“If consumer confidence is at a 15 year high, then perhaps it is time for the Fed to raise rates and make credit a little more expensive. To take away the proverbial punchbowl before the disco gets out of control.”
To market to market to buy a fat pig There is a saying that my late mother used to tell me, she said that there was a Japanese saying that said “tomorrow never comes”. Meaning that when you wake up today, it is still tomorrow. I suspect in many languages there are similar sayings, including, why wait for tomorrow to do what you can do today? Markets are always wanting more, wanting some action today, clarity on this and that. Whereas in reality, there are many processes that evolve very slowly.
Including rates and the Fed. I am sure that I have told you this many times, it is always worth sharing. There is a book called It Was a Very Good Year: Extraordinary Moments in Stock Market History. It covers equity market rallies through the ages and deals with the events leading up to those great years. Those years when you have to be invested in equity markets. Those years that you HAVE to just take part in equity markets.
There is a theory around here that as long term investors that you always have to be in the markets. Like ….. always. Nobody knows what will happen next, it is best just to own companies and stay the course. If you have a pattern recognition model on markets, know that no two times are the same, and it is best left to back testing to be 20/20. Tomorrow, we don’t know what is likely to happen. Another important part of our job is to act as shock absorbers when markets are tough. And make no mistake, markets have been very tough locally. Quality businesses being buffered in some parts by a very stodgy local economy and a stronger Rand not helping offshore sales at all. Same companies, different environment.
In a phone call yesterday to a client that has been around the block multiple times, we agreed that in times of weakness, companies set themselves up for strength when the tide turns. i.e. Cost cutting and making sure that when top line expansion finally arrives (it almost always does), then you have done all the hard work, margin expansion leads to much higher profits. In-between now and then however, one has to “constructive”. And often the best thing to do is to do nothing as a shareholder.
Second point about the book above, the Fed is always spoken about. At length. The Fed this and the Fed that. Punchbowl, this and that. Angst over when rates are going up, excitement when rates come down. Is there anything you can really do about the Fed and their interest rate policies? Like the weather, this is beyond your control. Can you time in and out for the cycles? Perhaps, possibly too hard to do consistently. If consumer confidence is at a 15 year high, then perhaps it is time for the Fed to raise rates and make credit a little more expensive. To take away the proverbial punchbowl before the disco gets out of control. As ever, this is noise in the bigger picture. One looks back in five years time when the rate cycle may have returned to something resembling a “normal” pattern, and rates may be on their way back down.
Quick scoreboard check, seeing as there is plenty to do, at session end the Dow Jones had given up just over half a percent, the broader market S&P 500 had basic materials weigh heavy (down over two percent), whilst the nerds of NASDAQ sank nearly three-quarters of a percent. A pause in the rally and it looks like futures are lower. The biggest news of the day was undoubtably the Snap listing, shares ended up 44 percent on the day, round about where the first trade was. In other words, having IPO’ed at 17, the first trade was more or less that level higher.
I suspect, having watched the process at arms length, that the company may have eked out a little more (and felt the price was too low), it is no used crying over what may, or may not have happened. First piece of Snap – Snap Inc. Announces Pricing of Initial Public Offering. Second piece of Snap, 44 percent higher. And as somebody else pointed out, Snap is already worth 2.5 Twitters.
As Twitter pointed out, SpaceX has a market cap of 12 billion Dollars. And lands successfully (after taking off), the most important of the rocket again. It costs 70 million Dollars. The rest of the quote that explains what Snapchat is, goes like this “20 billion Dollar valuation: Rainbow filters.” In the end, both companies will be valued on their future profitability and ability to create value for shareholder, existing and exiting and future. The holders, the sellers and the buyers. Am I going to buy Snap any time soon? Nope, I don’t think so. First Friday of the month normally signals non-farm payrolls, this one happens to fall too close to the last day of the prior month, so your hyperactive trigger finger is going to have to wait for next week, capiche?
Back home, in Jozi, Jozi, it was a mixed bag, financials rocked, up nearly a percent and a half, courtesy of some better than anticipated results from Standard Bank. That stock flew off the shelves, up over six and a half percent by the close. Nedbank also touched a 12 month high. Both stocks were joined by MTN, which had results that obviously beat expectations. At one stage MTN was up over ten percent, tailing off at the end of the session, still up 8.32 percent by the close. We will have a look at those numbers below. The quarterly update from Steinhoff was obviously dimly viewed by the markets, I did not think that it was that bad at all. Mr. Market sent the stock down nearly 4 percent by the close. Also faring poorly, on what I thought was “ok”, was Aspen, down just over two percent.
There was quite a lot of other stuff going on too, the biggest brewer in the world had some average numbers, AB InBev sank over two percent. Brazil, it is still going pretty tough there. That looks in the end like a place that certainly can deliver the goods, it ticks all the Mark Mobius boxes. The generic ones, you know, young population, working off a low base, plenty of natural resources, hard working and so on.
Read this recent piece from a fellow that has now slowed down on the investments front (Mobius), at least from the perspective of full time employment – A Travel Transformation in Emerging Markets. I like Mobius, he is a cheerful soul with lots of optimism. You got to love that. So Brazil will be fine too in the end (as will China), whether or not beer volumes can grow a vast amount (how much can more people consume?) remains to be seen. In the end, stocks as a collective had managed a four-tenths of a percent.
MTN had results yesterday. I guess the share price reaction tells you a lot about what the market thought, the stock definitely outpaced expectations, if you think that is important. It is at some level. The stock has disappointed bitterly after a period of sublime growth through the last decade, adding tons of customers and making sure that they were building out a continental champion, a brand that is well recognised alongside other multinationals, such as Coke. They are really that big in some territories. Michael is not a fan of MTN investor relations. I can see why, the presentation is still not up, the one from yesterday. That is, how should we say ….. not good. I sent a tweet to the MTNGroup handle, awaiting a reply.
So we shall have to do with the sheets and the emails, rather than the glossies. So here are the highlights and lowlights of the year. Revenues were flat, voice traffic fell (down 1,7 percent) whilst data traffic (up 143 percent) continues to become a much bigger part of overall revenues, 39.5 billion out of 146.9 billion Rand. The company managed to repatriate 6.3 billion Rand from Iran, which as they point out is “the entire amount due under the loan advanced for the licence fee in 2005.” Group Capex was an astonishing 34.9 billion Rand, around 11 billion Rand spent here. Consumers are always demanding better services from their networks, this is a rather large amount to continually spend.
The reason for the positive reaction is simple. Last year, as they point out, was the worst in their 22 year history. Politics, economic factors beyond their control, and of course the big fine in Nigeria, as well as interruptions in that territory (which they refer to as material regulatory factors). Things in Nigeria have improved in the last quarter. I wonder what this recent bout of xenophobic attacks are likely to have on their business, it is one of the unknowns. I see that Nigeria are sending, or looking to send a delegation, to South Africa, that may include the foreign minister. This is a good thing to ease the tensions, incorrect rhetoric to the foreign community is not helpful for anyone. It is no different to Trump acting against others. No different.
The company took a 31 percent hit in EBITDA as a result of the Nigerian fine, fees associated with that fine, MTN Zakhele Futhi share-based payment expense, the writing off of a large portion of their South Sudan business (as a result of civil war). The fine itself had a 500 cent impact on HEPS. There was another 329 cents in forex loses. There were several other “issues” which lead to a 77 cent loss in basic headline earnings per share. Notwithstanding the accounting (and other real) losses, the group managed to declare a 450 cent dividend, bringing the total dividend to the year at 7 Rand. After tax of 20 percent (now), that equates to a four and a half percent yield. After tax. Vodacom, on the same basis have a historic yield of 4.3 percent post tax. Telkom is less than half of that. That is the simple reason the stock surged, IMO.
Another simple question, is the thesis still intact? Forget the oil price and regulatory issues, past, present or even future. The company has spent, and will spend a total of 100 billion Rand in infrastructure development over the last two and present financial year. Roughly one-third here in South Africa. Telkom has a market cap of 35 billion Rand, MTN will invest that in around three years in South Africa. Nigeria. That was supposed to be a country with great commodity wealth with a young and dynamic population. That part still exists.
In fact, I saw the Dangote Cement results the other day, the company operates in ten countries across the continent, including Nigeria as their home base. Dangote Cement reported cement volumes in Nigeria that were 11.1 percent higher than the prior year, raising their market share at the same time. Sales in the second half of the year were weaker than the year prior. The annual results also suggest that the countries economy contracted by 1.7 percent, according to the world bank.
Why is this at all important? If cement sales are a pointer to fixed capital formation increasing markedly, that indicates that at least the consumer is feeling a whole lot better than government finances, which are reliant on oil revenues, one should view this as a positive for all businesses operating in this territory. It is no secret that the current political dispensation in Nigeria, which was elected on a ticket of fighting corruption and growing the economy may have disappointed. Equally, in another of their territories that is key to growth, Iran, the weak relationship with the US is more than a little unsettling. There, in Iran, the economy has recovered smartly, as a result of capturing the higher oil prices.
MTN will be key in the data revolution across the continent, being able to deliver content to hungry customers with hungrier handsets. Music, movies, gaming and other sorts of entertainment, as we have seen in China and other countries and territories that have emerged from “developing” status, take on higher consumption. A phone and data is a form of freedom. Freedoms for watching, listening and learning. Whilst the numbers have been disappointing, the new management team inherit a structurally wobbly house in a good location. We continue to hold, we like the recent momentum with the existing business and continue to hold, the next year is certainly going to be one of rebuilding and continued infrastructure spend.
Linkfest, lap it up
There has been a little bit of a stink about ticket prices and the Soweto derby, tomorrow. See -> Kaizer Chiefs defend Soweto derby ticket prize hike. Surely it is about simple economics? 70 Rand might mean a lot or a little for tickets to watch the biggest derby in these parts. For the record, an El Classico ticket (between Barca and Real Madrid) costs close to 6500 to 7000 Rand (I checked myself on Viagogo). That is around 100 times more, to watch Messi and Ronaldo. Spain PPP Dollars = 32 thousand per annum. South Africa? Around 22 percent of Spain. What are your thoughts?
The big argument against high taxes and a big government is that the government is inefficient in operating and in the allocation of resources. Denmark is looking to cut their eye watering high 60.2% income tax – Welfare Icon Now Wants People to Take Care of Themselves
There are very few people, that when they talk the financial community listens. Howard Marks is one of those people and he also writes regular letters to his investors, just like Buffett – Howard Marks on What Matters Most
This dovetails nicely with our piece about communism from yesterday – Don’t demonise capitalism – it’s making the world a better place. This article, that suffers from Afropessimism, makes the point that since 1960, the gap has widened between the free market system in the USA and Sub Saharan Africa. They (the US) did have a twenty mile head-start though. It can be said that capitalism is still a superior system for populations.
How badly damaged have the banks been since the financial crisis? Some would argue not enough. This number looks like a giant pile to me, shareholders of banks have had to pick up the tab. From Bloomberg – World’s Biggest Banks Fined $321 Billion Since Financial Crisis.
Home again, home again, jiggety-jog. Iron ore prices are all fall tumbling down. The global rally seems to have run into a few obstacles, it was bound to happen at some level. Onwards sportslovers!
Sent to you by Sasha, Byron and Michael on behalf of team Vestact.
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