Friday 28 May 2004

NOTHING TO BUY – YET


I did some “proper” analysis this week and what did it reveal? Well just that there are really no nice clear themes in the markets at the moment. There are no “gimme” situations.

Bonds are looking dreadful. My worry is that the government has a great deal of borrowing to do. My estimate is that expenditure this year will be at least R50bn greater than revenue. Last year the deficit was less than R30bn. That’s a big jump.

So the country’s biggest borrower will be making plenty of trips around town with the slotted tin. (He does of course borrow offshore as well – different tin) And I am sure you have noticed all the new borrowers (e.g. Joburg city) who have crawled out of the woodwork after being attracted by the low interest rates. It seems to me that the price (interest rates) of the commodity (money!) in demand is very likely to rise. Not what a bond investor needs to see.

The picture for the share market is not all that peachy either.  Dividend yields are admittedly not in “no value at all” territory – but what is interesting is that they have been maintained only by a savaging of dividend cover ratios.  That is, companies have been holding or growing their dividend payouts only by paying more and more and retaining less and less of their earnings.

I guess that this means that when earnings growth resumes (did you realise that the earnings of the shares in the Top 40 index are down 20% year on year?) dividends will not increase in unison. Companies will try to restore the cover ratio. The good news is the pleasing number of companies that in the current reporting season have been coming out with some rather fine results.

On a relative basis the analysis suggested that the financial sector is the best of an uninspiring bunch. But on a fundamental level I wonder how much time and attention that industry has to devote to collecting all that “know your client” data. Did you see that some bank branches are going to stay open late to try and meet the deadline? It’s an industry right in the cross hairs of all the bureaucrats, politicians, and other assorted freeloaders who are “following the money”. That must be costly and irksome.

It is worth remembering that the indices that I used for this work contain no companies with a market cap. of below about R200m. (Anglo has a market cap of R200bn) To some extent, that is a reasonable cut off, especially in respect of liquidity as well. But it doesn’t mean there are no good ideas below that level – especially if one is looking for a home for R50k or so. So there’s some more “proper” analysis in the offing. Watch this space.

Final thought: “Will the bank freeze my overdrawn account if I don’t show them my ID book?”

James Greener
Watermark Securities
28 May 2004

Friday 21 May 2004

BEAR GORED – BUT NOT FATAL


Eish! This has been one tough market this week. Anglo, Billiton and SAB Miller have each risen enough to add more than R10bn to their market cap.  At the other end of the league table Kumba shed just R350m so it was a no-contest game for the bull. The Top 40 Index looks as if it will be up around more than 5% on the week. That hides the fact that on Tuesday we saw a low which was 8% below today’s high. Absolute roller coaster stuff and very very difficult for investors. It also didn’t help that Thursday’s main financial newspaper fussed over the story of worthless MBAs (is this news?) and relegated to page 18 the information that the previous day’s 3.5% up tick in the all share index was the biggest in several years!

Even for traders, who sit glued to the screens all day (except for restoring trips to the gym or the pub), it was not an easy market. Using the INet charting system I have devised what I call the pain index (well, I am a bear!) that calculates the losses involved if one were to do absolutely the wrong trades day after day. That is to sell at today’s low what you bought at yesterday’s high and then also to cover yesterday’s sale at to today’s high. This is not a recommended trading strategy but seems often to be pretty much the outcome for the trader who is both stupid AND unlucky. The current picture is that the pain index is well over double its long term average. Call the stretcher bearers! Naturally the joy index for the clever and lucky trader is identical but positive. The index is really just a crude form of measuring market moves.

There have been all kinds of stories doing the rounds about why this volatility has happened. The most popular one (probably because it involves someone else in trouble) has to do with those big players who have large derivative books. Now you and I think a derivative book is one where the author is guilty of plagiarism but apparently in this context it is a portfolio of options and futures.  These babies are very sensitive to market movements and can burst into tears if mom is just the slightest bit inattentive to their nappy or feeding time.  It is being gleefully rumoured that severe neglect has allowed both starvation and rash to occur in some nurseries. And major tears are happening.

Whether or not this week really was a case of a bull trap followed by a bear squeeze we will not learn for several weeks until the bandages come off the burned fingers and the stories get leaked over a calming brew. It does not alter my view that the bear will run out as the king this year. Just watch that US 10 year bond yield!

This seems to be a good point to share with you a bumper sticker plastered on a bakkie in the garage here: “Beer is not just a Breakfast Drink”.

James Greener
Watermark Securities
21 May 2004  



Friday 14 May 2004

IT’S ALL ABOUT THE CATERING


I have been reading the report-back from our tireless city councillor about the month’s events in the civic pile on Braamfontein Hill. The phrase above seemed to encapsulate the workings of local (and probably all) government quite perfectly. I was intrigued by the ingenuity and number of pretexts that the elected officials had devised to reward themselves with a spot of sluicing and browsing.

Virtually any meeting, however small or trivial could be organised only if the caterers had first been alerted to be on hand with a suitable selection of viands and beverages. Pre, post and preferably mid meeting munchies are an absolute must if one is to keep up one’s strength for proper consideration of the introduction of the 210 litre wheelie refuse bin. A trip to the depot to view the bin coincided neatly with lunch. Don’t even mention the celebratory party for the delivery of the first bin.

Catering (note the capital letter, this is now a pet topic of mine) ranges from the simple and not much liked, cup of tea and plain biscuit right through to a poolside shellfish and champagne brunch at a tropical resort playing host to an international conference.

The overriding characteristic of Catering is that those who pay for it almost never get to taste it.

A current fine example of the genre was the  farewell party that was held for the intrepid 2010 Soccer World Cup bid team due to leave for Zurich a few days later.

But I suppose if Danny and the guys, not forgetting Charlize joining the team as decoy, bring it home this week end, we will forgive them all their excesses – because a new round of super-Catering will be about to begin.

[This piece should have been a reasoned list of shares that will benefit from the World Cup effect. But you’ll have to go to a proper analyst for that. In my view, any run next week will be far too premature]

James Greener

PS Thanks so much to the folk who responded to our “where do you live” and “know your client” requests by sending a photograph of their house or long letters detailing their habits and social needs. We have filed them.

Friday 7 May 2004

ADVICE ON SOME MATTERS


Just down the road from here, on the way to the JSE, there’s a pleasant piece of open space, often occupied at weekends by dogs who have taken their owners to obedience classes. Today, as I went past, I noticed a pretty dilapidated caravan parked in one corner of the field. It was not on level ground but it was open for business. A bold sign promised “Advice on All Matters”

I did not stop.

But I did rather wonder if there’s much difference between what she (I assume the camper was a shrewd gypsy lady) and I do to pass the time. Using our experience and perhaps even skill we both attempt to foretell the future. I base my views on interpretation and extrapolation of historical data; she bases hers on observation of the client sitting before her. Naturally we are both in danger of telling our customers what they want to hear.

Some recent reading on the matter of the randomness of market behaviour has made me even more sceptical about the likelihood of success in this forecasting game. On average one should be correct about half the time. Statistically it is not improbable that one could come up with a string of successive – preferably spectacular – correct calls. One would soon be hailed as a market guru. And anxious investors would form an orderly queue outside the door. I saw no such queue outside the caravan either.

What we do have going for us in this investing business is the trend. Analysis of traders shows that, whatever method they use for making decisions, the “luckier” ones are those who stay with their winners for the ride but abandon their losers quickly.

And so, at last, to the market which after several weeks of exasperatingly static action does seem to be picking up downward momentum. The ongoing weakening of the resources is starting to swamp and flow through to the financials and industrials. The all share index is about back to the level where it started the year. (It has never been more than 7% above it) Pretty soon we could have a real trend showing through. And with one of those in place we can all look smart. Just remember to get some liquidity on board to make the trip more fun though.

And if you feel the need to call in at the caravan, please mind where you tread. Woof!

James Greener
7 May 2004