Thursday 29 November 2007

DEFENDING THE BRAVE MAN


Perhaps the most important market developments this week were the slide in the rand and the surge in inflation. Other items like the third quarter GDP numbers, the abandonment of talks between telecoms players and the money supply figures have had some impact as well. But Governor Mboweni has told us repeatedly that he is particularly focussed on by the first two parameters. It is hard to imagine that he will not have all the ammunition he needs to increase interest rates next month. Even though the pundits point out that despite the earlier interest rate hikes, the GDP growth of 4.7%pa is still excellent, I am sure that money that is more expensive will have an effect on growth in due course.
The forbidden word “Recession” has begun to make its first appearances in US newspapers and I think that portfolios should be getting more defensive. This does not, however, mean buying shares in arms manufacturers despite the example set by our probable next president who allegedly has often used this type of business as a source of income. What I mean here is to search for shares with dependable income streams. Traditionally this means primarily the food, drink and drug industries where presumably their customers do not rely on credit.
Maybe it is also time to have a closer look at the falling yields being experienced by some of the property counters. The distributions from most of these shares are deemed taxable in the hands of the investor, which makes them no different from a three month cash deposit offering say 10% pa interest. And there is no danger of capital values sagging when the tenants decide they no longer can afford the rent.
The headline that [ex-head of the National Intelligence Agency] “Masetlha [was] not guilty of breaking the Intelligence Act.” made me pause for a moment. Do we now have laws about how clever government employees should be? Are state officials obliged to have an IQ above or possibly even below some hurdle rate? All very odd.
I am appalled by the idea that broadcasters have been squabbling about getting exclusive rights to record the proceedings at a political party conference. Is there a new genre of soporific TV on the way? The cooking channels already offer quite enough images of sticky fingers and stuffed turkeys.
If it were not so tragic, the news that it is now impossible to calculate the consumer price index in Zimbabwe would be very funny. With no goods on the shelves, there are no prices, no consumption and so no index. Inflation has become a meaningless concept. Down here south, of the Limpopo, however, it is mainly just the electricity supply that is noticeably erratic. There appear to be plenty of stocks of just about everything else. In particular, second hand cars are well offered. Showrooms and car lots are springing up everywhere. Soon there will be a battle between people looking for space to plant bio fuel crops and people needing to park cars that might one day need that fuel.
Tidemarks is washing up the beach early this week because I am going to the Kruger for a few days. Based on what has been happening to prices recently, not even a polar bear sighting in the park will be as surprising as what I have witnessed sitting here at my desk. Peregrine falcons don’t swoop as fast as the all share index has and spitting cobras don’t strike back as sharply. It will be very relaxing.
James Greener
29th November 2007

Friday 23 November 2007

GLOBAL WARNING


The “pain index” measure is loitering at the year’s second highest levels, which means that the JSE has been experiencing successive days of  wild swings from high to low and back again. In these circumstances, it is impossible to pretend that one has any insight or authority about the market. At least when there’s a trend evident, one can appear to be knowledgeable by forecasting that it will continue. All I can tentatively offer at the moment is that there is quite a lot of unusual stuff going on. Not least of which is that there are nearly a dozen new companies that will list on the JSE before Christmas. If all goes according to plan, the founders of these businesses should be able to shower their nearest and dearest with some pricey presents. However, not all of the recent listings have been unqualified successes and I wonder if investors are not getting just a tad weary of “pump and dump”.
I have mentioned before my fondness for the Prudent Bear website that collects together dozens of links to market news that leans towards satisfying the inner bear that lurks within me. More than two years ago, I noted that I had read about traces of smoke rising over the US housing and mortgage markets. Those wisps have now become a world-wide pall that is pouring out of a fiery inferno that is fiercer than anyone could have imagined. The US yield curve is now very inverted – that is long dated interest rates are considerably lower than short dated ones – and this is almost always an excellent predictor of a slow-down in the economy. In simple terms, folk are going to stop buying and ordering stuff.
Coping with the consequences of this development is now near the top of everyone’s priority list, particularly those people who are running businesses that can and will be affected by the American consumer deserting his post and neglecting his duty. I am therefore surprised that the quaintly named Carbon Disclosure Project managed to get any JSE-listed firms to spend any time at all on their pointless and doubtless irritating survey. Whose money did they get to spend in order to discover (gasp) that Eskom’s coal-fired power stations produce noxious fumes? And just what are we to make of the news that SA’s population is one of the most environmentally ignorant in the world? I know. Get taxpayers to fund more research and projects and schemes and programs and harass and hector people with bad science, poor policy and unworkable legislation.
Consider the fact that the total annual dividend payments by companies on the JSE is about R350bn. Compare this with annual government expenditure of more than R500bn. Certainly, there are tax and other linkages that make this simple comparison rather shaky but it is terrifying to note that private enterprise has less money to distribute to its owners than it takes to run the government.
I am delighted that the price tag for the Cullinan diamond mine is a lovely round R1 billion. When you are talking those kinds of numbers no one wants to bothered with the annoying 99 cents that invariably appears on the till slip. And also it removes the hassle of wondering whether to round up or down to the nearest 5c. I do just wonder, however, if it is the right price.
More international hot air this weekend. This time in Durban, where the 2010 Soccer World Cup preliminary draw takes place. (I wonder how many trademark infringements there are in that sentence?). My English friends and readers will not want to be reminded of this sport right now. Just where/who is Croatia?
Mind where you place your carbon footprints please.
James Greener
23rd November 2007 (my final sub-sixty prime number birthday)

Friday 16 November 2007

EVERYTHING COMES IN CYCLES

That R99 million fine that has been imposed on a bakery because it admitted that it had been chatting to its competitors about the price of a loaf, is a lot of money. Why the government is going to pocket the loot is not explained, although I do understand that doling it out fairly amongst the folk who have bought bread these last few years is a tough task. Would I, for example get a greater refund on my exorbitantly priced Ciabatta this weekend than the chap who is about to lunch on a Bunny Chow? But once again, I am puzzled that the state feels so strongly about ensuring free markets in some things while it simultaneously insists that it alone can decide on the correct price of money itself. Governor Mboweni has been very clear this week that he believes that the stuff is still too cheap and he will be pressurising the committee of great and good next month to raise interest rates some more. The sound of the pips squeaking is clearly not yet loud enough for him.
At last, the share markets appear to be noticing the cries of pain coming from the credit markets in the US and other large economies. Even two of our own local banks have been affected by these euphemistically named sub-prime loans. No-sign (of the money coming back) loans is a truer reflection of the situation. Things are already much worse than any forecast that I have read. The only people who are not feeling the pinch, are the departing bank chief executives whose main problem is wheeling the truckloads of farewell-present cash out of the door. It’s an odd system.
Inevitably, the picture is not unambiguous, however. The gold price has plunged below $800 per ounce which is another way of saying that the greenback has strengthened. With so many experts calling for its collapse, I suppose a recovery was probable. It has this week gained against every major currency except the Yen  and this last anomaly may have something to do with these mysterious “carry trades” [Not the same thing as the aforementioned CEO’s wheelbarrows].
Reporting season on the JSE is in full swing and with the notable exception of a dismal set of numbers from the fixed line phone monopoly, most companies are doing fine. Understandably, earnings growth is sometimes lower than a year ago but no calamities have yet come to light in the industrial and financial sectors. As we have discussed many times, the miners have their own special set of problems.
I maintain my attitude that a well-balanced portfolio of solid dividend-paying shares does not need to be radically adjusted even at this time. If one is exceptionally worried and bearish then certainly postpone putting any extra cash into the market and maybe allow the income account to accumulate for a while. I am fairly sure that cheaper prices are on the way.
I do hope that the weather in Cape Town is fine this weekend. When the mother city puts on her party frock, she is one of the most attractive places in the world to visit. It will certainly be warm since there are right now plane-loads of G20 conference delegates arriving at the foot of the mountain and once they get going, the hot air will be flowing in torrents. May they nevertheless be delighted and beguiled by the place. Please watch your wallet at all times and especially when chatting to estate agents in Clifton.
On Sunday, thousands of cyclists will once again encounter that strange Highveld summer weather phenomenon. No matter in which direction you pedal, the wind is always in your teeth.
James Greener
16th November 2007

Friday 9 November 2007

MINING HOUSES MAKE LIKE MISSILES


A gentle glow of satisfaction was starting to pervade the bears on Wednesday evening as they watched the money channels on TV. Wall Street was looking very weak and it did appear as if the odd chicken was even coming home to roost. The JSE sagged in sympathy on Thursday morning and buyers were scarce. Then a few minutes before lunchtime, the news broke that BHP Billiton, the largest company on the JSE ranked by market capitalisation, had been spotted trying to persuade Rio Tinto that a merger of the two would be a match made in heaven.
What happened immediately was that the Billiton share price shot up – fast and far. This was followed closely by the Anglo share price. When these two behemoths sprint like that, the earth moves for all investors. The index climbed nearly 1000 points in seconds. Thereafter things got even more messy and complicated and mere words could not describe events. You had to be there, in front of the screens and in earshot of the screams. The talking head industry has seized on this topic with delight. One can now get a complete range of opinions on whether or not a merger would work. Political opinions, jaw-flapping and intervention are confidently expected next. Acres of weekend news print will be assigned to the story. Trees will fall.
The current position is that Anglo is once again the largest share on the JSE, the All Share index less than 400 points off the all time high, and the bears are back in the woods. Potential mega deals like this are of course the reason that investment banks exist and sometimes the deals become one of those rare “black swan” events that can demolish carefully crafted investment strategies. I do not entirely understand the various extreme price reactions to the news. What is certain, however, is that knowledgeable people in the commodities business believe that the demand for their products is not over and that good growth lies ahead.
We are staring to move into company reporting season again. Some of the recently listed ones with construction and building-related business have announced stellar results. In some cases the wonderful earnings have somewhat justified the terrifying valuations that the shares had been wearing. Nevertheless, these sectors still have very few obvious bargains. Ominously, however, it appears to be getting tougher to sell consumer durables to people who have to borrow money. A motor dealer this week complained that cars are not flying out of the showroom as fast as they used to. Credit-dependant furniture retailers are also slowing down quickly. The new money lending legislation is obviously having one of its intended effects of controlling individual indebtedness. The price of fuel is also making the idea of car ownership and indeed most travel unappealing. And that’s before you consider the implications of a plane discarding an engine during take off.
The papers today tell a rather sad little story about the response of the national broadcaster to complaints that the ball-by-ball cricket test commentary was absent from the usual radio channel. The response was “What is ball-by-ball commentary?” I suppose for some people, the appeal of cricket is as low as the appeal to me of televised proceedings of the debating chambers of the provincial and national legislatures. In my view, this is a complete waste of broadcasting bandwidth and at the very least should be tagged as unsuitable viewing for children and anyone who can read without moving their lips.

James Greener
9th November 2007

Friday 2 November 2007

THANK YOU JAKE WHITE. HAVE A NICE LIFE


The US obediently followed my forecast and this week cut interest rates by a quarter of a percentage point. However, the debt dragon is already far too big to be worried by such puny actions. His fiery breath is licking into every corner of the US and illuminating more and more cowering damsels in severe distress. It almost seems as if no one who borrowed money in America in the last few years had any intention of paying it back. The banks and intermediaries disguised this fact from the lenders (and it seems, from even their own bosses) by slicing and dicing and packaging and wrapping the toxic messes in ever more mysterious ways. But now the blood is not just dripping from the corner of the smelly and battered suitcase. It is pouring out at such a rate that just maybe the share market can no longer ignore it. There have been some bad down days in the Dow and buyers worldwide are now pondering their purchases a bit more carefully than before.
The dual-listed rand hedge shares on the JSE have been the best performers of the week as the rand has given up much of the gains that followed the news of the big Chinese purchase of Standard Bank. The quarterly reports from the gold mining companies and the outfits that claim one day that they might become one, have been appearing and it is sad to see the near collapse of this as a viable South African industry. Gold shares are now only for the very brave, nimble and risk-hungry. Investors need no longer give this sector any time at all. Someone should tell the SABC that they could make more time for cabinet ministers to preen themselves by dropping any mention of the gold index from their news programs
The chaps down at the Financial Services Board have ensured themselves a merry Christmas with a couple of multi-million rand fines slapped upon some hapless traders who manipulated share prices in March 2003. Based on this speed of justice, if anyone who helped give the JSE prices that big push in the final minutes of trading on Halloween is worried about the cops, they have plenty of time. The Soccer World Cup will be over and they will be able to travel to Pretoria for their hearing on the Gautrain.
The Department of Home Affairs has decided that the Post Office is the source of all its lamentable inefficiency and failures. In a somewhat garbled tirade it appears that that the department uses the Post Office for tasks like moving documents from the “front” office” to the “back office” or other such nonsense. Admittedly, it is rare to see any government employee shuffling from one place to another burdened with anything more than a single sheet of paper, but to use the mail to get something to the next room seems extreme. I have long been in an industry for which the SAPO is an unavoidable partner and I think that generally the service is pretty good. For example, if I overlook the fact that they were sold out of standard postage stamps in those convenient dispenser rolls, they did manage to deliver to most of my clients their October statements within 48 hours of being posted. In a probably deluded attempt to ensure that the mail keeps working, I refuse to use anything other than the post for my correspondence with the tax man. Sadly, so far his assessments and demands have never gone astray.
I am grateful to the person who pointed out that England rewarded their World Cup-winning coach with a knighthood. In South Africa we have allowed politicians to use Jake White to send a message about government power to the nation. It is a pitiful, shameful, embarrassing and alarming development. Those of us who nurture a hope that there really is something special that can grow in our rainbow nation, have been reminded that we are naïve. Politics before people. Oh dear.
James Greener
2nd November 2007