Nay, Nay, IBM

“IBM is struggling in the face of newer technologies, I am sure that the giant machine will adjust their business model, the old adage of turning around the supertanker applies here. The stock is down nearly 15 percent over the last five years. Over the same time the S&P 500 is up 45 percent, the stock has woefully underperformed.”



To market to market to buy a fat pig.
It was a day of recovery. In large part the (and I am putting it in brackets) “disappointing” Chinese GDP numbers played a role in the market second guessing the Chinese authorities next move to stimulate the economy in that country. How are we to know what the Chinese authorities are likely to do? I think that having grown their economy at a breakneck speed over the last three decades, it is inevitable that there is going to be a slowdown of the pace of the growth in China, if not the absolute number.

An 11 trillion Dollar economy makes the country as a standalone the second biggest economy in the world, after the Americans of course, if you include the European Union economy as one, then third place. And to think that not so long ago we were talking about the Chinese economy overtaking the likes of Japan and the United Kingdom, as well as Germany, I remember having those conversations. The Chinese economy is now bigger than the combined economies of Germany, the United Kingdom and France. That is pretty astounding, the rapid pace of growth that has unfolded in front of our eyes and often misunderstanding how compounding interest works, the large numbers sneak up on you in time. Compounding interest is as they say in the classics, the 8th modern wonder of the world. Although in investing, it may be the only wonder!

Our equities market got busy, stocks rallied broadly, there are always exceptions of course. The Jozi all share index rallied 1.6 percent into the close, marginally off the highs of the day. Resources came off their very best levels of the day, as a collective nearly adding two percent. Glencore was halted in London as the volatility circuit breakers on the way UP were triggered, that was not something that you would have come accustomed to hearing lately. The words resource stock and circuit breaker leaves you feeling rather frigid, in this case it was the opposite.

MTN issued a rather strange, yet necessary announcement. I know that in the modern era “things” can be quick, not that quick however! Leaks emerged from their Nigerian businesses profitability, This Day newspaper in Nigeria published the numbers that MTN were close to their profit number (955 million US dollars). Yet as MTN stressed in the SENS announcement, the company had not finalised their audit. So the numbers are close, they are however not the numbers yet, as this has not been finalised. Of course the cynics may say that internally there may (or may not) be some elements wishing to show how profitable the company is, to use it as leverage in the case pending with the Nigerian Communications Commission. Still, if this is the case, the original year is over five years worth of profits, which still sounds ludicrous to me.

Over the seas and far away in New York, New York, the going was tough again. After having been closed for a day for Martin Luther King Day, futures pointed to a strong start at the open, led by global gains and pending stimulus in the Chinese market, if you believe that second part of course. I can’t say that I do, the growth seems “just fine”. Stocks closed mixed, tech stocks were down around one-quarter of a percent, whilst both the S&P 500 and the Dow Jones eked out marginal gains. Again stocks were unsettled by the oil price, that at one stage looked to regain the 30 Dollar mark, quickly slipping away in the second half of the session, and this morning making fresh multi year lows again. Currently the oil price is trading below 28 Dollars a barrel, the IEA making noises yesterday about the continued glut in the oil market.

I saw a misconstructed sentence in the FT this morning, that doesn’t bode well for oil producers, it went like this: “Brent, the international benchmark, was down 0.5 per cent at $28.61, after dropping on Monday below $28 for more than a dozen years.” So, from Monday onwards for the next 12 years, the oil price will be below 28 Dollars a barrel, if my understanding of sentence construction is correct.

I have seen some folks struggle to give a one year forecast accurately, this seems quite crazy to stick your head out over a dozen years! The IEA suggests as much as 1 million barrels of oil a day overhang. Whoa. I can’t understand how this is a massive problem in the long run, that seems like a windfall for consumers globally. In the same way however that we didn’t see hyperinflation in a time of oil prices having rocketed (remember 147 Dollars a barrel in the first half of 2008), I am guessing that we won’t see significant deflation either.

After hours there were numbers from both Netflix and IBM, the old and the new I guess. The old being IBM is struggling in the face of newer technologies, I am sure that the giant machine will adjust their business model, the old adage of turning around the supertanker applies here. The stock is down nearly 15 percent over the last five years. Over the same time the S&P 500 is up 45 percent, the stock has woefully underperformed.

I suspect that Berkshire might her doing some buying at these levels, and why not, the yield (provided it is secure) is over 4 percent now. Earnings, as far as Mr. Market is concerned, was a beat, it did however show major slippage, down at 4.84 Dollars a share, representing an earnings decline over the year of nearly 19 percent. Yech. On revenues that declined 8.5 percent over the year, clearly the new business is struggling to offset the sliding revenues of the old business. A mistake from Berkshire? Perhaps, it certainly wouldn’t be the first and won’t be the last, IBM are synonymous with quality and reliability.

And then the new, Netflix with all their newer territories that surprised the market, in terms of user growth. Subscriber growth in the US has slowed, globally the company now sits at nearly 75 million subscribers, having added 5.59 million during the quarter alone. As speeds increase, as broadband quality improves across the globe and I am sure that it can in a hurry, more users will be able to enjoy the same content. It is of course going to be a service for wealthier people, broadband speeds not being good enough are rich people problems. For shareholders there is the prospect of limited profitability, as the company expands their global presence, spending more money to be more aggressive.

The company of course fits into the acronym that drove the market higher last year, FANG (Facebook, Amazon, Netflix and Google), and investors in the business will have high hopes of the subscriber and content quality. It will remain a highly volatile stock that has the potential to reward shareholders handsomely. Equally, one stumble and sign of revenue and subscriber growth slowing, a Twitter type scenario could unfold. Twitter is down 60 percent from their first day of trading, the service was briefly unavailable during the day. Perhaps there were some Twitter addicts hiding under their beds, curled up in the foetal position yesterday.



Linkfest, lap it up

In our modern world being connected and having a cellphone is vital. On the African continent more people have cellphones than electricity to their homes – Is Africa leading the innovation revolution?. Does this mean that cellphone can be considered a basic human right?

It might not be cost effective yet but using peoples movement as a way of generating energy is an interesting step forward – A solar-powered soccer pitch in Lagos also uses players’ footfall to keep the lights on. The technology uses tiles that generates energy as people walk over them.

Josh Brown feels that commodities shouldn’t have a place in your portfolio as you don’t get a proper reward for the risk that you take on. He also makes the point that you normally have secondary exposure to commodities through other ETFs and stocks. MTN is a great example, oil price goes down and so does the stock price due to 2 of their 3 biggest operating regions being oil rich countries – Are Commodities a Necessary Portfolio Component?



Home again, home again, jiggety-jog.
Stocks are getting smoked across Asia, Japanese stocks have entered a bear market, although in theory, with stocks never having been close to their end of the 1980’s highs (around half currently), stocks have been in a bear market since 1990 in that part of the world. Hong Kong stocks are also getting smoked, down 3.6 percent today. Fear not everyone (insert sarcasm), the delegates of Davos are going to save us. Every year I turn a horrible shade of green in my envy of the location and the quality of the people attending, it seems like a closed inner circle. The elites of the world attending and allowing us a few snippets of how we could also be there. I must stop it and be a bigger person, Davos is important in that it stimulates conversation, and conversation is good. As for stocks today, expect “things” to be not so good, sadly.


Sent to you by Sasha and Michael on behalf of team Vestact.

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