Chow down on history

“a fellow by the name of Daniel Peter, a native of the town, is said to have invented milk chocolate here in 1875. Or there, and thereabouts. Henri Nestle, the founder of the company, was brought in to help Peter fulfil a seven year experiment. Henri was actually a German pharmacist by trade, and is credited with “inventing” infant milk formula.


 

To market to market to buy a fat pig The ECB had a meeting yesterday, or concluded their meeting should I rather say. For some people, this is the most excitement they will get out of the week, and they will jump around as if central banks are the be all and end all. That is not to downplay their significance and their importance, it is true that the fixed income markets are far larger than the equities market. Interest rates will be determined by the central banks as they see the incoming data and the economic outlook, the inflation expectations will be viewed exactly the same way. Except we are mere mortals in all of this, it is like being the farmer waiting for the rain. It will come. It happened last night in Jozi, and the night before, good rains in Jozi, at least in my neck of the woods.

We can’t control the rain, we can’t control interest rates. Nor food prices, nor inflation. Getting anxious about the sports team you support or the next dress your favourite celebrity is wearing is as useful as getting anxious about interest rates. I am waiting for a snarky comeback and reply from a celeb who says when asked “Who/what are you wearing” to reply, “a black dress, can’t you see”? That is unlikely to happen.

So, Draghi and his mates concluded that there was not much to do – Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. Staying on everything, and as for the asset purchases – ” … the options to ensure the smooth implementation of our purchase programme until March 2017, or beyond, if necessary.” You can read the whole thing and try and understand what the ECB is up to, they want the same outcome as most of the major central banks. A modest pick up in the inflation rate and a return to growth of yesteryear. I am not too sure that in the modern world, with improved efficiencies that it is likely to come in a hurry, after all, the bots are furiously looking to replace us here, are they not? Some jobs may become more replaceable than others, and as we have often discussed, don’t just assume that those are likely to be low wage paying jobs.

As we always say, you should not look for Central Banks to make investment timing decisions. You should own equities that you think have a great chance through any cycle of any sort. Own quality companies, not central banks and whatever they say and do. It will make your life easier and will eliminate anxiety. How many people (equity investors) do you think read these releases from the Fed and the ECB and are not reading annual reports from the businesses that they own? In part it is what we are told is important, and what is not. Make up your own mind.

Quick check in on the markets scoreboards, over the oceans and across the equator in New York, New York, stocks sank at the close, after a see-saw session in which fretting about the Fed was the order of the day. I sure hope that the Fed raise rates in December. And act accordingly as they see fit. Remembering that at the beginning of the year, the Deputy Governor, Stanley Fischer suggested that there would be 4 rate hikes this year. In the words of Trump at debate time, let us interrupt that with a big “wrong”.

The broader market S&P 500 lost 0.14 percent, the Dow Jones Industrial Average lost 0.22 percent, whilst the nerds of NASDAQ were the “least bad”, that stock was only off 0.09 percent. eBay got a kick in the kidneys, down nearly 11 percent, AMEX rallied sharply after some decent results, up 9 percent. Take no prisoners, the street can be a tough place if you miss, equally if your results are far better, the shorts take their chances like everyone else. There goes the tide, I hear you say.


 

Back home stocks were also lower on the day, the all share index had slipped by 0.16 percent by the close. MTN slipped to a 12 month low as Nigerian politicians continued to suggest that the company had taken money out illegally, more than originally thought. Sigh. Illicit? We will find out in due course, the company continues to defend their practices, they are soft and easy targets with those margins. At the top of the leaderboard was NEPI (low rates in Europe for longer?) and then Discovery. Amplats were at the top of the losers board, down over three percent, wow, that is volatile.

There is big news in the tobacco market this morning, BATS are looking to own the rest of Reynolds (the holder of RJR) that they don’t own, for a combination of cash and shares. Currently BATS owns 42.2 percent, the rest will be bought out at a 20 percent premium to the price yesterday, a combination of cash and shares. I don’t know man, I would rather not own a company that is likely to run into more and more regulation. For all the noise that is made about pricing on pharma drugs, not enough is made about cigarette businesses, you would agree not so? A 47 billion Dollars price tag, 27 billion in BAT shares and the balance in cash. Remember that this RJR is the subject of that fabulous book: “Barbarians at the Gate”. A must read for any aspiring financier.


 

Company corner

Nestle is a business that stands tall on brand excellence. When you talk of Nestle, you imagine the gold standard in food products, the best of the best. The company is very close to our newest colleague, Bright, who has nearly been here for a year. Bright used to work there, not a bad first employer, you would say? The company delivered a 9 month sales update yesterday, delivered from the canton of Vaud, the town of Vevey. Charlie Chaplin lived there for a quarter of a century, perhaps the attraction of fine chocolate never made him leave. Or was it the communism thing? Either way, Chaplin lived there to the end of his days, checking out on Christmas Day of 1977.

Vevey is very important for humanity, a fellow by the name of Daniel Peter, a native of the town, is said to have invented milk chocolate here in 1875. Or there, and thereabouts. Henri Nestle, the founder of the company, was brought in to help Peter fulfil a seven year experiment. Henri was actually a German pharmacist by trade, and is credited with “inventing” infant milk formula. Whilst him and his wife (the Nestle family) had no children of their own, Henri was struck by the high infant mortality rates at the time, and knew that better nutrition would help improve matters. And it did. He wasn’t alone in his thinking, Justus von Liebig, who founded a company that gave us the cube stock blocks Oxo, also worked on a similar project.

In the end, Henri Nestle gave us the birds nest, the surname Nestle in a “German” dialect (Swabian) means exactly that, birds nest. Nestle gave us condensed milk. And helped the Peter fellow with milk chocolate. He actually sold the business to his partners, who retained the early name – Societe Farine Lactee Henri Nestle. Or Henri Nestle’s Milk Flour Company. And when the business joined forces with the Anglo-Swiss Condensed Milk Company in 1905, they kept the Nestle name. The First World War made condensed milk even more popular, it is easy to move around in bulk. Coffee was only a business post the war and the Great Depression as a result of the decline of the popularity of their core products, they needed another iron in the fire. Milo was founded down under in 1934, and quickly becomes a favourite. And why not?

Thanks to a fellow by the name of Max Morgenthaler, and a coffee surplus from the Brazilian government, Nescafe and instant coffee was born. It took nearly a decade to develop instant coffee, in the end it was worth it, right? Check out the fascinating story: What did we do when the bank called? Invented Nescafe. The story was a little more traumatic for old Max, other readings on the matter saw the company drop the project and he was forced to work on it alone. And then back at the company. Either way, the Bern born pharmacist is credited with creating coffee granules. I just took a gulp of coffee as I wrote that. I am a coffee snob, there was no granules with the making of that cup. Sigh.

Today the company spans the globe, the brands themselves are gold standards in their respective fields, Gerber, Maggi, the water (they even own Perrier), the coffee and associated products (milk creamer), pet food (Purina, Friskies), infant formula and food (Cerelac and the like), chocolate and frozen foods. The list goes on. There are also nutritional and weight management products. All come with the gold standard promise that you are unlikely to find much better at a similar price, stocked in most places in the world.

Nine month numbers – Nestle nine-month sales: 3.3% organic growth, 2.5% real internal growth. Full-year outlook: organic growth around 3.5% with margin improvement. You do not own this business for tearaway growth. You own it for the standards, and the whole idea that as people across the globe become richer, they would gravitate towards quality. The company has a *nice* spread between developed and developing markets, a good slide from the investor presentation below breaks it out:

Inside of the next decade, their products are more likely to be sold more in emerging markets than developed markets. By which stage it may be clear that some developing markets may have obtained developed market status. What then? I guess as the collective humanity, this is what we hope for. And less conflict. More getting along. Less poverty.

The company is geared towards urbanisation and upward mobility. The simple things in life, like a better cup of coffee, be it Nescafe Gold or Nespresso. Be it their milk products or ice cream. And of course, making your life simpler, with quality, prepared dishes and cooking aids. And, as per the annual report of Nestle: “Good nutrition and the right feeding practices during the first 1000 days of life, from conception to a child’s second birthday, are crucial for a child’s health, growth and development.”

As the world demands healthier products with healthier lifestyles, the company will continue to innovate and give you only the best. The company generates strong cashflows, has relatively low debt levels and is in a “sweet” space globally, nutrition and food. I like it a lot. What I also like a lot is that the share price in Dollars has not “done much”. The five year Dollar performance of the share price has been staid at best, up only 27 percent. For the gold standard of food, with a three percent dividend yield (less the excessive Swiss DWT tax), and a not so demanding multiple, this is quite simply a stock you could own “forever”.

With the appointment of the first outsider since 1922 (i.e. not from Nestle), Ulf Mark Schneider is due to start 1 January 2017, replacing Paul Bulcke. He is an interesting guy, a German who is an American citizen, he studied to obtain an Economics Doctorate from the University of St. Gallen (the German or Northern part of Switzerland), and an MBA from Harvard. He has been busy with running Fresenius, a German healthcare company. It is going to be interesting, the analyst community are expecting “big things” from this fellow. We continue to accumulate at the fringes for those looking for a long term anchor.


 

Linkfest, lap it up

Microsoft is in the top 5 largest companies on the S&P 500 and has been around since the 80s. If you had bought the stock back in the 80’s and forgot that you owned them, it has served you well in capital growth and dividends – The Microsoft Millionaires. The blogger points out that when Windows 95 was released people queued through the night, something like an Apple product launch now.

The self driving revolution can’t get here soon enough. Over 1.3 million people die in car crashes every year, plus another 20 – 50 million are injured. Self driving cars will drastically lower that number if not get it very near zero – Singapore starts outfitting buses with high-tech self-driving sensors.

Having notes in digital format is great for retrieving the information. Making the notes though is better done by hand. Montblanc have the solution – The world’s most luxurious pen digitises your handwritten notes.

Given that the Brexit vote was relatively close. I wonder if this game was out before voting, if the vote numbers would have changed much – Soccer managers are preparing for Brexit – in a video game. Given the likely change in movement of labour regulations between the UK & UE, international stars playing in the UK may need to get work permits.


 

Home again, home again, jiggety-jog. Stocks are up with, to start, the BATS share price is up sharply on this news, looks like they are getting a deal. A bargain. GE results today, that should give one some good insight into the lay of the land.


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

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