Friday 30 April 2004

Africa is not for Sissies


There were plenty examples of the truth of that little saying this week. We saw marathon parties, soaring oil prices, shuffled cabinets, Chinese credit freezes, plunging precious metals, declining inflation, shocking rugby playing, volatile currencies, dubious Russian deals and then the news that the Karoo Mineral Water company had been saved from liquidation. Whew!

So what’s the investment strategy in the midst of all this turmoil?

Quite a few years ago when I entered the broking business from a science background I was lucky enough to join a firm that was the industry leader in using computers and mathematical methods for identifying relative value. I felt right at home and even added a few tools to the box of tricks they were using. However, alongside this comforting analytical approach I discovered a parallel universe of gossip, leaks, tips and bluff. As a non-golfer I was largely excluded from the main clearing house for this source of investment advice. The middle of a trout stream is not a suitable venue for the muttered aside, lifted eyebrow or shaking head. The fellow just looks as if he has been bust up by a big one.

Furthermore I discovered the power of the aphorism. It was, for example, a great shock to learn that a stock was going up only because there were “more buyers than sellers” and not going down because one’s rigorous research had unearthed a cash flow calamity in a significant subsidiary. The fact that “in a bull market no one needs analysts while in a bear market no one needs stock” was a blow to one’s self esteem. After a few years of absorbing these key investment tools, I myself suggested that things happen “sooner, faster and further” than you expect. And only half the time in the direction you have forecast. Of course I was delighted to be informed that the secret to investing was to “buy cheap and sell expensive – but not necessarily in that order”.  Physics was never that simple.

However to return to the analyst in me for a moment, I can tell you that this past month’s All Share Index percentage performance figure (down almost 2.5%) would have been 50 basis points (0.5%) worse without taking dividends into account. Now there are two interesting points about this statistic. Firstly, that this April dividend contribution was larger than it was in March. This is unusual. March is normally the peak month for payouts. Was there a deliberate or even a distress-induced policy among the companies of delaying the dividends? Secondly, (but not perhaps a surprise) dividend contributions to the total return are running at about 10% lower than they were a year ago. I have previously described the price action of the all share index in the past few months as disappointing. And this scarcity of dividends is not helping very much either. So what can I say but “Sell in May, and go away”?


James Greener
30 April 2004

Friday 23 April 2004

Tidemarks 23 April

Smarting from the pain of having my repo rate prediction so thoroughly trounced, it would be wise of me to avoid making predictions and analyses this week. However, there was an event that caught my attention and will be of interest to AngloPlats shareholders.

This company has a market capitalization of R56 billion and has announced its intention to raise some R4bn with a rights issue. Now rights issues mean big fat company announcement documents full of dates and formulas and words like “perpetual’ and “cumulative” and big fat merchant bank fees.  If you are already feeling numbed or alarmed at the direction this piece is going, just skip the next paragraph after noting that my opinion is: “Sell the letters and buy the ordinary shares rather than the preference shares if you want more exposure”

The nub of the story is that current ordinary share holders are being invited to increase their exposure to AngloPlats by taking up (i.e buying) Preference Shares. These “prefs” have a variety of characteristics including conversion to ordinary shares. The bad news is that the theoretical market value of the prefs on take up date (the middle of May) will be about 23% less than the amount you will have to pay for them! The kicker is that if the ordinary share price does reasonably well over the next few years, then one’s pref share position will soon move into a profit. However, my sums indicate (and you are welcome to the spreadsheet if you like) that if the share does go up, then one will enjoy a much higher return by buying more ordinary shares rather than by “taking up” the prefs.

But now on to something I really do know about – holidays. There’s one next week, remember? The mother of all parties is to be held in Pretoria on Tuesday and some one else is paying.  I wonder who?  I don’t think I’ll go. I’m not sure I received an invitation anyway. I’ll jut stay at home and light the Weber and prize the top off a Castle or two. So that keeps SAB as a “buy”.

It was a pity that the Stormers did so badly this morning, so it adds a little urgency to an early start tomorrow to shout for the Bulls. Now that’s going to be hard for an old bear like me.


Friday 16 April 2004

Tidemarks 16 April

In just a three day working week there should not have been a lot of opportunity for much ebb and flow. However, things did happen and the gold price gave up about as much ground as the ruling party gained while the rand bounced through a range of more than 40 cents against the USD and slightly more against sterling. I believe that while the poor old rand could stay “stronger for longer” (vile phrase) we did see its strongest peak back in December. I may also be on my own in putting a non-zero probability on The Governor next week squeezing interest rates up a tick or two – nothing dramatic.

The All Share index is down for the week but this doesn’t tell much of a story as there was quite a large dispersion between individual shares. On a weighted basis, Sasol (one of my favourites), Naspers and Telkom led the pack, but Anglo, Billiton and MTN overwhelmed them on the down. In fact, the down list is predominately resource shares, despite the weaker rand. It really isn’t easy is it!

After last week’s scribblings about valuations I was challenged to find those areas which were least off-putting. I began by looking at year-to-date returns and like this week’s results, the All Share performance of 5.3% (including dividends) fails to tell of 34% from Metals, 28% from IT Hardware and -20% from Golds!

I checked out the worst performers to see if they were looking ready to recover yet. However, using the same sort of method that I described last week, this year’s losers still look like poor value. Perhaps the platinums look marginally better than the golds or the mining financials but still not at all tempting. Unless of course the rand swoons completely.

Sectors which caught the eye, oddly enough, included this year’s winners – which begs the question of why we didn’t spot them earlier. So Transport, Engineering, Automobiles, Investment Companies and General Retailers are offering relatively the better values and so I guess we should be delving into the shares behind them to see what lurks. Of course remember that there are only 165 constituents to the All Share index, which means that most of the candidates are left out in the cold. Sort of like last Wednesday really.


Thursday 8 April 2004

Tidemarks 8 April

Thank goodness that the building operations that have been going on right outside my window are nearly at an end. It seems that to add a few new layers of parking to a shopping centre involves empowering a lot of people with angle grinders and hammers. One day I must ask a civil engineer why a concrete slab, once cast, must then be sliced into small squares. The uncivil answer is that it makes a pleasing racket. However, today there are just some fellows painting white and yellow lines to demarcate the parking bays. Much quieter.

Wouldn’t it be useful if there were yellow and white zones for the share market too? Shares in the white areas would be a hold while anything in the yellow would be a sell. And the brokers would just be like those informal parking attendants with a rag (lappie-swaaiers) waving you into the bay.

Actually, I do have a technique that attempts to distinguish white from yellow. And when I ran it this week, it suggested that the market was getting pretty close to the no-parking areas. Briefly described, the method looks at historical price earnings (pe) ratios - no rocket science here!
 I was surprised to see that for the All Share index, the ratio had risen from about 8 to about 15 not just because the p (price) has increased 40% in the last 12 months but also because e (the earnings) had declined by about 12% in the same period. This last figure is not a surprise to those who have been following company announcements about the pain of a strong rand. But it does mean that prices could remain static (let alone go down) until those earnings recover.

Now I am not an accountant and I don’t really understand (trust?) earnings, I look also at dividends (I just love things that are tax free) and particularly the so-called dividend cover ratio. Dividend yields themselves are already on the slim side, but not yet below the 2.5% danger level. However, to my horror I found that for the index, the cover ratio (a crude indicator of the ability of a company to pay a dividend) has plummeted to a multi year low. That means to me that dividends are unlikely to grow much any time soon even if earnings do pick up.

But of course, this is (almost) Sandton, and everyone parks on the yellow lines here!

Have a safe Easter weekend.

Friday 2 April 2004

Tidemarks 2 April


I am sending this off early today because I am going fishing!

What, if anything is driving the market? Of course the classic but true and pretty unhelpful thing to reply is “more buyers than sellers”. Or the other way round as the case may be, as it was last month when the All Share’s Total Return was -1.39%.

And what in turn drives the buyers or the sellers?

Rather too many years ago when I was a bond dealer on the secretive so-called Gilt Floor way up in the JSE’s Diagonal Street building, the answer was the gold price. Some of the smarter and richer firms proudly owned Reuters screens that could be made to display in shiny green numbers the latest gold price from London. They tried to not let the rest of us catch a glimpse of that data for it was precious stuff. If the gold price climbed a cent or two the bulls got excited and rushed around shouting to buy bonds (Who else remembers the E154 and the R124?) and so yields went down. If the gold price looked poorly then the bears did the shouting and yields went up. It was all so simple.

As time went on, more and more of us installed Reuters screens and spent idle moments looking to see what other data we could find that we could use as an excuse to stimulate a deal. And we started to fret about things like money supply (just a measure of how many ATMs have been robbed?) and reserves (the ones without the lions and elephants) and many other numbers that most of us had no idea what they meant. This is when we asked the economists to explain them to us until we got a headache and went off for a drink.

And now we ALL have ALL the data in the world pretty well instantaneously. As I write, CNBC gurgles on in autobabble mode, up on the trading room wall. And we also have legions of regulators who get fierce if for a moment they suspect that someone got some news before anyone else. But we don’t get the market right any more than before. I mean what IS a non-farm payroll and what should I do before and after it is announced this afternoon?

Oh right, I’m going fishing, so you can tell me on Monday please.