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Posted: 30 January 2012 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Market news

There is some good food for thought in this piece from WWW.ETMSTRATEGY.COM about how much government is best.

 

I have dropped the whole article in, but also do visit the source (link in title) and the rest of the site. NIce to read from economics-educated people with enquiring minds!

 

For me the central point is not just whether we now can emulate 60s policies from there, since clocks object to being wound back. The point I take is:- What drives our current rulers in their allocation of resource? If a Cowperthwaite for today is available, will he get a job? A hearing, even?

 

Ask youself if a person sounding like this:-  "...government is a capital consumer and a poor allocator of private capital, ... without business, there can be no government.  Private industry creates wealth, government consumes it.  In order to free up the wealth creation capacities of a nation best, .... government must get out the way. ..." would get airtime in South Afrtica today.

 

Yes we have benign projects like the National Planning Commision under way, but surely those of us who think we know best should just shut up and get out of the economy's way?

 

Sadly, I don't expect much movement here while so many in government talk of "Job Creation" - a phrase which suggests that a job, which is essentially an obvious outcome of permitted price discovery in an uncleared market of eager hirers and available workers,  can be "created" at all, presumably in a whoosh of smoke by an old man in a long beard and white robes!

 

So perhaps as a start we can discourage the phrase "job creation" wherever we find it!

 

Cheers

Stuart

 

 

To achieve 7% growth in South Africa, we should copy Hong Kong

 

 

In the 1960s, Hong Kong’s GDP per capita was roughly equal to South Africa’s.  Today, Hong Kong’s GDP per capita is around $44,413 (on a PPP basis), the 10th largest in the world.  South Africa’s GDP per capita stands around $10,243 today.
 
Hong Kong’s population grew over four times wealthier and faster than South Africa’s population in five decades with no mineral or natural resource wealth such as SA's.
 
This is not just a case of comparing diamonds with dogs.  As James Bartholomew from the Daily Reckoning explained some years ago: “Britain, in 1945, was one of the most advanced countries in the world. It had hospitals and doctors admired around the globe, some of the finest engineers and scientists, who only recently had developed the Spitfire fighter and penicillin, among other achievements. It was far richer than the vast majority of countries.
 
Conversely, Hong Kong was a Third World country, like Kenya or India, only probably even poorer than either of those. In 1945 it was described as “a barren rock”. Immediately after the war, average incomes actually fell because of the influx of penniless people. In 1960, the per capita output of Hong Kong was a mere 21.5% of what advanced Britons produced. Britain was nearly five times more productive per capita and, broadly speaking, correspondingly vastly wealthier…
 
By 1992, Hong Kong’s growth had been so outstanding - and so vastly better than Britain’s - that its output per head overtook that of the “mother country”. Hong Kong had transformed itself from being a poor relation - a poverty-stricken colony making cheap plastic toys - to Britain’s equal. Hong Kong caught up with Britain in a mere three decades.”
 
By 1997, Hong Kong's per capita output had grown to 137% of the UK's.
 
Hong Kong skyline 2009
Hong Kong skyline 2009
 
What did Hong Kong do right?  Keynesians and other interventionist economists claimed it was an "economic miracle."  However, free market economists are not too surprised by the reasons in the slightest.
   
A man by the name of John James Cowperthwaite, born a Scot, became the Financial Secretary of Hong Kong in 1961, the same year South Africa became a Republic.  Here is how he 'did' it.
   
Cowperthwaite described his style as "positive non-intervention." He kept personal tax rates at a maximum 15% for everybody, rich and poor alike.  No tax on dividends or foreign income.  The government was not allowed to borrow.  The government did not provide subsidies or charge tariffs.  A new company could be registered by filling out just a single form. In South Africa, it today takes weeks if not months to register a company.
   
In Hong Kong, government was there to serve business to the best of its ability, to make doing business and earning a living as easy as possible.  In other words, to protect the free market and property rights.  This ultimately boosted wealth much faster than any politician can in his/her wildest dreams achieve through intervention.
   
As a Telegraph obituary explained in Jan 2006, Cowperthwaite's "extreme laissez-faire economic policies created conditions for very rapid growth, laying the foundations of the colony's prosperity as an international business centre." 
 
Cowperthwaite believed that government was a capital consumer and a poor allocator of private capital, understanding the basic principle of economics that without business, there can be no government.  Private industry creates wealth, government consumes it.  In order to free up the wealth creation capacities of a nation best, the argument went, government must get out the way. 
 
John CowperthwaiteAs Cowperthwaite said himself in his first budget speech: "In the long run, the aggregate of decisions of individual businessmen, exercising individual judgment in a free economy, even if often mistaken, is less likely to do harm than the centralised decisions of a government, and certainly the harm is likely to be counteracted faster."
 
So much for the urgent need to spending billions upon billions of taxpayer Rands to build infrastructure and in turn to "boost" the economy.
 
He strongly resisted government misallocation of resources and transfers of wealth.  An example of this came when business lobbied government to build a tunnel across Hong Kong harbour, a proposal Cowperthwaite declined and in response to which he remarked that if the project was so beneficial, someone would build it themselves, and fund it with their own money.  Ultimately the bridge was built but not before it would be economically viable, and not at the expense of taxpayers.  One ultimately spends your own money a lot more efficiently than one spends another's.
 
Another completely counterintuitive idea to the modern branch of mainstream economics, a group of economists who want to measure, quantify, and test their economic knowledge empirically, was that Cowperthwaite did not provide any national economic statistics for fear that the interventionists would be given ammunition to intervene in the free market economy.  He famously sent a British delegation of bureaucrats packing when they asked for unemployment statistics, because he simply didn't have any.
 
Last year Pravin Gordhan said it is a challenge for the government to get the economy to grow by 7% each year over the next twenty years to reduce unemployment.  Hong Kong did exactly this and more with nearly no government intervention, growing by roughly 7% for four decades.  If our government were really serious about boosting employment creation and uplifting the masses from poverty, it would take a step back and let the unfettered free market get on with it.

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Posted: 9 January 2012 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Research

Distance helps, when it's perspective that's needed.

 

One can envy the objectivity of investors who can look at our markets from a detached stance. Some even refer to their portfolio approach as trying to build a "Jupiter portfolio" i.e. what would an extra-planetary visitor, who could see it all - yet is wise enough to know that he knows nothing (particularly of the immediate future) put into a portfolio.

 

Having never been to Jupiter, the most detached I was over the break was some downtime in Europe, so here are a few thoughts:-

 

 

One must read (or better, re-read) Gibbon's Decline & Fall, and also the Meditations of Marcus Aurelius. Rome's empire was in peril for much of its first three and most of its last 5 centuries; yet so many expect the current imperialism to collapse at a stroke because of one bad press conference or little crisis. The US empire will last longer than I think, even if less long than George W Bush thinks.

Take Rome slowly. There is just too much to see in a rush. (wrt Venice, the same broad comments can be taken).

_________________________

 

In a small (permanent population ~10,000) town in Austria, there were a choice of around six high street banks. Each with a banking hall, and staff (who were helpful and functional in several languages). In SA we have around one bank branch per 10,000 people. In most rural SA dorps of that size, one gets either a Standard OR an FNB OR an ABSA. Might it be that they co-operate (I am sure they would never collude) in rationalising their branch networks? 

 

Thinking this difference through is fascinating. In Austria, the public saves - far more than here, so maybe the thought of losing cutomers with those deposits (cheap funding) makes the banks a bit more outward thinking, and reaching. Also, money is less crassly profiled - e.g. when you buy some ham in a deli, they weigh it and slap on a price sticker (just like here) but always seem to hand it to you with the price sticker facing down - as if to say that the price matters less than the ham! We are far keener to flash price and money here. Any lessons?

 

And we stayed at Gastehaus Schwab! Could that suggest that Klaus Schwab (the uber guru of the World Economic Forum) is scrimping for cash for his Davos jamboree this winter?

_________________________

 

Berlin.

Similar age (post Wall) to our new regime, but Berlin really works.

 

Its public transit system is a joy - numerous examples make one wonder whether our trusty Gautrain project mangers confined their research to Bela-Bela. In Berlin, it is easy, and customer friendly, to buy a ticket. They obviously want people to buy tickets, and so one suspects are less exposed to advantageous patronage guarantess than our lot. The Berlin system appears geared to the movement of people, not to the buying of trains. Changing lines, modes, or directions is easy. And we had hefty luggage - no problem.

When a section of line is down, a substitute (ersatz is the term they use) is set in place to bridge the network gap. Trains, buses, trams etc move SLOWLY,but OFTEN. If our Gautrain can really go at a high max speed, who cares? - it seems the Berlin transport guys paid more heed to passenger volumes moved, not to the gasps as the speedometer touches the odd high!

 

Its shops show fair value - with high prices and exquisite merchandising at Kaufhaus de Westens (KaDeWe) in the old West Berlin, and easier pricing and better value at Galleria Kaufhof on Alexanderplatz (East). On coming back, while yes we do get a lot of sun and warmth in SA, we don't get a lot in our baskets - and do you know anyone who can still afford a trolley? Oh, and among the various joys of being in Berlin - merchants in shops present the device for your PIN with the amount of the transaction showing. Surely asking you to authorise without the amount showing is too much like asking you to sign a blank cheque? 

What's wrong with our 'competitive' banks? Have we let them reach uncritical mass?

 

Berlin's urban design is a delight - the bad architecture is good, and the good is wonderful, and even in the bleak dark days of January there are many treed parks to offset the human intensity. I wish I had been there out of winter - particularly because the Philharmonic Orchestra was on a break.

 

Some heavy post war stuff is available. At the "Topography of Terror" you should go into the (free) museum to the bizzarre era of the 30s and WW2 on the very site of Gestapo HQ.

 

And finally, Lufthansa staff at Frankfurt showed more aplomb in dealing with a 550-person A380 delay for 12 hours than most local airport personnel do when having to metabolise a Bafana victory!

 

Anyway, here's to 2012

Cheers

Stuart

 

 

 

 


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Posted: 10 January 2012 - 2 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Research

 

The eternal question will always be with us, and demands a straight answer especially now, as guru after guru makes solemn noises about the “catastrophe about to engulf Europe and the Euro”, and almost anything else besides. While reflecting on our SA equity levels, which of course stand sturdily a bit like a three-legged pot, with Currency, Commodity prices, and Consumption by turns steadying our ship, it is instructive to ask where the big market is. US equities.
Well, some perusal of data from Standard & Poor shows a current PE multiple of 14X, which may not be eye-poppingly cheap, but is well below the post 20th century mean of 15.7X. (Yes, I know there is data going back to 1871, but my cheap Microsoft spreadsheet gets a lump in its throat if I ask it to handle date formats pre-1900!) And please note, these are raw data, not smoothed by the rolling decade or anything else.
And more to the point, if one looks at the forecasts for 2012 and 2013, they currently suggest eps growth of around 10% yearly which places today’s SP 500 on forward multiples of 12.75 (one year) and 11.54 (two years out). As shown in the chart, that does start looking like a bus that you would hate to have missed…
Good luck
Stuart

alt


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Posted: 12 January 2012 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Research

So SAB has placed $7bn in bonds to finance the cost of their purchase of Fosters in Australia.

 

What is the interest rate on these bonds, and what might this all mean? (For generic comment see Vestact's Blog - If only Portugal and Greece were beer companies )

 

Firstly, the simple weighted average interest rate right now is 3.364%. Yes, SAB Miller has borrowed seven billion US dollars at a 3.364% interest rate - nice to see a borrower who doesn't get on its knees before a banker.

 

If one adjusts this for the shorter durations of the lower rate bonds, as one should, the better answer would actually be 4.175%, but still, that they have got their acquisitive paws on the first (three year) billion at a paltry 1.85% means buying beer businesses is very easy for them right now. One hopes that it isn't so easy that they are going to buy more than their stakeholders will benefit from!

 

Now, how do these rates stack up relative to the interest rate base (the so called "yield curve")?

 

Here is the at a glance summary:-

alt

 

The black line shows what US government rates are at for the various durations, and the little black dots show where the SAB bond placement amounts lie. So, yes, its a fine placement by the brewer, but note that significant premium which lenders are getting for exposure to a mere brewer, rather than to the US government, lender (or printer) of last resort.

 

For more on the yield curve, and what is means, please follow this link - http://stockcharts.com/freecharts/yieldcurve.html -  its  very, very illuminating.

 

You can see, by clicking the animate function, where various rates have been for the last several years (and you also get to see where the NYSE was at those times - a thousand pictures saving a million words!)

 

And if you reflect a little, you can get your head around the entire "yield curve" concept. Here is a simpleton's way to tell it:-

 

Think of the interest rate as a measure of the resistance which money markets have to a business' ambitions.

 

A good analogy is water depth, as a person tries to walk along a canal. The short rate tells of the water depth where the person is right now, and the yield curve simply joins the "water depths" or interest rates, as the walker looks and then progresses along the canal (representing time). So right now, Washington policy has taken water away from your feet, hoping you will be able to progress, and get the economy going. Further out, however, you are reminded not to be lulled by current near-zero short rates - as you play the animation, note how much stabler long rates are - you always seem to face ~20 years of any 30 year bond at a rate of almost 4%.

 

Note also how while you might expect low rates to inevitably mean high share prices, the linkages are a lot more complex and interwoven.

 

Cheers

Stuart

 

 

 

 

 


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Posted: 17 January 2012 - 1 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Research

Today (17 Jan 2012) sees a new high on the JSE, with the all share index reaching 33490 points.

 

[As an aside, isn't it weird how the company which runs the JSE seems unable to get out a SENS notice to advise investors in it and/or in its listings of the breakdown in its continuity of execution!]

 

So with a new high, and much attention thereon, many comments suggest that is a time to sell or exit, that a new high by definition is somehow unsustainable.

 

Well it takes opinions to make a market, and in my opinion new highs on the investment capital markets are zero cause for alarm. After all, the cost of living seems to find new highs continually, with no surprise to anyone. And the big incumbent companies which make up the lion's share of our stock market are selling into that rapacious cost of living system every day. 

 

And the fundamentals of the JSE are none to shabby  - see the attached picture, a slide from my latest fundamentals course for Standard Online (SBG), which tells of the three-year averages for return on equity (ROE) and operating profit margin. At ROE of 29.6% and operating margins of 23.7%,  why be afraid to own these companies?

 

Cheers

Stuart

 

alt

 


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Posted: 18 January 2012 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Market news

Lets home in on the stereotypes in the so-called PIIGS countries.

 

Greece? After all, aren't they lazy, dirty and tax dodgers?

 

Portugal? I mean look how they dive in the penalty area?

 

Italy? - Berlusconi, slimy and bent though he seems, has been in charge too often for any hope there.

 

Ireland? - All charm and blarney, they had a lucky property boom with some tax farming to get software revenues channeled through, but still no hope, surely?

 

Spain? - Sad-eyed lazy knife fighters, who can only glory in their arts legacy and the fact that Leo Messi works there.

 

Right, now that prejudice has been aired, what might facts bring to the table? It is interesting to reflect that even if Greece's entire economy doesn't exist, the Chinese scale and growth is such that the equivalent of a new Greeece economy gets added by China every four months. 

 

But, back to the title... This table shows the top ten countries by economic decline in the years 2007-2010 measured by the disarmingly clear measure of $ decline in GDP.

 

 

alt

 

And tthe leader by a country mile? BRITAIN!

 

So despite the joy they are trying to ooze at hosting the Olympic athletics meeting, the Rugby world cup soon, at announcing a new train to get from London to Birmingham faster, the core of Europe's problems really does seem to be larger, English speaking, and getting less profile than it deserves.

 

For a more comprehensive read on this, please see (the source of the table) Business Insider article:- How long until people raise the alarm about Britain?

 

Cheers

Stuart


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Posted: 23 January 2012 - 1 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Research

Pick and Pay (JSE code PIK) has had a marvellous run over the past few weeks, with its shareprice  being up around 17% in three months.

 

How should we look at that? Is the business today worth 17% MORE than it was three months ago?

 

Here is the DCF (discounted cash flow) valuation on PIK which I compiled last year, and which reflected that the value (based on Feb 2011 results) was around R47 per share.  And that R47 required sustained annual turnover growth of 10%, and margin (at the Profit before Tax level) of 3.5%.

 

alt

 

Now of course the valuation is not frozen (i.e. it isn't a horizontal line on a time graph), it can be expected to rise into the future and also fall backwards into the past at a slope of the discount rate. That sloping value trajectory would represent how the valuation rises in time as the growing turnover and profit come through, and all happening in a dull/orderly way at the discount rate.

 

Here is an illustration of that, with the price (blue) against the imputed historic valuation (red).

 

alt

 

So now the pictiure is clearer - and if anything my valuation has been inline with the market in its demanded cash profit growth, since my red "value curve" is generally in the broad trend of the the truth (price). But maybe the recent developments in retail have knocked PIK off its old perch as the prime food retailer on the JSE. Yes, Shoprite has been aggressive here in SA and into Africa, and yes Walmart has taken a stake here, but into another PIK competitor Massmart, not in PIK. So the game is tougher than it  once was. 

 

Anyway, with the sharp resurgence in price, is it based on long term expected operating results, or is the market maybe hoping for a dividend bonanza from the long awaited sale of PIK's Australian foray? One hopes its operating driven, since the dividend bonanza would not be repeatable! But if I look at the interims to August, I can't see the signs...after all, turnover growth was only 7.4%, and PBT margin declined! So I suspect PIK has to pull some golden rabbits from the hat for the current year to Feb2012, and we will only know the final results in around April.

 

My conclusion?

The value has not leapt by 17%. The price may have moved too low, and has partially sought correction, and I am not a buyer at the current price.

I will look after the finals are released. Certainly, clarity after the finalisation of the Australian/Franklins story will make it a clearer call. 

 

Cheers

Stuart

 


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Posted: 24 January 2012 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Research

While the Occupy movement is giving Wall St and Davos some food for thought, data is ahead of the game as it so often is.

 

See this panel from one of my current guest lectures.

 

It uses insight from the Brookings Institute about cities on the up. And be aware, the planet has recently moved into a 50% urban state...

 

Cheers

Stuart

 

alt 

If you are both keen and lazy, here is the  live  link to the Brookings work:- http://www.brookings.edu/info/globalmm/globalmetromonitormap.aspx

 


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Posted: 25 January 2012 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Research

Amazing results from Apple for the fourth quarter of 2011.

 

Amazing. This company made profits of around R471k in each and every every minute in 2011!  (Twas higher per minute in Q4).

 

And the share price didn't do the old "buy on expectation, sell on the facts" slump, it ROSE 8%.

 

So lets look at the results - here is a pictorial summary from Dan Frommer's SplatF ( http://www.splatf.com/2012/01/apple-1q12-charts/ ), and there is lots of Apple result commentary like at http://abnormalreturns.com/no-one-knows-nothing-apple-edition/ 

 

alt

 

So, where to now?

 

Is this the start of a new upcycle for Apple, with the iPhone leading it into sustainable compound growth on a new high level, or has it been a perfect sweetspot, with the Blackberry Blackout and the tragic death of Mr Jobs giving the company a one-off megaboost.

 

Personally, my concerns that the quarter's numbers are too dependent on one product make me bullish about smartphone and the tablet era, but more so about Samsung and other adopters. I am taking a sober view on Apple.

 

Cheers

Stuart

 

 


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Posted: 27 January 2012 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Market news

 

With new highs reached on the JSE, some seem afraid, and certain that the market “must drop” after broaching previously unreached levels.
I disagree. New highs can be perfectly comfortable. Especially when the highs are measured in nominal terms, and we live in an inflating world where new highs in many cost of living measures are reached continually.
To help with perspective, see here a picture of the JSE’s current high, plotted (blue line) against its earnings per share (purple). Note how although the index high is only just ahead of its May 2008 high, earnings have advanced by some 24% since that date. This makes the current new high a lot less stressful than if it was a pure price spike.
alt
 
And also, take a look below at some data on the world’s largest economy, the US. Although our (SA) performance is rather balanced, with trade to Asia and Europe being as important as US trade, the fate of the US is a substantial driver of world business momentum. And according to these data from www.calculatedriskblog.com retail sales in the US are at least at new highs in seasonally adjusted nominal terms, and are continuing to grow year-on-year at 6% - a seemingly acceptable yearly growth rate if one sees where it has been.
 
So - don't get rattled by the JSE high
Cheers
Stuart
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Posted: 31 January 2012 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Research

Murray & Roberts' shareprice responded today to the announcement of access to a further billion in debt and the raising of "circa R2bn" by issuing ">= 30% of the issued shares" by dropping. Easy value-equilibrium arithmetic says the new shares will be issued at R20, a 28% discount to yesterday's price, and a 23% discount to the equilibrium price today. So lets assume that the underwriters are in at R20, and the team will see what they can get the issue away at.

 

The debt could also a telling indicator, since the company has not revealed the interest rate at which the facility (now up to R4.3 bn) can be accessed. Remember the clarity with which Metorex' cost of debt told the truth?

 

So what is MUR worth? Its price has had a lively trajectory, suggesting one needs a clear perspective whether wanting to trade or invest.

 

I have done a cash-centric discounted cash flow (DCF) model, assuming  a tax rate of 25%, working capital at 6% of turnover, and fixed asset turnover of 5X. The key variables of sales growth and margin then drive the story. It appears that MUR is worth R60, if you assume 10% sales growth and an 8% margin. Or MUR is worth R26, with 6% sales growth and a harsher 3% margin. (I have also imposed a higher 15% discount rate on the milk & honey projections, versus 12% on the harsh set.)

 

Here is a chart showing price (blue) against the two value outomes.

 

alt

 

So it appears that the JSE price has generally been expecting the best from M&R, and hasn't penalised the team for the overstatement of turnover in 2010 which then had to be re-reported after some clients differed with the company on which work was complete and would be paid for. (see company press release at  Murray & Roberts Cleans the Slate )

 

So what is a realistic margin to expect from this company? A solid place to start is the facts, and here is the history of MUR's operating margins:-

 

alt

 

My conclusion? Even with the chance to add to my holding at R20, I am not enough of a serial optimist to believe that MUR's pbt margins can hit and stay at 8%.

 

Not for me.

 

Cheers

Stuart

 


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