Friday 25 March 2011

THE “AFRO” IS DELAYED

The folk at Wallmart must be astonished by the extreme diligence of the competition authorities who appear to be moving into areas way outside their usual remit in order to decide whether or not the world’s largest retailer should be allowed to sell cheap stuff to South Africans. Obviously many people are fearful of the retailer’s reputation. One of the existing local store chains has just with much fanfare launched a loyalty card. Excellent.
I am frequently embarrassed to find out just how many silly people there are making a living in my industry. It was reported that a piece of research revealed that the South African Volatility index increased by more than 50% during the second quarter of last year. Almost no one understands what this index measures and exactly no one knows what it implies for the future. Nevertheless, this (rather tardy) research by the so-called “Annuity Actuary” at a very large investment house, stated that: “… pensioners should hedge themselves against high inflation and volatile markets by using specialised investment tools to protect their retirement savings.” I do hope that he has been misquoted or at least his grandparents give him a good thrashing for trying to scare us old folk into spending money on stuff we don’t need. Naturally the “tools” he mentioned are designed and sold by his company. By the way, even cash investments provided positive returns after inflation last year.
Did you know that there are plans for countries from the southern tip to the Congo River to adopt a single currency by 2018?  News of this horrifying idea surfaced recently when the SA contingent at least, made back-pedalling noises “in the light of sovereign debt crises in the European Monetary Union”. This is hardly even the best or biggest excuse for delaying such an exercise but anything that does so is to be supported and welcomed.  It is well known that the Europeans have been obliged to turn a blind eye to egregious non-compliance with the membership standards of the euro for even some of their largest members, let alone the rats and mice now scuttling aboard. About the only financial standard that most countries at this end of the continent could all easily meet is that their leaderships can recognise money especially when it is in a private Swiss bank account.
The violent unravelling of power bases in many countries up north is very worrying and so far showing no signs of reaching a swift or peaceful conclusion. This will not be good for investment markets although the extent and duration of the bear’s reign is unknowable. Some small amusement can, however, be found in watching diplomats and bureaucrats – our own included – utterly failing to explain to a camera why they have agreed to try and depose and even harm someone who up until a few weeks ago was just about their best friend ever and a really decent and lovely chap who ran a model regime with contented citizens. The Chinese of course never bother to answer those kinds of questions and presumably feel that their arrival this week in Harare with a plane-load of dollars is all about their need for minerals and nothing to do with anyone else.
A three hour total power failure here at Ocean Towers today not only shut down the internet link threatening the timely publication of Tidemarks but also blanked the TV screen with the cricket in Dhaka. As you can see, normal service has been resumed and unless the Proteas provide another masterful display of snatching defeat from the jaws of victory all seems set for a good weekend. The Boat Race and at last some Formula 1 will be good and my doubt about the Twickenham venue for the Sharks match was totally misplaced. The ex-pats of both nations in London are delighted.
James Greener
25th March 2011

Friday 18 March 2011

FAILING THE GRADE

In just one week the story about the Japanese earthquake has vanished from the front pages and from investor’s concerns. Despite the ominous and very serious developments in the damaged nuclear-fuelled power plants, life for everyone not directly affected has obviously returned to normal.  In most share markets a modest recovery has been seen after the panic drop. The US long dated bonds have also seen some buying, however, and that is usually interpreted as a move to quality. Myself I am not so sure. Getting paid back in dollars in ten years time may not be that welcome. I am also not sure that we have all yet experienced the worst implications of this event
The prices of the variable dividend preference shares have been plunging recently. The indicated yield of the “safest” and largest one (Standard Bank) has moved up from 0.6% above the benchmark to double that. While this may be an (over) reaction to next week’s possible repo rate increase, it really ought not to have anything to do with the long awaited implementation of the change in the way that dividends will be taxed. If that were the case then ordinary shares ought also to be falling, as their dividends face exactly the same taxation change. And in any case the tax change is revenue neutral to the fiscus and so (unless companies are exceptionally greedy and unfriendly towards shareholders) ought to be neutral to dividend recipients.
Another strange discount is visible in the price of Newgold, the exchange traded fund that provides exposure to the price of bullion in rands. The price of the units is now more than 2.5% below the actual rand price of the metal. Presumably this reflects suspicion and doubt that the sponsors can meet their obligations. I believe this is unfounded.
Readers are cautioned that my views on the financial markets are very suspect and possibly dangerous as I have not sat any of the exams that the Financial Services Board requires financial advisers to pass before working with their clients. Years ago I did pass the JSE membership exam and for a while I was even president of the Institute of Stockbrokers but I doubt that the Board would consider me to be properly licensed. And as I have made a pact with myself never again to write any exams, there may be problems ahead.  The problem is that cynicism is not a recognised or welcome exam technique.
Here in Durban plans were unveiled of a scheme to turn the old airport into a harbour. This must be a world first. A lot of digging will be required. And money. It’s a popular product, money. There are a number of listed companies who are having rights issues and other capital raising schemes at the moment. Eskom have announced that they have all the money they need, provided that they are allowed regular eye-watering price rises for their product for the next several years. Only a few of us will spot the irony in their delight at funding a mere 90 basis points above the government rate. In the days when Eskom was a world-class utility and the state was a pariah that premium was reversed.
Everyone is sympathetic to the plight of the folk in Christchurch who have decided that their stadium will not be repaired in time for even the Rugby World Cup. They are gambling on a pay-off from moving the Super 15 match between the Crusaders and the Sharks to Twickenham next week.  They might just enjoy a larger, more sympathetic and possibly generous crowd at Kings Park. Mind you, London is where it is all happening. The national soccer team’s new jersey (designed in Germany, made in China?) is to be launched at “a glittering ceremony in London. How odd.
James Greener
18th March 2011

Sunday 13 March 2011

SO VERY MUCH IS HAPPENING


It is still very early days in this Japanese earthquake tragedy but my feeling is that this event is going to be a game changer for many things, including investment markets. Firstly the process of recovery and rebuilding after the terrible devastation of the massive earthquake and its attendant tsunami will absorb a great deal of the resources and focus of one of the world’s great economies. But probably even more devastating will be the unfolding drama of the damaged nuclear power plants. Hopefully the short term risks and horror of radiation leaks will be small and contained, but the “I told you so” anti-nuclear brigades have already begun to muster and in the years ahead the generation of electricity by this method will become even more mired in doubt and fears.
The fact that nuclear fuel is really the only current realistic alternative and replacement for coal, oil and gas for generating significant and reliable electricity, will be denied in a flood of misinformation and non-science. Politicians will leap aboard that band-wagon in an orgy of vote catching. It is likely and sensible that existing nuclear power plants will have to be subjected to new tests and checks in the light of this Japanese experience. The commissioning of new ones will certainly become delayed and postponed. The consequence will be that many economies will probably soon experience power shortages and price rises. Earning a profit from making and selling certain goods and services will probably become very much harder as disposable income gets diverted to necessities. One exceptionally pessimistic analyst has suggested that even the UK is about to experience food riots!
It is sad to find myself offering such gloomy thoughts after a wonderful few days in the kingdom’s high mountains, but a wander through my favourite charts now that I am back in the land of computers shows that markets are also not very confident or happy and were already drifting downwards markedly even before this latest and exceptionally large natural disaster struck. The All Share is 6% off last month’s high.
Results from December year-end companies continue to fill the business section of the newspapers and there appears to be almost a weird sort of relationship between the amount of space taken up and the weakness of the situation they reveal. It is hard to find the bad news when it is buried in acres of fine print spread across two pages. FNB who have produced about the best results of the major banks managed to act hurt and surprised when their rather good numbers leaked before the scheduled time. The JSE played along and suspended trading in the counter to ensure that no investor would be disadvantaged. Oh really.
Sport and investing are equally devoid of logic. Prices rise when they should fall and teams lose when they should win. Italy beat France in the Six Nations rugby, and the team that lost to England who in turn lost to both Ireland and Bangladesh at the Cricket World Cup, beat India last night. Whew. It is very hard work supporting Proteas cricket. Please note the Lions’ victory over the Cheetahs in the Super 15 last night.
James Greener
13th March 2011

Friday 4 March 2011

YET MORE BLARNEY


In three weeks time we will be treated to another TV appearance by Reserve Bank Governor Marcus who will announce whether or not their spell of agonising over tea leaves and economic charts has resulted in decision to change the price of money. The markets seem to think she might as there are now distinct signs of rates edging up in certain areas of the money market. Clearly the prices of plenty of important stuff like fuel and food are on the move and that would suggest that consumer inflation will also rise. And Chapter 4 of the Central Bank Governor’s Text Book suggests that rising inflation is often best dealt with by making money more expensive. My own analysis of the alleged relationship between these two parameters has always failed to detect any sense or effect in the suggestion. In America they have followed the recommendation in the appendix of the same Book and removed from the inflation index those things whose price tends to go up.
But that is not the only place where uncertainty and volatility are putting in an appearance. Share markets world wide are jittery and off their highs of both price and sentiment. The US dollar has seen some outflows and in most other currencies (except the rand) the gold price is setting records. Oddly one of the presumed most sensitive markets – the US 10 year bond yield – is holding steady  so maybe this time the smoke is without a fire. It is puzzling, however, that the world is content to lend money the world’s most indebted nation for 10 years at just 3.5%pa.
Except for the R114 bn in social grants and the R76bn in interest payments to the folk who have lent the government money, virtually every other cent that the state spends (R790 bn) goes to individuals (or the businesses they represent) who are expected to deliver either goods or services. Most of the individuals are state employees who have only their services to offer; which crudely means turning up for work and doing something useful for about 8 hours a day. An astonishing number of “civil servants” are actually “on suspension” which means that they are required to do nothing!  The critical job-creating portion of state expenditure lies in paying private citizens to deliver goods which in turn should trigger a cascading demand for durable and consumable items out into every corner of the economy. Even a small party to celebrate a new presidential spouse should ultimately involve a wine farmer, a jeweller and a band. A large piece of yellow machinery that is used to build a dam or a road will need drivers, fuel, parts, mechanics and someone with a red flag behind it. But a growing number of tax eaters are discovering that they can pocket the cash and deliver nothing, thus cutting off the cascade. This results in the lack of service delivery that voters and taxpayers (by no means identical groups) are increasingly unhappy about.
From the perspective of the share market it does explain the profitable consumer goods sector and the deeply troubled heavy construction sector. It is better to be selling premium whisky and cavernous luggage for shopping trips to Dubai (just avoid Tripoli on the return leg) than providing the equipment and supplies to build and operate schools, hospitals, libraries and sewage plants.  It is also worrying to see that the banks are continuing to battle, with earnings in some cases going backwards. Despite the suspicion that many of us have about the banking business it must surely be true that if they are not making money, then it unlikely that any other growth is going to be sustainable.
I was in a pub on Wednesday night where a gathering of good old boys of the kingdom suddenly began ordering Guinness and speaking funny. After Ireland scored the winning runs against England the situation deteriorated By tomorrow, however, they will all be Sharks supporters in black and white with not a shamrock in sight. Funny game cricket.
James Greener
4th March 2011