Alpha-Bet on it

“Larry Page will be running Alphabet, Sergey Brin will be his partner, not much changes there. Sundar Pichai will run Google, he is highly regarded and got tweets of encouragement from the likes of Satya Nadella, the Microsoft CEO, Tim Cook, the Apple CEO and Google Chair, Eric Schmidt. He comes with a top pedigree, is only 43 years old, born in Chennai, I am just guessing that he is a huge MS Dhoni fan.”


To market to market to buy a fat pig. Last Friday we had the “jobs” number or the employment situation as the Bureau of Labor Statistics in Washington DC calls it. The BLS. The report was one of those Goldilocks numbers, not too hot, nor too cold, just perfect and the consensus has moved to a rate hike in September now. At least that is what the many talking heads (who should know) have suggested, people like Bill Gross, king of the bonds.

Well, you could argue that there are several kings of the bond world, Jeff Gundlach is another. As recently as the middle of July however, Gundlach said that he thought the Fed should not raise rates this year, a sentiment shared by the International Monetary Fund (IMF) managing director Christine Lagarde. Janet Yellen and her team will do whatever they need to in order to meet their mandate, if this number confirms the launch of rates, then so be it, you personally should not worry about anything. After all was said and done, last evenings session was a cracker for the bulls, the Dow Jones up nearly 1.4 percent, the broader market S&P 500 up nearly one and one-third whilst the nerds of NASDAQ gained the least of the lot, ending up nearly one and one fifth of a percent.

Why the big jump in the “major gauges”. Yes! I have always wanted to work that in, “major gauges”, finally nailed it. The reason is pretty simple, the Oracle of Omaha, Warren Buffett’s business Berkshire Hathaway, is showing the strongest signs ever of faith in US manufacturing by offering 37.2 billion Dollars (including debt) to buy a business called Precision Castparts. The stock jumped nearly 20 percent on the news over the weekend, another elephant gun transaction (in the current environment I think another analogy is in order). The official release from the Berkshire website, you can download it here: Berkshire Hathaway Inc. to Acquire Precision Castparts Corp. Berkshire has an awful website. A really bad one, all you need to know is that it is functional.

The reasoning is simple, Buffett sees more aerospace growth, so does Elon Musk, who has dedicated his life to this. In the release: “For good reasons, it is the supplier of choice for the world’s aerospace industry, one of the largest sources of American exports.” Yes. It also services many other industries, chemicals, oil and gas, pollution control and power generation. The part that is interesting (several) is that this is the biggest ever deal for Berkshire, eclipsing the 26 billion Dollar railway deal, where the company had a part purchase of Burlington Northern Santa Fe back in 2009. First point, made, biggest deal ever.

Second point, the timing. The S&P 500 is up 87 percent over 5 years, as at close last evening which included the nearly 20 percent gain by Precision Castparts during the day, the stock is up 86 percent. So, with the premium, the stock has basically performed the same as the index. Which, if you needed reminding, is trading only around one and a half percent off the highs reached in the second half of July.

Third point and the most important of the lot, Berkshire is paying 22 times earnings for the company. Buffett obviously believes that this is a fair price for a business of this nature. Remember the Buffett wisdom: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Exactly that, don’t feel afraid that you may be paying too much today for that business, when in five years time you “wish” that you had bought that company.

Buffett is paying nearly two and a half times book value for the company, a metric that deep value disciples use. Two and a half times sales. Before buying a company, ask yourself why you are getting such a discount, if that is the case. Is it a fair business or a wonderful business? I often see people say that a company is really great, I wish I could own it, it is however too expensive. And remember, from his mentor Benjamin Graham: “Price is what you pay, value is what you get.” That is also a favourite of the Oracle of Omaha. Third point, do not be afraid to be paying up for a good quality business with better than even prospects.


Company corner

There was an interesting announcement from Google last evening, after the market closed: Google Announces Plans for New Operating Structure. The holding company is Alphabet, the website is abc.xyz. That is pretty cool, and the design is clean, G is for Google. Larry Page will be running Alphabet, Sergey Brin will be his partner, not much changes there. Sundar Pichai will run Google, he is highly regarded and got tweets of encouragement from the likes of Satya Nadella, the Microsoft CEO, Tim Cook, the Apple CEO and Google Chair, Eric Schmidt. He comes with a top pedigree, is only 43 years old, born in Chennai, I am just guessing that he is a huge MS Dhoni fan.

He, being Sundar Pichai, told his bosses (according to this Bloomberg article: Google’s Sundar Pichai Is the Most Powerful Man in Mobile) that they had to get into browser wars, with Chrome. And he was prominent in making Android a success. All in all, what this move is supposed to represent is that we may see segmented earnings (and research and development spend too), rather than all of the advertising businesses lumped into one. Whilst there was not too much being fleshed out as of yet, it does provide more clarity.

And more importantly, reveals what we know all along, that whilst the company is currently heavily reliant on one revenue stream, there is plenty of ambitions to grow the business into many others. Hence Alpha-bet. And whilst G stands for Google, there are 25 other letters in the English alphabet. Does this mean that Google can only ever have 26 businesses in total? Perhaps, I remember reading that at any one time there were 40 things on the go there! The stock popped 6 percent plus in after-hours trade to above 700 Dollars in GOOGL, near an all time high. Lovely to be shareholders.


When are you going to get your Mediclinic shares? In two weeks time. Be patient. The N shares will trade for the balance of this week, the shares and cash will swap hands on the 24th of the month, to give you a blended price, remember you are getting the rights at a discount, 90 Rand a share. Relax, we haven’t forgotten about you or your rights, we are on top of it.


Linkfest, lap it up

This is an interesting change in the labour force dynamics. Do you think it is a problem that teens are not working as much as they used to? – Why American Teens Aren’t Working Summer Jobs Anymore

Dont forget to consider inflation when looking at what your long term (and short term) returns have been. At the end of the day, real returns are what matter not nominal returns – How Inflation Affects Market Returns

Norway is one of the countries that have done the best out of high oil prices, so a drop in the price of oil is putting pressure on the economy – For Norway, Oil at $50 Is Worse Than the Global Financial Crisis. The headline has a negative connotation but note that unemployment is still below the 5% mark (most countries would love that!). Also note that they have nearly $900 billion in a sovereign wealth fund which they have built up from oil revenues. They made hay while the sun was shining. A point to make though is that it took two busts in the oil cycle for them to finally implement setting up the fund. While things were going well there was not political will to set up a fund for the bad times, until the bad times came around twice and the country struggled.


Home again, home again, jiggety-jog. Markets are in catchup mode here today, across my screen there is a green-spread. Green bedspread, all stocks are up. Which is good news for all and sundry, as long as you are long. Across the rest of the globe stocks are marginally lower. Google to watch today, there seems to be some short term excitement about that. Love it!


Sent to you by the Vestacters, Sasha, Michael, Byron and Paul.

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