Good news is bad news


“The lower employment rate and strong wage growth must be a sign the Fed are going to hike rates. The equities market dislikes the Fed raising rates. What is essentially good news leads to heavy selling during the Friday session.”


To market to market to buy a fat pig. Yikes! What happened there? The Dollar keeps gaining momentum, the chances of gradual rate hikes continue to be a reality. All this as a result of a mixed, yet still strong US non-farm payrolls report on Friday. The headline number of jobs created was not inspiring, a marginal miss, the unemployment rate below five percent (that is right, 4.9 percent) and the average hourly earnings increasing half a percent, that is what sparked Mr. Markets interest. This is bad, said Mr. Market, now the Federal Reserve have the ammunition that they need in order to raise rates. Yip, in case you missed it, we are back on Fed watch.

So this is how you must read the jobs report and Mr. Market’s reaction. 1) The headline number in jobs created is a miss and a marginal disappointment. 2) The hourly wages number is a strong beat and indicates that workers are earning a lot more, by extension in a consumer driven economy is a good thing. 3) The lower employment rate and strong wage growth must be a sign the Fed are going to hike rates. 4) The equities market dislikes the Fed raising rates. 5) What is essentially good news leads to heavy selling during the Friday session.

I am sure that I have told you this before, in all of the market related news and books I have read over the years, pointing to the post war years onwards, the Fed is always a huge influencer of what the mood is. Don’t fight the tape, don’t fight the Fed is what the old floor folks will tell you. The tape of course used to come out of a machine, the ticker is more up to date and a whole lot more reliable than at any time in history. Michael Lewis in his last book will of course point out that people who have invested tons in infrastructure hold a millisecond edge over some of their competitors. High frequency trading, you know it well.

We couldn’t be at a further end of the market if we tried, our approach is to advocate long dated holdings in quality businesses that offer services and products that are either going to be in need forever, or at least in the long run. Of course you can get the theme right, the investment wrong, Nokia, Blackberry, those are brilliant examples. Equally, one will think you have the right investment, only for the market to prove you completely wrong. And by market I mean high/main street first and then the equities market. In that order, even though Wall Street and most capital markets around the world tend to employ some of the smartest people, the market always humbles.

I once tried to think of what would be the first pick if you had to pick up sticks and roll one hundred years forward. Food is important, as is healthcare and I suspect we will continue to make steady advances in those fields, more so of course in healthcare. The other is consumer related activities, adjusting the consumption levels relative to global growth and equality levels. Of course projections are for 9 billion of us to be alive simultaneously by 2040-2045, I can remember reading that around 108 odd billion of us have gone before. So whilst households may have to service debt and grow their asset bases, companies and countries have a luxury that most humans don’t have, they basically have a forever time frame. Not to mean that the personalities involved are not drivers of the prospects of each respective country and company.

Enough of that, let us take a hard look at the scoreboard for Friday, which makes the Proteas recent performance look generally acceptable. The Dow sank a percent and one quarter, the broader market S&P 500 lost 1.85 percent and the nerds of NASDAQ were bog-washed (Went to boarding school? You know what this is then) three and one quarter of a percent. Markets had the stuffing knocked out of them, seemingly good news on the jobs front is not good for the market. In the very short term, yes.

I am sure that the Fed are also keeping a keen eye trained on the oil market and any signs of stresses in oil companies as well as the finance businesses debt. Banks have recently been reporting worrying signs. I suppose it is the classic cycles, investors take their chances in oil company debt, banks and by extension their shareholders take on the same risks. I suspect that even at the hugest level (the number I have read is less than 200 billion, sizeable in itself) is nowhere near what subprime was to the global market.

As such, whilst the movements for those long only (all of our clients) are disconcerting, it is part of equity investing. Since the financial crisis we have seen several events that almost scuppered this recent rally off depressed levels. The important thing to remember is that you own companies. We all make the mistake of judging a business by their share price.

Sometimes there are factors beyond your control. In the end you have choices for periods of time and what you can or can’t own. Paul always used to throw this classic one in, you can either buy a company that sells cigarettes or cell phones. Whilst investing can be more complicated than that, the wise old Warren Buffett said something along the lines of, beware the analyst using Greek letters, i.e. complicated formulas. Patience and just good old fashioned pain tolerance with the prices is required when investing, common sense and trying to pay attention along the way.


Company corner

When this business listed, there was much fanfare. It was of course one of the first of the social networks. Pre Facebook, pre Twitter and pre about almost all you know, I am guessing that MySpace is now a distant memory along with BetaMax or VHS that is. Facebook killed the MySpace star in the same way that Video killed the Radio Star. Ironically what that lyric writer didn’t know was that there will always be captive audiences around the world (in their offices and in their motor vehicles) Videos take many different shapes and forms, the classic old VHS is dead too. I see them in drawers, I don’t see them in the machines, those are DVDs now, and in a world of streaming, in a certain sense the DVD and CD is in sunset mode.

What business am I talking about? LinkedIn. Reid Hoffman is a high profile fellow, the CEO, he apparently introduced Peter Thiel to Mark Zuckerberg to provide some of the initial funding for the social network, the rest is history. Why didn’t Reid sink his lot in there? He had other fish to fry I guess. The stock was brutally carved about Friday, something that I have not seen for a while. Down 43.58 percent in ordinary trade. The stock last traded at these levels in the middle of 2012. These were results for the fourth quarter and full year, revenues for the quarter, when measured against the comparable 2014 quarter was 34 percent higher.

Cumulative members grew to 414 million, a sizeable network of professionals looking to connect if needs be. I use LinkedIn for one thing only, snooping either potential clients, or folks in the business world. Some LinkedIn profiles are brilliantly maintained, I am impressed that people keep their online CVs in such tip top shape. You never know who is going to be buying the information and head hunting, I guess. Co-CEO of Standard Bank (when I last checked), Sim Tshabalala had nothing other than his job title. It looked so unbelievably simple I thought I may share it.

If you have the premium subscription, you can see who has been looking at your profile, which means that you can get “connected” in a smarter way. LinkedIn is special like that. I am sure that Mr. Tshabalala is not really interested in who has been snooping him out. Let us finish the numbers for the full year, revenue nearly topped 3 billion Dollars, adjusted EBITDA was 780 million Dollars, on a per share basis that translates to 2.84 Dollars. 57 percent of all traffic takes place on mobile phones now, year over year page views grew at 17 percent.

It was the outlook that stunk however for Mr. Market. Full year guidance sees revenue at 3.6 to 3.65 billion Dollars, a seemingly healthy 20 odd percent growth rate, Adjusted Earnings per share are expected to be between 3.05 to 3.20 Dollars, low double digit growth, at the current share price levels (after the all fall down), the stock trades on 30 times plus earnings. The company continues to invest heavily in their network, high teens of revenues for next year. That is pretty impressive, higher than the R&D rate of some pharma companies, admittedly on a much smaller scale. That all seems OK and acceptable to me. The number of shares in issue is also going to be up around five percent, ain’t nobody got time for dilution!

Whilst we don’t actively look to own the stock for anyone, it certainly is starting to look attractive at some level, the growth rates being set a little lower possibly mean that the market is likely to be slower to think that the stock might see much “action”. I suspect that the product is certainly sound and it is still the number one go to platform for professionals looking to get a job. Competition? I suspect that Facebook or Amazon could with their networks replicate something in a hurry, competition threats from external parties are a real possibility. Let us watch it!


Linkfest, lap it up

The biggest difference between individuals and institutional investors is size and access to resources. The results often lead to institutional investors making their own lives and investment decisions more complicated than needs be; if you have the resources it would seem wrong not to make things complicated – The Difference Between Institutional & Individual Investors

Humans have a need to see patterns and to simplify things, this trait has severed us well in staying at the top of the food chain. When it comes to more complex systems like stock movements it can be a problem. As Jeff Miller points out, sometimes the market moves for non-sensical reasons, emotions get the better of us and clever people do stupid things because of the need to “understand” and then react on the reason for stock movements – The Costly Craving for Explanations.

The future of entertainment consumption is online. The big question though, is will we move toward a subscription based model, pay per view or an advertising based model – YouTube Schedules Original Shows, Movies for New Paid Service. I don’t see myself paying $10 a month to watch Youtube videos ad free or watch content from amateur film producers.


Home again, home again, jiggety-jog. Stocks across Asia are mixed, what is new with that? Japanese and Hong Kong stocks are up, Shanghai stocks are not. US Futures are up, which is a bit of a relief after Friday! And in other important news, The Broncos won the Super Bowl, the 50th Edition. Usually the event would be called Super Bowl 2016, this year it was Super Bowl 50. The Denver Broncos won. And more importantly, a 30 second advert costs 5 million Dollars. Lady Gaga sang the national anthem. Coldplay, Beyonce and Bruno Mars all appeared at the half time show. Doritos and AB InBev were still major sponsors. Beer and corn chips, perfect for that athletic figure! Ha-Ha!


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

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