Be Optimistic


“Points such as optimism appearing oblivious to the risks, whilst pessimism seems so much more intelligent and aware are true, even if not stuffed with facts. When someone is screaming and telling you the world is ending, you had better pay attention. When someone keeps telling you to keep calm and that everything is going to be OK, there seems a genuine “something” missing. They know nothing, so innocent and unaware of the world.”


To market to market to buy a fat pig. That rally lasted all of ten minutes. Perhaps a little longer, in market terms. Depending of course at what end of the spectrum you invest. Two days is either a time that you can lose your boots and find them again, or a blink in the investment world. Stocks continue to trade in lock step with the price of oil, which really leaves me scratching my head. You would have to think that lower prices of fuel and energy are good for consumers globally, for earnings and equity market levels (i.e. all the energy and services related stocks), that is not too good. The journal (that is the Wall Street Journal to you and I, who are not for jargon) suggested that Oil, Stocks at Tightest Correlation in 26 Years.

In other words, and I think that this is the best way of explaining it, if I provided an oil and gas company with software, or even cleaning equipment, tight budgets would mean that I come under pressure too. At the same time, Joe Consumer has more money to spend and may well drive the global economy in a different way, consuming. Which may require higher transportation of goods around the globe (even locally), which means that demand for oil and gas get stronger. And so the cycle continues.

It is the same with the equities markets, day in and day out. The sun comes up, the electronic opening bell rings, stocks trade, there are sellers and buyers, the bell rings for the close, the sun goes down. Repeat, and repeat again. Yet in our jobs, no two days are ever the same, there is always something going on. Even if the underlying companies that have their stock prices change hands furiously do the same thing.

Yesterday in Jozi, Jozi, stocks sagged all the way into the close, where we ended the day nearly one percent down. Having opened better during the course of the day stocks went {hum the tune} slip sliding away. Paul Simon, what a singer! Unbeknownst to me, Art Garfunkel had a successful solo career. It is hard to believe that Simon and Garfunkel have been broken up since 1970, they started as school kids called Tom and Jerry.

Back to local equities, where it does seem like a simpleton cat and a friendly mouse keep chasing each other, there certainly was enough company news to leave you feeling indifferent. See below in the company corner segment. The Monetary Policy Committee has a really tough time of it later in the week, the drought and weaker currency will obviously mean imported inflation, the weak demand in the economy will mean a balancing act. And a consumer that whilst having worked hard to repair their balance sheets, still looks a little exposed. Good luck to them, the stuff that I have been reading suggests 150 basis points rate hikes between now and the end of the next year.

And then over the seas and far away, stocks in New York, New York sank in the second half of the session as oil prices slipped. Both the S&P 500 and the nerds of NASDAQ slipped over one and a half percent, the Down Jones by around one-quarter of a percent less than that. McDonald’s produced some stellar results that were all led by the US again, it has now been confirmed by both Starbucks and McDonald’s that the average Joe (and their cup of Joe) are in pretty good shape. Obviously the companies cannot control the currencies, McDonald’s pointing out that they will be taking a currency hit. Tonight of course is the much anticipated and highly publicised Apple results. Those are set to be released after market, either stay up and see the release one hour (traditionally) after the market closes, or wait for tomorrow morning.

I am going to leave this part of the message with a simple, yet powerful message. Byron sent this onwards yesterday, it is simply titled Why Does Pessimism Sound So Smart? the author is well known in the financial world, a fellow by the name of Morgan Housel. In this article, Housel makes a few excellent points against the backdrop of the reality that the S&P 500 (has risen) 18,000-fold over the last century.

Points such as optimism appearing oblivious to the risks, whilst pessimism seems so much more intelligent and aware are true, even if not stuffed with facts. When someone is screaming and telling you the world is ending, you had better pay attention. When someone keeps telling you to keep calm and that everything is going to be OK, there seems a genuine “something” missing. They know nothing, so innocent and unaware of the world.

And then the last point that he makes is #winningly good (I just made up a word): Pessimists extrapolate present trends without accounting for how reliably markets adapt. If your energy prices double, you will look for an alternative, not so? Replace energy chewing light bulbs, use gas, start using solar panels, sound familiar? All those good things, and once it becomes economically viable, it becomes mainstream. What happens to the grid as we know it? It changes, for the better of humanity.


Company corner

Amplats warned that earnings would be well lower (much lower), in the face of what we now know is a changing company. Changing from expensive underground mining to fewer and more profitable open cast and mechanised mining. That is effectively the future that has been chosen by the shareholder. And to think that the share price of Amplats in Rand terms is down nearly 60 percent. The going has been more than tough, it has been awful. See the twelve months ended 31 December 2015 trading update.

Whilst the stock slipped nearly three percent on the day, I suspect that much of that was market related, implying that (using a Rumsfeldian) all this was known knowns and baked into the share price cake. Talking about Rumsfeld, I saw this via Quartz, can you believe it? Noted torture enthusiast Donald Rumsfeld has made a really difficult solitaire app. Which is more torturous, holding Amplats shares for the last decade or hearing about (from Rumsfeld) the hardest version of solitaire and downloading it to compete? It is close.


The Lewis group produced a rather tepid trading update, I guess that is to be expected in this environment. Over five years, the price of the Lewis stock is down 41 percent. The market is telling you something here, that it doesn’t even believe the current price, relative to future prospects. The historical dividend yield is 11.8 percent, the multiple (the current share price to the historical earnings) is less than five times. You can’t even buy a private business at that price. Mr. Market is clearly cautioning you on this one, throwing up a flag of sorts. Is the consumer really about to stop buying furniture and is the company going to been thrown the book by the regulators for their insipid business activities? Is that what Mr. Market is really worried about? Time will reveal the answers no doubt.


AVI, the brands business that sells well known household good such as Bakers biscuits, Five Roses, Freshpak (you Rooibos drinkers, you!), Provita, I&J (Feeesh) and distributor of the likes of Carvela, Lacoste and Kurt Geiger shoes through their Spitz stores , released a trading update yesterday. This is for their 6 months to end December. It looks OK at face value, the reason for the share prices of them, and their peer grouping, Tiger Brands and Pioneer Foods sinking over the last six months can be attributed to several things. The weakening Rand and crippling drought means that input prices are going to rise, whether or not these companies can pass it onto their customers remains to be seen. I guess not all of it.

The other “thing” that has happened is that global investors have fallen out of love with emerging markets, that is ironically longer dated in nature. It may take years before some money managers decide that emerging markets are no longer broken. Against that backdrop it is fair to say that the dividend underpin (currently 4.4 percent pre tax) should provide a floor for the stock. Thank goodness for prudent cash management. Sometimes boring can be good.


Linkfest, lap it up

Thanks to the information age and an increasing number of people willing to do the hard yards, it is getting more difficult to find inefficiencies in the market. Making continuous outsized returns is becoming that much more difficult – Why we’ll never see another Warren Buffett or George Soros ever again.

Having a computer know if you are being sarcastic or not has very little practical use. It does however show how far machine learning has come, being able to detect sarcasm requires some level of “understanding” – Researchers have developed an extremely effective “sarcasm detector”. I’m looking forward to a day where I can do even more stuff by just talking to my phone/watch/fridge/TV/car.

Our style of keeping things simple and keeping our eye on the longer term view has served us and our clients well over the past 13 years – Finding the Real Expert.

The article title is a bit misleading, I suspect it was chosen to get more clicks – Dumb Alpha: The Drawbacks of Compound Interest. The point of the article is that, when investing lump sums with a long term time frame, your timing still matters. The market returns closer to the starting point matter more to your long term returns than the latter returns. To maximise long term returns, regular additions to your portfolio is essential!

I don’t agree with this guy at all, the former finance minister of Greece: Yanis Varoufakis: Capitalism will eat democracy — unless we speak up. And communism or extreme socialism will work? You can’t speak up there. North Korea, Cuba, the list is finite, which is a good thing for productivity and inventions. Any one who names a political agenda after themselves is a narcissist (Marxism, Leninism), there is a Greek word that Varoufakis will understand.


Home again, home again, jiggety-jog. Stocks across Asia are understandably lower. The Nikkei in Japan is down over two and a half percent, the Shanghai markets are nearly down three. Hong Kong markets are off 1.8 percent, at least the US futures point to a little green open, obviously with earnings in focus it will differ on a company by company basis. I thought that the market would be more receptive to earnings as a whole, rather the same concerns around the oil price, the global economy and in particular China remain front and centre.


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

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