Well there goes Stumpf

“It had to happen, Stumpf is out, Sloan is a 29 year veteran and essentially lifer at Wells Fargo. He has a tough job initially, to restore trust and more importantly, lead the bank into the modern era. American banking is still old school, it may need some time before their ability to change the landscape happens. All I know is that with a massive infrastructure, there is certainly a lot of room to manoeuvre on continued cost cutting.”


 

To market to market to buy a fat pig Public outcry is one thing when it is broad based, when you live in an urban area and people are active on social networks, it means that they have more resources than most. i.e. to have data and access to a smartphone means that you are in the upper end of society, economically speaking. It is sometimes good to listen to and read “stuff” you do not agree with, provided of course you can be objective. If you are unable to stay calm and insist in shouting at the referee from the couch, even though you know it is a one way medium (TV), then do not listen to other opinions. Whilst you may always think that yours is the only one that matters, and the others will come to their senses, sadly this is not the case. It is sometimes a better method to let the dust settle and then try and analyse from a number of steps back.

Besides, politics is not our thing. We have very little capacity to change the landscape. We will instead try and focus on the stuff that we have a semblance of control over, the companies that we hold. Of course there are currency related issues that you can’t control either, the Pound barreling down the hill has not been good for the JSE, large components of the local bourse are tied to the exchange rate between GBP and ZAR. Although, if you are looking for lower rates, we need imported inflation to come down. Lower rates will (perhaps) lead to a higher growth trajectory. All we need is a period of extreme stability. A period where we don’t shoot ourselves in the foot repeatedly. Repair, shoot, fix again, repeat. Capital will not commit. Capital needs to know that 5 to 10 years from now, the environment is going to better.

It does not mean that there are NOT opportunities. There are many. And like many points in history, politics is polarised and that leads to a business freeze. Yesterday I said to someone who thought this was terrible and horrible and no good (which it is), that it is a tipping point in history. South Africa, like many countries, in the eyes of their citizens is always at a cross roads. Like Christo Wiese (who knows a thing or two) said, politicians and different governments come and go, businesses will still be around before, and after. Or something along those lines. For the record, he has been vocal, like others, and suggests the current dispensation is hurting the South African economy. Obviously not every person agrees. And that is what makes both markets and politics.

OK, market scoreboard quickly, resources led us lower here in Jozi, those stocks as a collective were down over a percent and a half. I saw that the oil price in the afternoon was under pressure, implementation of cuts and production freezes were going to be hard to implement. What? Who would have thought? The Rand, after having weakened significantly during the course of the day, reversed that trajectory and strengthened again. Gordhan is here to stay and is fighting. The chattering classes are on his side. Even the president! Hah! Some of the banks and financials recovered some of the lost ground over the last couple of days, equally some of the retailers added some ground. Richemont rose a little, I read through the LVMH results, they seem cautiously optimistic that a luxury revival is afoot. Although, not necessarily in the segment that Richemont operate, LVMH has loads of booze and bags! Richemont is more watches and jewellery (mostly).

Hard Brexit, soft Brexit, quick Brexit, long term implications of financial centres moving, inflation versus rates and exchange rate. There is a new word for the people who voted for Brexit and are now complaining, they are called Bremoaners. New word. We love new words around here. A weak currency (the Pound) relative to the Rand = a 12 month low for Old Mutual, at least for the Rand share price. Truworths, who recently bought a business in the UK (and paid 385 million Dollars at the time), at a much weaker rate than we are now, sees their share price down 25.48 percent since Brexit. Old Mutual is down 19.14 percent, Brait is down a whopping 35.99 percent since Brexit. Bidcorp (which also has businesses in the UK) is down 9.56 percent. These are all according to Google Finance and are taken from the date of the vote, the 23rd of June. Capital and Counties, in Rand terms, is down nearly 40 percent since Brexit. Intu is down 28.44 percent. Wow.

Bremoan all you want. See that, I mixed Brexit and moan, or bemoan? Let me start again, Bremoan all you want, there is nothing you can do about the currency and equally, there is less you can do about politics. People often hold these stocks for the Rand hedge element, you must be prepared then to own these stocks in an environment which is the complete opposite. i.e. own the business as a result of the quality. Quality of management, quality of business, better than even chance of the business being in an industry that is likely to be more in demand in the coming years. i.e. not print photography or magazines, industries that are attracting investment and not the other way around. To use a rugby term (and I am sketchy here, Byron is far better than me), there is always a time to touch, pause and engage with your investments. Keep the scrum steady and push back against your urge to “do something”. Remember that doing nothing is doing something. And I am aware that touch, pause and engage in a rugby sense may be old, the new one also applies: “crouch, bind, set”.


 

Across the seas and far away, the highlight for Mr. Market and the rushing around trading Oompa Loompas (and their tail chasing Jack Russells) was the release of the Fed minutes. That would be for the meeting prior. These meetings happen every 45 days and then the transcript of the meeting is released in between the meetings. The next is in the middle of the first week of November, the last one was the 20-21st of September. If you are always waiting for the Fed for direction, either an insufferable Oompa Loompa or a Jack Russell getting giddy from all the turning, you are NEVER going to commit a single cent.

Get used to the idea that the Fed are always going to be here, they are always going to make decisions on how they see the current landscape. They are always going to be watching the data like everyone. Yet ….. Starbucks are going to sell coffees, regardless of whether you are waiting and sitting on the sidelines, trying to time the market. More time is wasted on thinking about timing when that time could be used constructively, reading information about the very companies that you are likely to own. And by ownership, I do not mean watching the share price and judging from there. I have not been doing this for an absolute age that I am anywhere near Jedi status, that belongs to a select few, I can tell you from experience that when private clients talk about their portfolios, they will talk about the one that is down 20-30 percent, not the stock that has gained 200 or 300 percent. We are all human. If the business is the same, then buy some more when the price is lower!

Nevertheless, herewith the Minutes of the Federal Open Market Committee, September 20-21, 2016. Tens of people in these meetings. Fedspeak interpreters found a phrase, “relatively soon” and interpreted that as December this year. Herewith an extract:

“Some participants believed that it would be appropriate to raise the target range for the federal funds rate relatively soon if the labor market continued to improve and economic activity strengthened, while some others preferred to wait for more convincing evidence that inflation was moving toward the Committee’s 2 percent objective. “

 

Nice. Do what you must. Do you also get the sense that the anxiety of what the Fed is doing, or not doing, is the same as scared fliers and obnoxious sports fans? The fact that they have no control over the process drives them to borderline insanity? Perhaps.

Markets on the street closed mixed. The broader market S&P 500 ended the session up 0.11 percent, the Dow Industrials 0.09 percent to the good, whilst the nerds of NASDAQ slipped 0.15 percent. Energy and Healthcare slipped. The idea that a less republican feel in some of the house, and more of a democratic party feel gives Mr. Market some anxiety over healthcare stocks. Apple caught another bid, the stock traded at the highest level for 2016. Thanks Carl for your concerns about China, we will hold these for now. Samsung, that recall seems a little overdone, what can one say other than, it is what it is.

And then no doubt the biggest market news of the day, received after market. CEO and Chairman of Wells Fargo, John Stumpf is resigning. The stock has popped nearly two percent in the aftermarket. The company has a news release: Wells Fargo Chairman, CEO John Stumpf Retires; Board of Directors Elects Tim Sloan CEO. Immediate. Stumpf leaves to spend more time with his money. Although, as the filings report, he is not going to receive a severance package of any sort. He will still retain all of his stock, pension and other benefits.

In the end, Stumpf had to take the fall. Don’t feel sorry for him. 34 years later at the company that he worked for, 9 years (and a bit) as the CEO, Stumpf has managed to amass around 134 million Dollars according to Equilar. And that was after he has forfeited 41 odd million Dollars in performance pay. At the end of the day, the remuneration of executives is a shareholders issue. Not society. That is my opinion. Society doesn’t part with any funds in order to remunerate the people who run what is effectively their asset. Shareholders own the business. If they pay some bum too much and they mess it up, the shareholders bear the brunt in the end. When the stock goes to zero, society doesn’t lose money.

It had to happen, Stumpf is out, Sloan is a 29 year veteran and essentially lifer at Wells Fargo. He has a tough job initially, to restore trust and more importantly, lead the bank into the modern era. American banking is still old school, it may need some time before their ability to change the landscape happens. All I know is that with a massive infrastructure, there is certainly a lot of room to manoeuvre on continued cost cutting.


 

Company corner

Yesterday we had the 6 month results from Taste. While not a core holding, they do have the master franchise of one of our US core holdings Starbucks. Onto the numbers quickly, revenue is up 9% to R529 million for the period and core headline loss of R23 million or 6c a share.

When talking about Taste, the fist thing that comes to mind is Starbucks and Dominos because of how massive those brands are globally. However as it stands at the moment, the jewellery division is making profits and the food division is making losses due to the huge cost outlay to open new stores. The growth in revenue also came from the jewellery devision, same-store sales are up 25%. This division used to be their NWJ brand but since last year it now includes Arthur Kaplan which operates in the premium jewellery category, which I feel makes this division look very attractive to investors. Arthur Kaplan has also become custodian to Cartier and Montblanc in selected stores.

On the Starbucks front, South Africans love for international brands has been ahead of their (Taste management) best forecasts & expectations. From a profitability perspective the current stores are EBITDA positive, but as a collective still loss making. It is expected that after the opening of 5 stores the segment will be EBITDA positive. One of the biggest costs to launching new stores is the training of staff. The training costs are paying dividends though:

“On the opening week in Menlyn Maine our partners processed just 3% less transactions than the opening week of Rosebank, with almost no queues. Already in all three stores we are transacting more than three times faster than when we launched.”

 

Over the long run, having the company owning more stores instead of franchising them out, particularly in key locations will be a good thing (in the case of Starbucks, they aren’t allowed to franchise any stores). Having more company owned stores does mean more capital costs up front and slower store roll outs, which probably means the share price is not going to shoot the lights out in the near term. All in all, the company operates in two good sectors and are gathering an attractive stable of brands


 

Linkfest, lap it up

The thought of having humans on Mars in the next decade is very exciting. Self driving cars and people living in space are things that science fiction is made of – Barack Obama: America will take the giant leap to Mars. Obama, not surprisingly, strings words together that the final product is a form of poetry.

The hardest market for Amazon to crack is the grocery and consumable segment. It is a segment that has huge potential given that all of us have to eat daily but not buy a book/ Tv regularly – Amazon to Expand Grocery Business With New Convenience Stores

Having a plan is what helps you avoid making poor investment decisions during rocky times in equity markets (like we have seen over the last 12 months) – Can You Rationally Process Market Events?. The blogger also mentions staying physically fit which keeps stress levels under control, meaning less impulsive, poor decisions.

When you take on market forces, you need to make sure that the balance sheet you are using is HUGE – Nigeria’s case study on how not to float your currency. Restricting the supply of Dollars to Nigerians means the only outcome can be a higher value for those Dollars (weaker Naira then). Even though the Naira is technically free floating, the black market is still flourishing.


 

Home again, home again, jiggety-jog. Phew, Aussies were demolished in the series, five zip is a pretty big thrashing. More encouraging is the discovery of a few youngsters and the return to form of others. Casting an eye over to the East, stocks are lower (on balance) and US futures are pointing deeply lower. Chinese exports fell more than expected, the Dollar is catching the offers (i.e. going lower) and precious metal prices are improving. That gives you a clue as to where we are going today, not so? Not up, at least not for starters. I cannot wait for earnings season to start.


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

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