!

Bright's Banter

I'm a not here to discuss how amazing an investor Warren Buffett is. I think we all agree on that and his track record tells a story. All I wanted to do is share these amazing timelines by the Visual Capitalist on how he processes information; maybe we can learn a thing or two. Buffett is still one of the most studied individuals because people are genuinely interested in what sets him apart from all the other investors.

Inside Warren Buffett Brain Part 2

Courtesy of: Visual Capitalist

Home again, home again, jiggety-jog. Capitec is up this morning, along with the broader market. It is 'Big Tech Thursday' this evening, where amongst others, Amazon, Alphabet, Apple, Alibaba (To have a successful tech company does the name need to start with an 'A'?) and Visa all report earnings. Stay tuned, we will give all the updates in the coming days.

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The Crown for Content

2018-01-31T01:38:00.001-08:00

To market to market to buy a fat pig. "Them who must not be named", A.K.A. Viceroy, were the centre of attention again yesterday. We now know that they weren't writing a report about Aspen or the Resilient group of companies but on the darling of the JSE, Capitec. If you haven't already seen the report, you can find it here: Capitec: A wolf in sheep's clothing

It is amazing how quickly this report circulated, and its immediate impact on the Capitec and PSG share price. Capitec plummeted, sending it into a volatility auction, it then recovered to be briefly in the green for the day, followed by a slide to R700 a share (it opened at R939). When the day came to an end, they were 'only' down 3%. The investment company PSG, who have more than 50% of their NAV in Capitec, also got walloped. They closed down 8% for the day.

At the other end of the spectrum was Aspen, closing up 6%. It seems that some people were still holding off buying the company due to the very remote chance that Viceroy were in fact writing about Aspen. I think it is worth showing Byron's tweet from the midst of the Aspen storm.

The same logic applies now to Capitec, the advantage this time is that you can actually read the report and make up your own mind. We don't own Capitec for clients, making us neutral onlookers. As neutral onlookers, I was very impressed with how Capitec's management has responded. They released three SENS announcements, one being a detailed reply to the Viceroy concerns, and had an investor call which you can listen to here - investor relations. Naspers management could take a few notes?

Organisations write positive and negative reports about companies all the time. Thanks to Steinhoff, Viceroy has this allure of having a 'Midas touch' or more aptly the touch of death. Steinhoff is what made their name, yet we are still not sure if the Viceroy version of events is accurate. Only time will tell how much is fact and how much is fiction, where fortunes will be made and lost in the bull and bear camps.

Market Scorecard. I woke up this morning to my phone telling me that the US market had its worst day yesterday since May last year. The Dow was down 1.37%, the S&P 500 was down 1.09%, the Nasdaq was down 0.86%, and the All-share was down 2.07%. Whatever the reason for a down day, remember that markets dropping 1% or 2% is normal.

Company Corner

Byron's Beats

Since Netflix released their Q4 results on the 22nd of January the share is up nearly 30%. Wow. And that is off a share price that was up 70% last year. The market cap of the business now sits at $120bn, a similar size to Naspers.

Streaming revenue grew by 36% (in other news they still rent DVDs) for the full year. They added a whopping 24 million new memberships in 2017 to bring the total close to 118 million subscribers. How many people out there could be potential Netflix subscribers? They need access to good internet and be able to afford $11 per month (I suppose those two come hand in hand). I would say at least 1 billion today and growing.

Guidance for this year was again positive. They expect to add another 6.35 million subscribers this quarter. At that rate you would expect at least 30 million new subscribers for 2018. 150 million subscribers paying $11 a month would bring in close to $20bn in revenues. For 2017, revenues came in at $11bn. You can see how quickly this can grow. Another growth avenue would be price increases (which they did do in 2017). Paul thinks the product is far too cheap. I tend to agree. Compare that to DSTV who charge up to R1 000 per month for the premium service.

Content is king!

My favourite show at the moment is The Crown, a show that follows the life of Queen Elizabeth. Like most great companies, clients are their best salesmen. People talking about "must watch series" will convince others to sign up. And it really is so easy. Most TV's these days link to the internet, all you need is to add your Credit Card details on the easy to navigate website.

The hard part for Netflix is creating world-class content. They plan on spending $8bn on content in 2018. This is a great outcome for that industry! As long as they keep churning out great series and movies, they will continue to do well.

The industry is very competitive. The potential Disney Fox tie-up could create another streaming behemoth. Amazon Prime is gaining traction with quality content, and Apple is also jumping on board. But if you signed up for all these services at the same time, you would still pay less than the old school satellite and cable providers. In the future you will have 3-4 streaming services which will also cover sport. That is my prediction.

This is a high flyer and can be volatile. We like it as a small allocation amongst a diversified portfolio.

Linkfest, lap it up

One thing, from Paul

One of the world's richest persons just died. Ingvar Kamprad was the founder of Swedish DIY furniture giant IKEA.. He checked out with a personal fortune of $59 billion, according to the Bloomberg Billionaires Index, but was known for buying his clothes from flea markets.

This tidy Quartz article has a list of nine intriguing facts about him. My favourite is that IKEA consumes 1% of the world's wood supply - Nine intriguing facts about Ingvar Kamprad and his IKEA empire

Michael's Musings

I found this very interesting article on the Vanderbalts and preserving generational wealth - The Best Way to Lose $5 Billion Dollars. There are many articles about how much wealth the top 1% have, and how that gap is growing. What isn't pointed out though is the high turnover of people and families in that category. So don't worry too much about the gap, generations two and three will use their inherited wealth to stimulate the local economy.

What makes the below information more amazing, is that 100 years before the family reunion they were worth more than the US Treasury.

"When 120 of the Commodore's descendants gathered at Vanderbilt University in 1973 for the first family reunion, there was not a millionaire among them."

Bright's Banter

This is such a great infographic as it shows where game developers are focusing all their energy to building new games. The graph is also quite relevant to us here at Vestact because Tencent (one of our indirect investments through Naspers) dominates both PC Gaming and Mobile Gaming in Asia. For example, their game Honour of Kings is still the top game in Asia and League of Legends attracts an eye-popping 24% of all the gaming audience in the world. Much wow! It's good to see that PC is still by far the favoured platform by developers and mobile isn't far behind.

You will find more statistics at Statista

Vestact in the Media

Paul chatted to 702 about Capitec and the Viceroy report - Vestact fund manager Paul Theron says Viceroy's Capitec report is irresponsible.

Home again, home again, jiggety-jog. The EU had GDP growth of 2.5% for 2017, best in a decade, and then later today they release their inflation number and unemployment figures. Moving across the pond, Janet Yellen announces if the fed is raising rates or not, at around 21:00 our time.

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A Dimon is for 5 more years

2018-01-30T01:29:00.000-08:00

To market to market to buy a fat pig. Today ~~Granny~~ Janet Yellen chairs her last FOMC meeting. Leading into the meeting, the US 10-year yield broke 2.73% for the first time since 2014 as investors start to contemplate a few rate raises for the year. Despite the spike in bond yields, market participants don't expected a rate raise tomorrow night. The key focus will be on the tone the Fed uses.

The impact on stocks is two fold. Firstly, higher interest rates means it costs more for companies to borrow for future expansion. Secondly, a higher interest rate means a bigger discount is applied to future company profits, resulting in generally lower share prices. The key here though is the speed of interest rate changes. With slow changes, which is expected, the market can take in its stride, with limited noticeable impact on share prices.

Market Scorecard. Markets globally yesterday spent the day in the red, I've heard the words 'Profit taking' mentioned. In truth, on an average day there are many reasons for market moves. We like to come up with simple reasons for daily moves because it gives us a greater feeling of control. Does it matter if our after the fact reason for the market move is correct or not? The Dow was down 0.67%, the S&P 500 was down 0.67%, the Nasdaq was down 0.52%, and the All-share was down 1.28%. Locally, banks and life insurers were crushed, being down 4.5% and 3.3% respectively.

Company Corner

Yesterday, Aspen released a SENS announcement saying that an unsolicited offer for their Nutritionals division, has prompted them to do a strategic review of the business (Aspen - Strategic Review). One of the options being explored is the "introduction of a strategic partner that could unlock appropriate value".

What that probably means is that they are thinking of selling part of the business to a company that can positively contribute to growing the nutritional business. It would also mean a nice upfront cash boost for Aspen, which they can put toward reducing the debt pile everyone was talking about earlier this month. We will probably get some more information at the company's interim results on the 8th March.

Linkfest, lap it up

One thing, from Paul

How important is a superstar CEO? Can one make a case for owning a company just because it has a hero at the helm? Should we blindly back entrepreneurs who start, build and then run great companies?

In my experience, when a company does really well, the media puts the chief on a pedestal. When a company falls on hard times, the converse happens. The boss guy must be an idiot!

Here at Vestact we are inclined to pick great businesses operating in promising parts of the economy, and to assume that they will be run by good people over time.

Highly visible CEOs who are fully engaged are great, but there is always a risk of them retiring or falling ill and leaving abruptly? Jeff Bezos, Elon Musk, Johann Rupert, Stephen Saad and Adrian Gore are amazing, but without them at the helm what will happen? Warren Buffett has done an amazing job at Berkshire Hathaway, but he is 87 years old and will be winding down soon.

Losing an inspirational leader can be tough and dent a company's rating, but usually shareholders should just be patient and wait for new management to come to the fore. Apple has been a good case in point. When Steve Jobs died, the naysayers moaned that the company "was no longer able to innovate". Since then its gone from strength to strength under Tim Cook.

I was thinking about this topic overnight, because one of our recommended companies JP Morgan, announced that its CEO Jamie Dimon would stay on for another five years.

Dimon is one of the most respected corporate CEOs in the world of business. Extending his contract is like Leo Messi announcing that he's going to stay on at FC Barcelona for the next five seasons!

He has been CEO since 2005. He's charismatic and opinionated, and is sometimes mentioned as a possible US presidential candidate. He's a pro-business centrist who once described himself as "barely a Democrat".

The succession plan at JP Morgan was clarified yesterday too. Daniel Pinto and Gordon Smith, currently the heads of the corporate and investment bank and its consumer bank have been elevated to the role of co-chief operating officers.

Byron's Beats

I know I harp on a bit about Nvidia but the avenues for this business are so wide and exciting that I have to share them. This TechCrunch article talks about how the oil and gas industry can benefit from AI (Artificial Intelligence). Anticipating new drill spots, dealing with seismic activity and avoiding malfunctions from wear and tear are all potential value adds.

I suppose anything and everything that requires image processing could essentially use a GPU chip (which is what NVIDIA make). In simple terms, it gives smart devices eyes. And that is a pretty powerful tool!

Nvidia and GE's Baker Hughes team on AI for oil and gas.

Michael's Musings

When thinking of years gone by and history, 2007 doesn't feel that far away. Since then however, countries like China have tripled in size, Australia has almost doubled in size, and closer to home, Ethiopia has also tripled in size - Visualizing a Global Shift in Wealth Over 10 Years.

Like many things in life, the more you pay for something, the better it is? - 'Expensive' placebos work better than 'cheap' ones, study finds

Vestact in the Media

Byron chatted to Business Day about Aspen's nutritionals division - Aspen Pharmacare seeks new formula for its global nutritionals business.

Home again, home again, jiggety-jog. It is another red start to our trading day. The only significant data out today is from the EU, at mid-day our time they release their latest GDP read, lets hope it doesn't disappoint like the US last week. Then on the company front, Stryker reports their 4Q and FY numbers this evening. Then lets not forget the US SONA tonight, I'm sure social media is going to love it! It is going to be yuuuuuge!

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China gets a Caffeine Boost

2018-01-29T22:41:00.001-08:00

To market to market to buy a fat pig. It was another record-breaking day for US markets. Our broker in the US, sent us a mail over the weekend pointing out that it appears many of the more cautious money managers, who have been caught on the sidelines of this amazing bull run, are now wading in. Our view is to always be fully invested. As Paul said in his message on Friday, "To paraphrase Peter Lynch: 'always be fully invested. It's great to be caught with your pants up.' "

Market Scorecard. Locally, due to Naspers our market was red. The Dow was up 0.85%, the S&P 500 was up 1.18%, the Nasdaq was up 1.28%, and the All-share was down 0.14%.

Company Corner

Michael's Musings

Last week Starbucks released its First Quarter numbers. Below, Paul goes into our thinking around owning them, so I will focus on the numbers. This was the first time that they had over $6 billion in revenue for a quarter, that is a monster number for a company that sells coffee! For comparison purposes, Woolworths' current market cap is R70 billion, Starbucks sold more in three months than the entire value of Woolworths.

Since this time last year, they opened 700 new stores (almost two new stores a day) globally bringing their footprint to 28 039 stores across 76 countries. Of those 700 new stores, 300 of them were in the China/Asia Pacific region.

The below table gives the best snapshot of where the company currently stands. The drop in margin is due to them selling more food; it is a more 'commodity' type product where margins are lower than coffee.

The key figure in the numbers for us was the 30% growth for China, specifically. As it stands, of the $6 billion in revenue, China is less than $1 billion, showing the amount of growth potential going forward.

Linkfest, lap it up

One thing, from Paul

This week on Blunders: Trumped in Davos, Chinese bank is in the Pudong, airport baggage handlers are evil, and things work differently in Saudi Arabia: Blunders - Episode 85

At any given moment, there are usually a few of Vestact's favoured stocks that are going through a tough time. That's how it goes. The tricky part of managing money is knowing when to sell out and run away, and when to hold on and be patient. A solid company in a good part of the economy will usually come right in time, so mostly we don't chicken out.

As an example, Starbucks has been trailing the field in US portfolios recently. The stock fell around 5% last night after quarterly earnings that showed less robust sales growth in the US than Wall Street had been anticipating. In general, coffee and food sales in the US have been a little sluggish. Not slowing, but not growing that fast either. Low single figures.

Kevin Johnson, the new CEO, said that holiday season drinks and merchandise did not resonate with our customers as planned. I'm not that surprised, having spent the festive season in the USA and seen the offers for Eggnog Lattes and Chestnut Praline Chai Teas. Er, no thanks!

In our view, the market is missing the real story here: China. Same-store sales in that mega-region rose 6%, and customers there mostly use mobile payment systems. Last month Starbucks launched its first overseas "Reserve Roastery", a flagship store combining gourmet coffees and a bakery in Shanghai. They plan to have 10,000 outlets in China within a decade, as many as there are in the US now. In that country, Starbucks is definitely seen as a premium, global, aspirational brand. I have visited some of the stores around Beijing, and noted that the stores were very well run, by young, energetic staff.

Here is an interview with Howard Schultz (former CEO, now Chairman and Reserve Roastery project leader) with more about the Chinese rollout: China brews bubbly future for Starbucks

Byron's Beats

Remember when Elon Musk tweeted that he would be able to solve Southern Australia's volatile energy issues within 100 days? Tesla ended up doing it in 60 days and gained some great PR.

But does that business model make money? This article explains how it does indeed make solid income. To simplify, the battery gathers energy at low prices when supply is flush. It then sells energy when supply is low at a much higher price. Sounds like a great business model. The utility side of the Tesla business is another reason to be excited.

Tesla Mega battery made about 650 000 euros in two days.

Bright's Banter

Nicholas N. Taleb has one simple message about Bitcoin. "It may fail but we now know how to do it". NNT makes some interesting points on why this cryptocurrency makes sense to someone who doesn't like to be part of "the system". "It fulfils the needs of the complex system, not because it is a cryptocurrency, but precisely because it has no owner, no authority that can decide on its fate. It is owned by the crowd, its users. And it has now a track record of several years, enough for it to be an animal in its own right."

Just because I like the guy and his writing doesn't mean I have to agree with him.

Bitcoin by Nicholas Nassim Taleb

I love Google analytics because you can see what people in your country are searching for at different times and you can even search by your region to see what kind of stuff people are searching for. Try it out, it's mighty fun!

Wikipedia has their own version of analytics and they just announced their most visited pages last year. The usual suspects, Bitcoin, Game of Thrones, Trump and Death feature on this list. What still amazes me is that Trump came out second with almost 30 million visits on his Wiki page and he was only second on the list after Death for 2017.

You will find more statistics at Statista

Home again, home again, jiggety-jog. We have a huge week ahead for the US market. The fed meet on Tuesday and Wednesday, and then all the tech titans report. Facebook on Wednesday, and on Thursday there is Visa, Google, Apple and Amazon. Are you as excited as we are? This morning, locally the index is flat, fluctuating between slight gains and small loses.

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