Friday 29 October 2004

SAYING BOO TO A BULL

The ghouls and beasties and things that go bump in the night that will be prowling around on Halloween night have never scared me as much as this market can. Just when you think that you have got your portfolio all nicely positioned, out pops a spectre shrieking about interest rate cuts or exchange controls or some other terrifyingly unexpected subject. This week we had a wonderful example of this kind of surprise when we learned that we all have yet another thing to worry about:
Interest rates in China.
Thursday’s news that Governor Zhou Xiaochuan had increased the one-year lending rate by the marvellously perverse amount of 27 basis points to the equally eccentric level of 5.58% would normally have gone unnoticed. But someone was watching and moreover cared and the resource shares swooned. The weakening oil price (mind you, still above $50) also encouraged the commodity bears. The rest of us were still trying to sort out the difference between a remnimbi and yuan but were dimly aware that a slowing Chinese economy is probably a “bad thing”.
Before this event I had been musing on the story where, in the same speech, some worthy attending a conference lamented the foreign perception of poor returns from investment in Africa and then called for debt forgiveness. No interest and then no capital back? I perceive that as a rather poor return on investment.
Talking of returns, it’s month end already, and the All Share’s October performance is running pretty close to zero,  despite having been both 3% up and 1% down at various stages in the month.  In the last few weeks the rand has been one of the strongest currencies in the world while the USD has been one of the weakest. This of course also helped knock the resource shares. October’s winners were the financials and industrials.
Next week will see the listing of the long awaited Gold Bullion Debentures. These amount to shares that simply represent 1/100th of an ounce of gold, so I guess that their price will be around 2800 cps. They are to be called NewGold and will be listed alongside the SATRIX products in the Exchange Traded Funds sector of the JSE. I shall be preparing a short write up and description for distribution to clients once we see how they are doing in the market. I have feeling, however, that these could be very useful additions to the portfolio for gold bugs and rand bears like me!
As an idle aside I wonder if you noticed the details of the foreign exchange amnesty revealed by the minister this week. R65bn in 43 000 applications looks like big money until you realise that’s just R1.5m average per application.
In just a few days, the ghosts and skeletons will have been and gone and we will know who will be haunting the White House for the next four years. The point for the markets is just how long it will take for the winner to spook himself with the reality of the US debt situation and how will he try to deal with it. More scary stuff.
Keep safe.
James Greener
29th October 2004

Friday 22 October 2004

HIGH FIBRE DIET


One day this week I tagged along with some real analysts to visit two manufacturing plants. It was really fascinating, and while they were asking proper questions about earnings and depreciation and top and bottom lines, I was wondering about quite different things. Like why were we there.
Naturally a company invites a bunch of nosy parkers (and feeds them lunch) only when things are going well. And things did seem to be going well.
At Vaal Sanitaryware there were bathroom appliances popping out of moulds and kilns at a fair old rate. Management’s excitement and pride in the new automated moulding and handling line was catching. Elsewhere in the factory, the process of turning clay into containers is still performed by hand using techniques probably as old as civilization. We were, however, assured that the newest urinal design was a first. With 50% of local market share and only one competitor, planned revenue growth for these guys is to come from fighting for more of the upmarket sector. This is currently satisfied largely by imports which, according to our hosts, contained many European second grade rejected items. I asked where their own reject items went and they gestured northwards!
Down the road, at Everite we were relieved and delighted to hear that not a scrap of asbestos has been used at the plant in almost two years. It was difficult when asking questions to remember to refer to the material as “fibre cement’. These days the fibres are cellulose or, increasingly, a smart new plastic material that looks like very fine white hair clippings, imported from China.  A hugely enthusiastic new team has pulled this 60 year old factory from the verge of closure. The growth in this business depends upon the building professions specifying and recommending fibre cement products in preference to alternative materials like wood and steel. Most of the houses on Thesens Island in Knysna are clad and roofed in fibre cement.
The unifying thread is that these two plants form the biggest chunk of the manufacturing division of Group 5.  A brief presentation about prospects for the construction division, revealed the very interesting fact that the World Cup 2010 soccer stadia have to be complete and ready by mid 2007 for a FIFA inspection! This puts the construction phase much earlier than I thought. Some doubt was expressed about whether the industry had sufficient capacity for all the promised projects. From what I could see, however, there is going to be no problem with having enough toilets and garden pots!
With Group 5s earnings growth at almost 20% pa, and sounding like it might even improve, the pe at less than 10 and dividend yield at 3.4% the catch is that all these parameters are at multi-year highs. So buying now is not compelling - to me anyway. But keep an eye on it.
I am indifferent to the outcome of Saturday’s sweatfest in the cauldron at Loftus, but I think the Cheetahs deserve to win. And remember the late start to the Brazilian GP on Sunday.
James Greener
22nd October 2004

Friday 15 October 2004

WET AND WINDY


At last the rain began to fall in Gauteng this week. It is so long since we had wet weather that I have been worrying that my smart new wireless rain gauge might no longer be functioning. I had visions of cobwebs and bird droppings gumming everything up. However, as I watched a particularly hard downpour, the electronic read-out ticked over just fine and reported that it was coming down at a rate of 12mm per hour! So far we have enjoyed more than half an inch of rain. I still measure and think of rain and fish in old money. Who could be pleased with a 1.2 kg trout?
The anemometer picked up a quite strong wind squall that came with the rain. The dial showed 18km/hour gust speed. Yes, I do live in a sheltered spot! The weather station has been faithfully recording all these numbers so I can draw graphs and compare them to history.
It’s not very different from my day job. Collecting the numbers, plotting the graphs and then trying to think what it means. For example the All Share index has been dropping all week and will end today just about where it was a fortnight ago. Is this the turnaround?
The Governor’s shorter than usual TV appearance in which he announced no change to interest rates, caused a barely discernable blip in this trend. The broadcast was notable for the innovation of fifteen minutes of “vox pop”. Hapless pundits, fully aware that the decision had been made even before they spoke, were grilled on their expectations; while interviews with the “man in the street” were also doomed to irrelevance. A cheerful music video would have been much more fun.
Another chart that has caught my attention is the one that shows that the American stock market (as represented by the S & P index) is currently a tad lower than it was 34 months ago (January 2002) while the good old JSE – expressed in US dollars - has doubled in that time. Obviously about three quarters of this performance was provided by our all-powerful currency. Only one quarter of the return came from the market itself. Sadly for our public relations with foreign investors, some other figures show that not too many of them actually managed to benefit from this run. However, the gap between the two indices is what concerns me and I believe that it will get wider still as the US market accelerates its already noticeable bearish trend.  But you are understandably bored with this theme.
For some good US news for a change, have you noticed that SAB has been the best performing share of the week and in second place for the month? It seems that some firm South African management is getting the US operations into shape.
And there will be heaps of firm South African management happening at Loftus and Newlands tomorrow. I shall be watching my barometer for the high pressure zone over Joburg when the Lions thump the Blou Bulle.

James Greener
15th October 2004

Friday 8 October 2004

IT’S ALL JUST ROCK AND ROLL


Last weekend I enjoyed a really fascinating excursion exploring the Vredefort dome area. I was delighted to hear that there is a good old fashioned academic squabble taking place about the likely cause of this massive geological event that took place there about 2.3 billion years ago. Our guide and lecturer is a major protagonist for the asteroid impact theory. If his theory is correct then it seems that a very large chunk of space rock thudded into the deck quite close to where Parys was going to be. It was cruising along at something like 20kms a second and landed with a bit of a bang. The next few minutes would have been rather hectic, what with rocks melting, dust rising and a shock wave rolling out in all directions. The neighbourhood quickly became rather inhospitable. The only life forms around in those days were colonies of blue-green pond scum, doing very little except hanging about waiting to evolve. They were fried. And then they were buried under a vast layer of sediment and ash, as what was thrown up from the crater came raining back down to earth. Nasty
The parallels with what has been happening in these markets these last few weeks are obvious. The Governor’s interest rate cut in mid-August landed on Gwen Lane like giant meteor. There was a huge impact. Rand bulls disappeared into the crater. The shock wave blasted the All Share index almost 20% higher. All bear-like life forms got burned. Untidy.
Now we just have to avoid being wiped out by the falling debris.
The surge has rerated the market by quite a significant amount. At a 2.65% dividend yield and 15pe the market is probing valuation heights that have previously proved shaky. But it’s difficult to get off such a fun ride.
Watch for next week’s appearance of Governor Mboweni in front of the lights and cameras after the Monetary Policy Committee’s deliberations. The general view is that he will leave interest rates unchanged. But do remember that this is that same view that completely missed the half percent asteroid in August. I think the more important date in the near future is the US election in November. I doubt that my long expected Wall Street showdown will take place before that event. But I think that the markets will not give the new White House resident much chance to catch his breath before asking a few difficult questions.
Those of us who have been waiting for the FNB preference share issue were disappointed this week to discover that all R3bn worth had been privately placed and that there is to be no public offer. Just shows how much demand there is for anything that’s got some tasty yield. The latest announcement even didn’t bother to hint what the coupon level might be. We’ll just have to buy some in the market when they list next month.
Have a wonderful weekend. And if you plan on some fishing down Parys way …..  tight lines

James Greener
8th October 2004

Friday 1 October 2004

WAITING FOR THE BANG


Sometimes there is never any shortage of material to write about down here on the southern tip.
One could have another pop at PAP who really does seem to believe that even though less than a tenth of the member countries have paid their dues, somehow those of us who actually work for a living deserve to support them and pay their president’s rent. Or I could drone on about the National Gambling Board’s (which is not a big blackjack table in Pretoria) report that that industry’s annual revenue was R8.2bn, but gambling taxes and levies collected amounted to just R764m – which seems like nice work if you can get it.
And then one could surprise everyone and talk about the market and how it delivered 5.7% total return last month. This was thanks to a surging 9.5% from the financial sector which behaved quite coquettishly when it discovered that a foreign suitor was about to ask for ABSA’s hand. Firstly, of course, the eager groom must do the rounds asking permission of the presidency, the unions, the central bank and who knows which other “uncles”, all of whom will doubtless carefully explain the lobola system.
These forthcoming nuptials were cited as the main reason why the rand improved between 2 and 3% against most of the big currencies last month. Official inflation numbers also came out surprisingly low. Hence the “dead cert” bet in the markets for this month is that the Governor will pull the “Interest Rates Down” lever when the MPC meets for the tea and biscuits in a few weeks time. However, perhaps one or two attendees at that gathering will have spotted the following news item and might inject a note of caution into proceedings.
This news was that we South Africans are consuming every gadget and geegaw the world can’t sell elsewhere and this is resulting in a massive trade (im)balance number.
Confirmation of this shopping spree comes from the JSE’s general retailer index that was the best performing industrial index last month and holds a top five position in the third quarter. Lewis Stores will be listed in this sector on Monday and its R2.8bn market cap will be a very welcome addition. I think it will run hard. As, I hope, will Spar, a fortnight later.
Definitely running hard is a pack of US presidential candidates. Perhaps until a winner is declared, Wall Street will continue to ignore the signs that us bears are certain foreshadow a foul-up. One time-bomb that I believe is ticking is the delightfully named Fannie Mae organisation that is a very key player in the US residential mortgage market. The explosives include derivatives and interest rates and accounting rules and suddenly departing employees and so on. I have watched this one carefully for a while and think that the little red numbers are getting very close to zero.
Now for a Lions home semifinal.
James Greener
1st October 2004

(PAP = Pan-African Parliament)