SPEEDING THROUGH CASINO SQUARE

There has been quite a lot of suffering “...the slings and arrows of outrageous fortune,” in the market these last few days, but I doubt if anyone feels  “nobler in the mind” for the experience. The simple statement that the all share index has today set the week’s high almost 1000 points above the week’s low, which was achieved on Monday completely disguises the extreme anguish in between. Most days posted daily ranges well in excess of 300 points. Sometimes the action was in one direction, on others it was both up and down, a long way, several times! This has taken the twinkle from the eye of even the keenest trader. Everyone is hoping that things will be much smoother on Monday when both the US and the UK markets will be closed to celebrate the arrival of the sun or some other quaint ritual.

Of course, we still don’t know if this is the end of the bull market or the start of the bear market (although readers will not be surprised that my own feeling is biased towards the latter). Or perhaps it is something else altogether. Like the end of the world as we know it.

Just as long as it doesn’t happen immediately or else we shall miss the sumptuous 2010: Corporate Banquet to be held by the drearily-named Institute for Local Government, at some glamorous gambling facility near the airport. From the advertisement, it seems that the mass munchies are planned as the highlight and main attraction of the 2010: The Role of Local Government Conference that starts this weekend at the same venue. “Limited seats are still available!!” but I shall not go.

Bureaucrats obviously sheltered in their offices during the cold spell and used the time to come up with a bonanza of strange ideas. Like the requirement that cell phone companies compile FICA-like records of ID and addresses of all their customers. At least one company has quoted some interesting statistics about the number of people within our borders who have neither, but do enjoy their cell phones. And then the state-owned and taxpayer-supported airline was “slapped with a fine” of R55m by the (state-run) Competition Commission for stifling competition through some dodgy deals about two years ago. Just whose wallet will get raided for this one? And a neighbouring country proudly announced the issue of inflation-linked bonds that will offer a yield of 2% above inflation. But with inflation through 1000%pa and rising, I am not sure these will be popular.

Meanwhile in the real world, companies have been continuing to report very pleasing results and it seems that the consumer and his (or her) credit card are going great guns. One bank grumbled about this profligacy a bit, but since it is they who issue the cards and set the limits it seemed a trifle pious. But we should all take their point. The bull has been fuelled by massive money supply growth everywhere – particularly in the US and, not insignificantly, right here as well. The US housing bubble has definitely burst and mortgage defaults are rising swiftly. Roosting chickens have been sighted.

But neither trade and budget deficits nor rising debt will be given a single thought in Monaco this weekend when the (very) rich and (improbably) famous gather on the poop decks of their yachts to throw champagne corks at the GP cars. As my boat has not yet come in, I’ll just sit in front of the TV with a Castle.

James Greener

26^th May 2006

KEEP A CLOSE WATCH ON THE BULLS

The market’s extreme gyrations these past few days prompted me to run the “pain index” calculation. This measures the fortunes of a legendary (but supremely unlucky) day-trader whose every purchase is made at the day’s high while every sale manages to set the day’s low. You will not be surprised to learn that the pain index is currently very very high. Short-term speculators who rely on volatility should be satisfied but alert!

At its worst, the all share index was almost 10% off its all-time high, set just ten days earlier. The biggest hit came on Monday when the daily range was nearly 4%. Investors should not be panicking though. The market is still better today that at almost anytime in the first quarter of the year. We have had an amazing run and things were getting overcooked. However, vigilance is always better than complacency. My analysis suggest that if the market were to return in the next 12 months to the sort of (good) value levels last available in early 2003, then this would require the index to decline something like 25%. Whether or not this will happen, no one knows, but it may be a useful figure to keep in the back of one’s mind. Key to this calculation is the assumption that earnings will continue to grow, but at around just 15% pa. This is considerably lower that what the companies have been enjoying in the last few years.

I am innocent of any knowledge of commercial law. However, I would have thought that the rule preventing companies from funding others to purchase their own shares was a necessary precaution and should not be struck from the statutes. Apparently, however, this is about to happen and will add yet another distortion to the efficient allocation of capital and resources all in the name of transformation. I was therefore pleased when Mr Khumalo, this week, struck a blow for those of us who believe that a willing buyer using his own money, who finds a willing seller who actually owns the asset, is the only way to operate an economy. He managed to stun some people who believed that his previously disadvantaged background would embarrass him from taking a tidy R70m profit in a rather audacious trade. Buying cheap and selling expensive is the way to go and sure beats trashing the streets outside parliament while striking for poverty. More evidence that governments are terrible at business, arrived with the R2bn loss reported by the state-owned arms manufacturer. To fail to sell guns when almost everyone on the planet is at war is not a sign of success.

Equally unsuccessful are the “13 national institutions that (have) anticorruption work as part of their mandate”. This report was juxtaposed with the news that the state is currently investigating 35 000 reported cases of alleged fraud in social grants. This number is, however, not all that large when you discover that the government this year has identified 11m poor people to whom it will distribute close to R60bn in aid. It’s surprising that the leakage is not worse. More worrying, though, is the realisation that the aid amounts to just R5 250 per poor person per year and comprises just 12% of total government revenue. This redistribution business is also not working is it?

We all hope of course that the bulls will distribute the ball to the wings efficiently tomorrow and crush the Crusaders. If they don’t then I expect dark mutterings from Sharks fans who probably still feel they were robbed of their trip to Christchurch.

Keep warm and safe please.             

James Greener

19^th May 2006

SELL IN MAY AND …….THEN WHAT?

There are several big stories from the markets this week. But I think the most interesting one is that it looks as if people are exiting our currency. We are all accustomed to watching the rand/dollar exchange rate. Indeed, there are illuminated displays alongside the freeway that allow travellers to keep in touch with the number. One such display alternates the rand/dollar rate with the ambient temperature, which in this recent cold spell has been causing more dismay than the currency.

But the complication is that the US dollar is fighting its own war and is sustaining some nasty looking wounds that may one day prove near fatal. While the rand’s decline versus the USD is attracting attention, it is against other mega money such as Yen, Pound etc. where some alarming action is starting to unfold. A need to understand relativity is not confined to cosmologists.

In fact, action is unfolding all over the globe. In the US, the scheduled meeting provided the expected hike in interest rates and the accompanying statement provided the usual rich pickings for economists to squabble over. This time it seems the excitement hangs on the appearance of the word “yet” in some otherwise insignificant paragraph. The gold price has soared through the $700 and $725 levels without pause and the copper price is now so high that the threat from cable theft to our phone conversations and data transmissions is also increasing.

Folk who find fascination in round numbers will have noted that the All Share index is having trouble clinging to the 22 000 level. “Is this the beginning of the end?” the cry goes up. Chartists have drawn my attention to the fact that the JSE has recently been rising at a rate last enjoyed just before the 1987 melt-down event. My own work on this phenomenon was to see what it looked like in real terms (i.e. after correcting for inflation) and an even more dramatic picture emerged. The present bull market is actually more similar to the one that preceded the decade-long bear market that began in the late 1960s. But of course, each time it is different. The market will eventually, pause or decline or perhaps even crash. But when and why is unknown.

Soon after I joined the young and exciting team here at Watermark I was introduced to the alliterative phrase “Turnaround Tuesday” In the past ten dozen Tuesdays us bears in the office have chanted these words while shuffling around the trading room. So far it has not worked. Perhaps next Tuesday is the ONE?

Readers may have noticed a number of developments among the shares listed in the property sector. Investors are being invited to request a copy of the prospectus for Madison, and at last, ApexHi have decided what to make of their new “C” units. While I am agnostic about the Madison business idea and listing, the Apex C units seem to me to be unlikely to be paying any distributions until the end of 2007 at the earliest – and that is based on a generous growth model. The sole slightly good news is that of all the C units that will be issued to current holders of the As and Bs, 30% will be bought off them at 200cps by the BEE partner. This partner is presumably not concerned at the potential lack of return for the next few years.

Crunch time in the Super 14 and will a German win the Spanish GP in an Italian car?

James Greener

12^th May 2006

NO STICKY WICKET FOR THE BULLS

Down the road at the Wanderers this week they pitched a tent over the cricket pitch on which today’s test match has begun. Heaters inside the tent were being employed to convince the grass that it was still summertime and not just 6 weeks to midwinter. The groundsman promised a “result pitch”. Seeing how many wickets have fallen already, he was dead right and the scepticism that many of us have had about cricket in May seems justified. It’s cold and it gets dark so early that there’s no time to have a beer before the game ends.

Artificial heat has not, however, been necessary to keep the bulls all pumped up and rampaging through the markets. The letters that make up the words “all-time high” are getting quite worn out on key boards. And the thesaurus is running out of similes for soaring and breakout.  Some astonishing volumes have been going through the markets and it is clear that greed has out-gunned fear and that prices are out-pacing earnings. All very satisfactory, but it becomes ever more important to keep vigilant and watch for individual holdings that could be getting significantly overweight.

Goldmine quarterly reports began appearing this week and despite the gold price going ever higher, very few companies have managed to report a profit, yet the gold mining index is up 25% in the past 2 months. Mystifying. That’s why I prefer to ride this bull run aboard the NewGold ETF; I don’t need to worry about whether anyone’s hedge book is making or losing money. And if it all does go bear-shaped I can (supposedly) ask for the certificates to be exchanged for actual ingots of the yellow stuff. Pop a few of those in the pocket and run?

It’s not that I have a particularly apocalyptic view of the future, but for some time now an enthusiastic young man at the traffic light has been pressing me to take a leaflet that invites me to learn to speak Spanish. While I would have thought that the second language of the future was probably Chinese, perhaps the idea of a bolt hole in Central or South America has some appeal. Europe itself is awfully close to too much enriched uranium in the hands of intellectually impoverished dictators on both sides of the pond. The Pacific Islands were racked by another huge earthquake this week and as a keen surf fisherman, the prospect of facing a tsunami while reeling in supper is not enticing.

It has gone rather quiet on the interest rate front. The UK and Europe kept theirs unchanged and local talk seems to be generally agreed that there’s not any need to tamper with our repo rate at this stage either. Cars and houses are selling like hot boerie rolls. And while some retailers are making the obligatory warning noises, no signs of actual penury are evident. `Business Day this morning submerged readers with an enormous ultra-glossy magazine that insisted that in order to keep up with the man who runs the monopoly that we are obliged to support, I must have a platinum and gold bangle. And a R22 000 lampshade.

With the prospect of power cuts looming in this early-starting winter I think that woolly blankets and paraffin lamps are more my style while we listen to the rugby and the GP on the windup radio.

Have a fine weekend.

James Greener

5^th May 2006