Friday 25 August 2006

GETTING REVVED UP


The Top 40 index this week came within a whisker of topping the record of 20 260 that it set on 11th May. Whether or not it will soon  actually break out into new territory and whether or not that will be significant I shall leave for real analysts to say. My observation is that this bull seems to be quite determined to erase the memory of the meandering trip of the last few months that took him to the edge of the bear-filled abyss. My view is that he may not yet be able to do that.
With probably indecent delight I comb the media for stories about how the US consumer is starting to feel the pinch. Apparently the future of the world’s economic  growth depends to a very large extent on that fellow spending money. However, for a few years now, most of the money he and she has been spending has been borrowed and not earned. Moreover, it is seems that the US housing market has been the supplier of the credit. But now that market is showing signs of melt-down with all those statistics like “housing starts’ and “new home sales” and “existing homes inventory”, changing direction rapidly and emphatically.
Now the connection between the Top 40 index and the plight of the man in Michigan with a monster mortgage is not obvious. But this bear believes that it exists and involves links such as Wall Street, inflation, commodity prices and indebtedness. I expect, however, that I shall need a bit more patience to see if my belief is true.
In the meantime, I can think about our own statistics like the second quarter GDP growth of 4.9% pa. Total GDP in the last 12 months was R1 606bn. Government expenditure in the same period was R434 bn or 27% of the GDP. At present rates of growth of both these figures, the ratio could be at 28% by the end of this year. Three years ago, this ratio was 24%. The trend is clear and alarming. Government’s share of the economy is getting far too large. Isn’t this another negative for the Top 40?
I believe it is; especially when they spend our money on lunatic ideas like holding an “International (!) Conference to Address Gender Equity in Transport Policies and Planning”. Billed to last three days and boasting a dubiously incorrect logo of a male astride a hermaphrodite bicycle, this is a clear piece of nonsense. It makes about as much sense as declaring that Pluto is not a planet when we all know it is Mickey’s dog. It will be more distressing than usual to send in the provisional tax payment next week knowing that some of it will be used to support “rural freight logistic interventions”.
However, a proper analyst should be focussing instead on all the company reports filling the pages of the paper each morning. Most businesses are steaming along very nicely with earnings and dividend growth in double figure. One of the more interesting facts to catch my eye is that BHP Billiton’s earnings are running at R27.3bn for a pe ratio of 12.2. Anglo American, which is 44% larger by market cap, earned just R25.6bn for a pe of 18.7.  The price of the latter has been running as the result of whispers that a deal may soon take place – but that difference still seems too wide.
I am looking forward to a pleasant day at Loftus tomorrow, provided my hosts allow me to stay at the bar in the marquee and not force me to watch the rugby. And there’s the Instanbul GP on Sunday. I wonder what Mr Ecclestone would have to say about gender equity in Formula 1?
James Greener
25th August 2006

Friday 18 August 2006

OUTSIDE INFORMATION

Loyal readers will have realised that I carefully avoid making any call on a specific share in these notes. The reason for this is that I could not bear having to append a four and half page disclaimer that states what people should already suspect: that in all probability the recommendation is wrong and is potentially dangerous to their wealth. A few analysts do have an excellent knowledge and understanding of various industries and companies and their research is often interesting and revealing. However, I also firmly believe that this insight will never reliably result in an accurate prediction of earnings, dividends or share price behaviour.  Obviously, the idea of tacking a disclaimer on to items of investment research has grown out of an acknowledgement of this chronic unreliability. If we were always right we would not have to say “sorry” and we would also probably not be peddling shares but negotiating to buy another island paradise with his and hers harbours.
Therefore, I shall not mention the name of the bank that has recently published its interim report with which I spent a few minutes and a calculator. I was interested to see that the traditional business of borrowing money at a low interest rate and lending it at a higher one contributes less than a fifth of the bank’s income.  Furthermore, the lending side has proved to be rather dodgy. The bank felt it prudent to set aside well over a billion rand in case the borrowers should prove forgetful about their obligations to repay. This “just-in-case” money is given the wonderfully coy name of an “impairment charge”. Recall, as well, that government a few months ago fretted in public about the spread between these two interest rates and it is little wonder that the bank’s most lucrative arm is the one that does “investment management and life insurance activities”.
I rarely attend those presentations given for the fraternity of proper analysts. However, one company always hosts their affair at a rather grand watering hole high up on the Westcliff ridge. If the weather is fine it is a good opportunity to see the progress of the spring blossom across the suburbs and to hear how the shipping business is doing. Very well, is the answer, but the CEO is puzzled that the investors do not share his optimism and is frustrated that the share suffers a low rating. Maybe we are just not a seafaring nation and prefer buying shares in holes in the ground.
And not just deep holes. The construction sector index has been flying (up more than 10% this month already) as the country pours money into bricks and mortar. One of the shipping company’s busiest routes is bringing cement from China to SA. But have you noticed that the squabble about where the Gautrain money will come from is still going on? In fact minor battles are breaking out all over the place. Eskom appears to be disputing just how dark and cold it was in Cape Town this winter. Telkom is unmoved by complaints about lack of bandwidth. South Africa’s display of beetroot, garlic and African potatoes (what are these?) at the Aids conference in Toronto has raised tempers. And the oil companies are pointing out the age-old fact that if you want less of something you just have to tax it.
Perhaps we need to tax All Black and Wallaby tries. Enjoy the weekend and keep an eye on that currency. It looks skittish.
James Greener
18th August 2006

Friday 11 August 2006

BOWLING FOR ANOTHER TIME


The financial and commodity markets seem to have decided that the great successes achieved by the world’s policemen in foiling what would have been an appalling act of terror is a good thing. Perhaps only the travel business will see any drop in turnover. Since your laptop may now not accompany you to the executive lounge and will likely end up making a different journey than your own, business trips become even more unappealing. Moreover, spending much of your beach holiday on the shores of the airport terminal will discourage the other kind of travellers as well. Petrol at north of seven rand per litre has one reaching for the bicycle pump. But then, I suppose, someone will want to test you for steroids. Oh dear. Best stay at home and look for shares to buy and sell.
In the last few days, central bankers in England and South Africa have raised interest rates while in the US they decided that the price of money was just right and did nothing. Even if these remote decisions are an important factor in driving share prices, turnover on the JSE has reflected a four-day week and the start of some school holidays. Excitement and involvement levels are modest as the market extends the current spell of low volatility.
Despite the attraction of keynote speaker Minister Stofile at the Esselen Park Conference Centre next week, I am afraid I shall not be applying to the National Heritage Council for my opportunity “to contribute to the heritage plan of football in preparation for the 2010 World cup Soccer legacy”. Whatever this nonsense might mean; it is another clear example of plans to board the gravy train. However, I have now at last seen a credible way in which the ordinary citizens of South Africa are likely to benefit from the boondoggle that the 2010 FIFA world cup is threatening to become. In recognition of the fact that seat prices at the event in Germany this year were way out of the price range of the average local football fan, a plan is being hatched. Very cheap or even free tickets will be offered here on the southern tip to “the poor” in four years time. What fantastic news. Without even needing the example set by the Namibian sports executive who sold his own free tickets this year at a very satisfactory mark-up, “the poor” will doubtless immediately spot the possibilities offered by this plan. Once again, the market mechanism will triumph and money will flow in the proper direction.
Similar trust in the efficacy of markets is not, however, evident in the creation of the Jali Inquiry. These worthies have the task of seeing how and why the banks make money and then presumably suggesting ways in which they could stop doing so. Before starting work, every member of the inquiry board should be required to use their own money to buy a portfolio of listed banking shares. Then they should offer the portfolio as collateral to raise a bank loan, the proceeds of which must be placed in a fixed deposit at another smaller bank. I can think of no better or faster way to learn about the banking business.
Do we really need to suffer the sight of the legendary seamer Shaun Pollock bowling off-breaks? Please let him go home to spend quality time with his new family. Thanks for all the pleasure you have given us in the past Polly.
James Greener
11th August 2006