Good Riddance October

 

Market Scorecard


On Friday, before the US market opened, jobs data for October was released. It showed that wages grew at the fastest rate since 2009; good news for short-term GDP growth, but higher wages generally comes with inflation down the line. Despite the good jobs data and the rally on Thursday, economic advisor Larry Kudlow came out saying that a trade deal with China is not imminent. As a result, US markets swung from green to red and Asian markets are being crushed this morning.

After the market closed on Friday, small-cap company Interwaste, announced that they will be bought out and delisted. Over the last month, there has been a string of small-cap companies being bought out. We already know that the JSE All-share in general is too cheap. Larger companies with cash to spend are taking advantage of these discounted prices. More important to me though, is that these buy-outs are a vote of confidence in South Africa’s future.

On Friday the JSE All-share closed up 1.29%, the S&P 500 closed down 0.63%, and the Nasdaq closed down 1.04%.

Company Corner


 

Byron’s Beats

Alibaba has over 600 million customers around the world. Last week this Chinese tech behemoth reported quarterly results. Revenues grew by 54% to $12.4bn, $10.5bn of that was from retail. The rest came from cloud computing, digital media and entertainment.

Often referred to as the Amazon of China, Alibaba is slightly different in that they are mostly a market place. They don’t sell much of their own stuff. For example, Amazon often uses their sales data to create competing products to the best sellers on their platform. Alibaba, on the other hand, shares this data with merchants so that the merchants can boost their own sales. Amazon is a retailer, Alibaba is a platform.

With a Chinese middle class expected to reach 850 million as well as an expanding global business, Alibaba sounds like a no brainer. However, with the recent trade wars and the Chinese market taking some heat, the Alibaba share price has fallen 29% from its highs.

I would say this presents a decent opportunity for those who believe China will continue to thrive and that these trade wars are a mere orange blip on their road to success.


 

Bright’s Banter

Warren Buffett’s investment conglomerate, Berkshire Hathaway came out with a strong set of numbers for the third quarter. Operating profit doubled in the third quarter, to $6.9 billion year-on-year. This is all thanks to lower taxes and fewer natural disasters on the insurance side of the business. Including investment gains, profits jumped to a mouthwatering $18.5 billion.

Berkshire bought back its own stock for the first time since 2012 . Buffett has been quoted in the past saying that he would consider buybacks when there are no other cheaper alternatives. Share buybacks are the closest thing to a free lunch, if done at the right price of course.

According to the report, Buffett will only repurchase Berkshire stock whenever its share price falls below what he determines as intrinsic value. This is an interesting shift in policy because previously the company used book value per share as a key input in the buyback exercise.

The quantum of the said buyback was $928 million which was done in the month of August. The last buyback programme was $1.3 billion in December 2012.

This reminds me of the book The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprints for Success. In the book the CEOs did lumpy buybacks when the stock was really cheap, and this (and other capital allocation decisions) created a lot of value for shareholders in the long-term.

Our 10c Worth


 

One thing, from Paul

October 2018 was a shocking month for global markets. I’m not sure why, but over the decades a lot of market pull backs have occurred in this month. Perhaps investors in the northern hemisphere feel depressed about the impending winter season and get skittish?

Keep in mind that share prices are not set in stone. They are made every day in the market, so a buyers strike leads to value losses. As we know from the old line, “the stock market goes up the stairs and down the elevators”.

The tech heavy Nasdaq opened at 8037.3 points on 1 October 2018 and closed at 7305.9 points on 31 October 2018. That’s a fall of 9.1%. Not pleasant at all. You will have shared that pain in the value decline of your New York portfolio.

Eddy Elfenbein tweeted this chart of the Nasdaq’s monthly changes since the 1960s, showing that whilst this was indeed a nasty month, it was by no means the worst in history.

If it’s any consolation, now is when everyone starts talking up the chances of a Santa Claus rally, which will take us into the calendar year end.


 

Michael’s Musings

I have no doubt that self-driving cars are the future. A car is generally your second most expensive ‘asset’, and it spends over 90% of its time not adding any value to your life. Outsourcing transport to a self-driving Uber, not only saves you money but it reduces the need for expensive parking spaces.

The problem of ‘who to kill’ in an accident has been raised before, what I didn’t realise was that the answer to that question varies depending on which country you live in. Do you kill the elderly or the youth, the pedestrian or the occupants? These are some very big questions.

My big question is, will there be international standards set? Or will it be up to each country or will it be up to the car manufacturer, to decide who is favoured in an accident.

Ignoring the grimness of the topic, it is fascinating to see the priorities of each nation. This Bloomberg piece gives an excellent breakdown – Should a self-driving car kill the baby or the grandma? Depends on where you’re from

Linkfest, Lap it up


There are a couple reasons why people are staying in their properties longer. Regardless of the reasons, it is a good thing financially because moving regularly destroys wealth – Homeowners are moving less frequently

Arguably the trade war is hitting China harder than the US, which is what The White House is hoping for – Many U.S. firms in China eyeing relocation as trade war bites

“Sixty-four percent of the companies said they were considering relocating production lines to outside of China, but only 1 percent said they had any plans to establish manufacturing bases in North America.”

Vestact Out and About


This week on Blunders: Venice is flooded; eMalahleni has the worst air in the world; Chinese telescope can’t find humans; Parkinson’s Disease could be caused by your appendix – Blunders – Episode 123

Signing off


Iranian sanctions come into force today, but both India and China will continue to buy oil from Iran. The Fed meets this week, where interest rates are expected to remain the same. The market will be focused on the commentary about what we can expect going forward. A bigger market moving event out this week is the US Mid-term election tomorrow. Then the worlds biggest travel company, Booking Holdings, reports their numbers this evening. Lastly, US clocks have moved an hour forward from today, which means US markets only open at 16:30 Jozi time.

Sent to you by Team Vestact.

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