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
19th May 2006
