Saturday 25 October 2008

BULLS ARE BLUE


Even founder member bears like me are startled by the way events are unfolding. I think that one of the big drivers for what is going on is that the US has decided to turn away from the outside world and concentrate on themselves and their own problems. The biggest of these is of course is debt – and lots of it. Despite everything that the so-called authorities can do, there is extreme reluctance and lack of capacity for any more lending to take place. There is now a desperate need for truck loads of dollars to pay off that debt. Americans are apparently selling off everything they own in order to raise dollars. And when they sell foreign assets – including here on the JSE of course – they then need to sell that foreign currency and buy dollars. Hence the present amazing strength of that currency.  
Naturally, selling shares on Wall Street is also a source of dollars and so that helps explain the weakness of that market as well. Anyone idly flicking through the TV channels will invariable chance across a remarkably attractive wide-eyed young lady relaying the latest plunge in the Dow while in the background are scenes of dejected dealers watching screens filled with red numbers. Thanks to these instant communications, the alarm and despondency becomes global in the blink of an eye, and investors everywhere become bearish about even their own local markets. It is an entirely unvirtuous and very vicious circle.
My guess is that the weak dollar gold price is evidence that the US government is selling some of their bullion reserves because they too also need dollars to pay debts. The rate at which the US economy is sliding into an ever deepening pit of economic seizure is quite terrifying. No investor anywhere is immune and there is pretty well nowhere to hide. Even the world’s greatest investor has felt moved to announce loudly that he thinks that on a five year view shares are worth buying now. The problem is that much of the audience are battling with a 5 week horizon of meeting the bills. Mr Buffet’s mortgage is probably paid off.
Mr Buffet is, however, probably correct and even I believe that local investors will probably find that most share prices five years from now will be higher than they are now. Those with the happy but thorny problem of a large amount of cash might think about the following two points. Firstly that the outlook of a positive 5 year return certainly was not true in May (some 40% ago) and secondly it is very likely that share prices will continue to go down even from here. This is a big and persistent bear.
But now consider the following propositions: that no one knows where the bottom will be nor how long it will last; that in the current environment, cash is a very poor asset class; that a buying program should be spaced out over a period of months or perhaps even years and that importantly, buying must be restricted to the highest-quality strong dividend-paying securities that are at multi-year valuation highs. Buyers should also promise to themselves and their advisers that they will not look at the shares prices and portfolio valuations more than once every month after each buying spree.
I have been in Johannesburg for a few days refreshing myself on what a proper traffic jam feels like and on just how beautiful this place is when the Jacarandas and roses are blooming. This evening I shall be home trying to find a place for a quiet beer which is not festooned in black and white bunting and posters portraying a toothy piscatorial predator.
James Greener
24th October 2008.

Saturday 18 October 2008

AND NOW THE CURRENCY CRUNCH


If money had to carry a passport and had to go through customs and immigration when ever it went from one country to another then the queues at Joburg International would be all the way out of the door and into Kempton Park. The stuff is leaving South Africa at one hell of a rate. Both foreigners and locals are deciding that despite the attractive big-five motif on our notes, the artwork alone is no reason to hold the stuff. All of which is a long-winded way of noting that the rand exchange rates are soaring. More and more of our runts are required to purchase a unit of almost any other currency except perhaps for a Zim dollar.
 Presumably much of the foreign money has been down here trying to earn its owners a return in the JSE share market. Now there is a widespread view that it is game over in that particular arena and unfortunately for us all, the non-residents are suffering an extra whammy as they try to get through the narrow rand exit door all at the same time.
Every single foreign seller of JSE shares and South African rands will of course have their own mix of reasons for making these moves and hopefully not all of them are equally alarmed by the dramatic disintegration of the ruling political party. There will also be domestic reasons for taking their money back home. Maybe there is a new-found spirit of fiscal prudence and rectitude that will begin with paying off debt? Actually the good thing about politicians squabbling with each other over the spoils of office is that they then don’t have much time for dreaming up more ways to interfere in our lives and steal our cash. As long as they keep the noise levels down and don’t for a minute believe that anyone in the real world thinks that their opinions of each other is relevant or important, I say go for it.
It has been another week of severe tests of character and patience in the share market. I don’t think that the official interventions being proposed and carried out can have anymore than a brief effect on the still astonishingly large numbers of investors who trust that governments can conjure up a bull market. The bubbles that are being deflated and corrected in the current market actions are numerous, large and in some cases very long lived. Whether there are yet enough conditions being met to declare that we are in a recession or a depression or just having a bad hair day, matters only for the satisfaction of the box tickers. For everyone else, the fact is that their net worth, their standard of living, and their sense of financial security is noticeably less than it was just a short while ago.  Sentiment is deteriorating but I don’t think that it has yet reached a point of widespread capitulation and rejection of the share market as a destination for one’s money. Until that time the bear remains in charge. 
 I have often remarked that one of the most important components of any gathering, meeting or conference is the catering. After watching the world’s big cheeses in government finance gathering to out-bid each other with schemes about which particular black hole to throw money into, it is clear that the group photo session is also an important moment. After hard hours of saving the globe from the mess that they originally created, the delegates eagerly troop out into the sunshine and jostle about on the steps of the palace smiling at the cameras and hoping that the voters back home will see what important friends they have. Presumably there is a pecking order worked out by those smart but nearly invisible young ladies who prod the luminaries into position. It must be getting increasingly difficult to decide to reserve the centre spot for the Washington delegate and to get others who will agree to stand next to him. Folk from the USA are these days prone to asking foreigners for money.
James Greener
17th October 2008.

Saturday 11 October 2008

BALLS DROPPING EVERYWHERE

Now where have all those anti-collusion zealots disappeared to?  Why are they not leaping about and complaining about the cosy calls that the US Federal Reserve made to fellow central bankers this week? Surely it is collusion when all together at one o’clock the price of money pretty much worldwide dropped in unison? Except of course for us folk down here on the southern tip.
It must be pretty embarrassing for Governor Mboweni to realise that he is not on Governor Bernanke’s speed dial list. The first time our chap found out that there had been a club meeting to which he was not invited was when he turned to the front page after finishing the sports section the next morning. But he got his own back two days later and at his very own meeting he dropped the rates in South Africa by precisely zero!
And then, if reports are to be believed, the Governor suggested that hope and prayer were important methods for keeping the currency strong. He really should be looking around for other means as well, because not even these tools are working. Money is clearly flowing out of the country – anecdotally, much of it from residents alarmed by political developments here at home – and the rand is testing multi-year lows against most other currencies. At this rate the expected hordes of 2010 overseas soccer fans will be able to party their lives away on just the loose change in their pockets when they leave home.
However, the main story of the moment is that money is leaving the world’s stock markets. In a big way! Either actually as cash in the pockets of those who have sold or notionally as terrifying declines in portfolio values. This is turning out to be one very serious bear market. The only humour in the situation is that the clowns who have been in charge and lying to everyone that everything would turnout alright  are now the same folk who are claiming to know exactly what to do to solve the problems. Predictably most solutions comprise dishing out new regulations and money in various proportions. I have seen no mention of integrity, honesty or accountability as important requirements for lifting the broken and discredited financial sector even partially back towards respectability and usefulness.
With already so many indicators pointing towards an economic slowdown it will need some inspired and selfless leadership if we are to avoid local and global recession. Current developments on the domestic scene are not hopeful on this score. One faction has already warned the other that they can “pick up their spears”. In the world’s most indebted nation, candidates for the presidency also appear clueless about how capitalism ought to work. That contest seems to have descended to the level of accusing the opposition of being a dog wearing lipstick.
I have before suggested that the choice of a name of a sports team should be the prerogative only of the lads and lasses who have worked and trained to get selected for that team. The same principal should apply to street names. A simply majority of ratepayers who live in that street should be entitled to choose the name and should also be responsible for all costs if they decide to change it. Politicians who can’t tell one ball from another and who have never paid any rates at all are once again meddling. Go and fix the hard stuff please guys.
James Greener
10th October 2008.

Saturday 4 October 2008

WAXING MOON WANING MARKETS


The markets were a terrible place in which to try and keep calm this week as they whipsawed mightily in all directions when each different news story emerged about the status of the so-called US rescue package. Fear and greed way overpowered valuation and analysis. In fact there was little local economic news bad enough to fret about anyway.(Political news was of course a very different story!)  Nevertheless the roller coaster continued its runaway journey and at one stage the all share was more than 30% below the May peak.
Nowhere in the material that is provided for students of investment analysis is there anything about the economic impact of selling rubbish to the taxpayers. The next editions of the textbooks will certainly need to cover this subject with whole chapters devoted to “pricing junk”, “bequeathing debts to the next generations” and “the wisdom of allowing the experts who created the mess to fix the mess”. It seems as if the whole world is waiting for the US Congress in the next few hours to pass legislation that will magically and omnipotently repair the balance sheet, confidence level and wealth of everyone in the world. I can assure them that it is not worth the wait. Before Halloween, the USD 700bn will have vanished like a ghost and the moaning will be louder than before. Quite simply the money is going to go to the wrong place.
Even a fanatical liberationist like me will concede that if there has to be a rescue package using taxpayers’ money it should be used to buy the delinquent and underwater mortgages. In this way, even if after all kinds of clever rescheduling, foreclosure is unavoidable, the taxpayer at least ends up owning a property that will one day likely be worth the price paid for the mortgage. The toxic waste that the current plan expects him to buy from the remaining solvent (?) banks will never be worth what he is going to have to pay for it. Much of it doesn’t even have certificates that can be perforated and rolled up. And on present form the banks will use the money to pay executive bonuses before selling the whole business to the taxpayer anyway!
I have scant sympathy for the poor saps who failed to understand the real cost of the loans that they were being offered in order to buy hugely overpriced houses and flat screen TVs the size of Boksburg. Education should devote more time alerting pupils to the brutal truths of compound interest and venal officialdom than to encouraging them to demand non-existent rights for themselves and polar bears. It is tough out here especially if you can’t read.
I was delighted by the picture of the EU big-wig holding up a candle while announcing the decidedly dodgy reasons for whacking Sasol with an extraordinarily large fine. Presumably the citizens of Europe need to be reminded what a candle made from wax looks like. Even if there is no escape from the penalty, Sasol shareholders can seek amusement from this splendid illustration of pained official indignation.
The internet lit up this morning with the collected wisdom of anyone with a word to say about the very large Impala Platinum deal. The main impetus for the deal seems to be the desire to get a hold of a great mining asset. Unfortunately there is a secondary driver which arises from trying to satisfy the government’s racist policies about asset allocation. This will undoubtedly cause wealth destruction in due course. This is an unhappy sector where apparent mouth-watering valuations have to be viewed through a veil of state interference. The health sector is another one. Maybe the new minister understands this.
James Greener
3rd October 2008.