Friday 17 June 2011

ROBBING HANS TO PAY ZORBA


The markets are frankly a mess. News items which in the past may have elicited one type of response are now just as likely to have the opposite or even no reaction. In the USA there are signs of yet another fad in buying shares in hectically overvalued companies where the assets walk out of the door on two legs every evening. Another bubble appears to forming around the huge numbers of very rich and label-obsessed Chinese who have discovered shopping as a contact sport.  Best to keep one’s head down and stick with the larger, financially healthy, well run and established companies that make and sell stuff we know and understand.
Once again the total absence of any formal economics training makes me unable to make any sense of the idea that lending money to Greece to help it pay its debts is either sensible or, more importantly, mathematically valid. At the end of the charade, Greece or which ever the particular basket case of the moment might be, is still in debt. Perhaps it now owes different people, but even that is not certain since there seem to be only a limited number of sources that have any money to lend. Follow the trail back through the thickets of lenders and borrowers and it is quite likely you end up at the door of the very same institutions that made the now obviously bad decision to lend the original sum to Greece in the first place. And too often the deeper tragedy is that those lenders turn out to have been using some else’s money left with them for safekeeping. It seems sensible that governments ought constitutionally to be forbidden from spending more than they collect and that debt in public enterprises should be used only for financing identifiable and specific infrastructural projects. It is wrong that an investor or lender of any amount should expect or demand a rescue from some benevolent third party – more often than not the tax payer – if it turns out that the counterparty fails to deliver.
The taxman’s complaint about shrinking revenue is a similar issue. A few years ago the government made the erroneous assumption that owning shares in a company is the path to instant prosperity. From this idea grew the policy of political allocation of resources which companies were strongly encouraged to facilitate. Since in most cases these empowerment schemes were characterised by a chronic shortage of actual cash it was surely obvious that companies would try to get the state to plug the gaps, since it was their idea in the first place. Elaborate deals were therefore concocted in which tax payment minimisation played a part. Hence the taxman’s moans.  This will of course be yet another example of the failure of command economics that its supporters will ignore and deny.
An impressive number of cell phone owners have RICA’d themselves with ID and proof of residence. The proportion is well above 95%, and since the stated objective of this annoying and intrusive piece of legislation was to help cut down on crime it is sad to see no report of this happening. Presumably that means that it is the people who have so far failed to RICA who are the ones responsible for all the crime and it should be simple to go out and pick them up. No, wait, we don’t know where they live. Uh Oh.
Investec have refreshed their delayed issue of a new variable dividend preference share. The interesting aspect of this counter is the very high (95%) fraction of the benchmark prime interest rate that will be used to set the dividend amount. They declare specifically that this is in preparation for next April’s change in tax legislation when dividend withholding tax at 10% is scheduled to be introduced. Other issuers will on that date have to adjust the fractions on their preference shares upwards to compensate shareholders. Until then the price of this INPPR will be presumably be high relative to the others.
I am told that the Bulls Sharks encounter this weekend is the BIG ONE. It will undoubtedly be fierce, and perhaps even a bigger game the World Cup final in a few months?
James Greener
17th June 2011

Friday 10 June 2011

BOXING CLEVER

One needs to be in a quiet place with no distractions in order to think about the information that the US government’s biggest creditor is its own Central Bank – The Federal Reserve. On behalf of the nation, the government has so far borrowed $1.3 trillion from the Fed – almost all of which was created at the click of a mouse or the rumble of a printing press. This process gloried under the name of Quantitative Easing, and there have been two sessions of this event known as QE1 and QE2 in the last few months as the US has tried to force its way out of recession.  However, that government, like many others, pursues a policy of every day spending far more than they collect by way of taxes. Some of the spending has, of course, to be used to service the debt, because if they did not do that then the USA would be in default – just like Greece – and everyone knows that the US is way better run than Greece. I hope you are following this.
Washington has been spraying the rest of this borrowed cash around in the hope of making its citizens feel prosperous and optimistic again. Sadly for the suits, this has not happened. The reality is that job prospects, wages and most significantly house prices in the US are all still very subdued. Another factor is that the second biggest category of lender of cash to the US Treasury is the US householder, who is at last starting to wonder if he will ever get all his money back.
A great number of those freshly printed notes found their way into the hands of folk who decided to spend it in the share markets. This helped to keep prices looking rather buoyant for several months. But now comes the news that there might not be a QE3. Buyers are disappearing and US share prices are doing what they probably ought to have been doing for a long time – falling. Even in those markets where their government has not been so financially imprudent – like here – bulls have also been standing back and the JSE had a poor week
It is hard not to be cynical about the reason for the unexpected shuffling of the boards of the big state owned enterprises. It is true that none of the organisations was performing in an exemplary and admirable way but in some cases the deposed incumbents were new and inexperienced (much like their replacements) and had not had time to show their stuff. But as we can see with the proposed information secrecy bill, the government appears to be tightening its grip everywhere and perhaps the enterprises were straying too far “off message” and needed to be reminded that ideology comes before customer satisfaction.
On this theme, Durban must now be one of the largest cities outside of China and North Korea where the mayor is a communist. Mayor James Nxumalo, draped with the city’s R2.3m mayoral chain of office, looked rather un-proletarian but declared himself to be an activist and servant of the people without any aspiration to being a capitalist. Well that sounds very good then. Good luck James.
And now I am off for a beer with a squad of loyal and fanatic Sharks supporters. I shall of course tell them about the TV pundit I watched last night who felt the Lions were in with a good chance and how I hope he is right. Of course I won’t admit to them that I really do want to see three SA teams in the playoffs and will move swiftly on to the topic of whether we can hope for another toothy South African lad winning a golf major at the US Open.. And then of course we can discuss the very first IBF women’s welterweight belt being fought for on African soil tomorrow night. It is between a South African lass and a New Zealander. I wonder if she starts off with the Haka?
James Greener
10th June 2011

Saturday 4 June 2011

MANUFACTURING GROWTH

Why do you think our President JZ went to see the Colonel in Tripoli earlier this week?  I really hope it wasn’t to offer him the facilities of the state guest house now just refurbished after the last despot departed. Aside from boosting sales of Deep Black hair and moustache dye in Pretoria there seems to be no other upside to hosting that rather tatty character here.
The news that the economy had grown at its fastest pace in more than three years was received with some doubt by us bears. The puzzling detail was that the biggest single contributor to this growth was the manufacturing sector which does not currently seem to be happy with its order book. During the second half of 2010 the Industrial index earnings base did put in a rise of about 8% from the depressed level that followed the 2009 decline. Since then, however, reported earnings from JSE listed industrial companies have been pretty flat and we will need to look elsewhere for something to propel the GDP as much as this. Another satisfying result of the unexpectedly perky growth is that many of those other statistics that are expressed as a percentage of GDP are looking much healthier. In particular the R149bn government deficit is now just 5.2% of GDP. This is a ratio that many other nations like Greece, Portugal and the USA would be very pleased to have. Furthermore, government expenditure has also backed even further away from breaching the 30% of GDP level. If all these numbers are true and valid we have lots to be proud of. But why are so many people unable to find work?
However, it will take a much bigger fall than we saw on the JSE this week before most shares on the JSE are no longer overvalued and trading at prices that are discounting earnings rises far larger than can reasonably be expected. A number of new listings and plenty of capital raisings are doing their bit to suck up the cash that is looking for a home. Amazingly even the outfit that builds and operates the toll roads saw its bond offer many times subscribed. Some of that debt is government guaranteed but still they are the guys who have built these roads but have not been allowed to collect their tolls yet.
But lending money to suspect outfits is all the rage. In the USA long bond yields are far below even the official inflation rate and yet many investors seem anxious to pile in and enjoy an assured erosion of their wealth. One day someone in Washington is going to discover the lever that lifts interest rates and give it a hefty tug. “Then”, as a colleague once said “it will be viewing unfit for children.”
About the only crime that Wal-Mart has not yet been accused of wanting to commit now that at last they have been granted permission to come and risk their own money in SA, is that they will be selling contaminated German cucumbers to the poor and helpless consumer. I do hope that someone is keeping a list of all those people who have predicted that the opening of a new shop will cause the end of the world. It would be fun to see which of those on that list might actually be tempted by the allegedly low prices of this new entrant.
The words “if” and “then” are getting a vigorous airing in the pubs of the kingdom at present as Sharks fans work out the various combinations that will get them to the final. In the event that things go awry I suppose that there will be widespread support for the opinion that the Super Rugby season has been far too long, especially as this is a World Cup year. Lions supporters have an easier sum to do.
James Greener
4th June 2011