WHO WANTS TO BE A BILLIONAIRE?

One does have to wonder why the Africa Ports and Harbours Show was held in Sandton instead of in one of the country’s actual harbour towns. Is our government taking their foolishness about threatened sea level rises to new heights of ridiculousness? 

Suddenly it is abundantly clear why the new mining workers union, AMCU is attracting members in droves. The leadership there is blissfully innocent of any arithmetic skills and they share our president’s deep and contemptuous misunderstanding of economic relationships. On behalf of their members they are demanding that wages for some categories of worker be increased by 100%. Of course they have not pointed out that in order to meet that demand, those workers whom the employers would have to fire would suffer a 100% decline in wages.

The most obvious impact that this sort of combative labour relations is having on our own small and mysterious corner of the economy, is that Anglo American has now slipped to only the 8^th largest market capitalisation on the JSE and is now smaller than Sasol, Naspers and MTN.  

There is something unsettling about the state’s claim that they have ferreted out collusion and malfeasance in every corner of the private sector they have bothered to look into. Certainly most companies singled out by this perhaps rather arbitrary process have readily agreed sometimes to make very substantial payments which they naturally insist do not constitute admissions of guilt. Whether they do that merely to keep the peace or to prevent further investigations and disclosures is unknown. However, the undeniable attitude of smugness shown by the authorities responsible makes one wonder if there is not some form of bounty hunting taking place. Certainly the fines collected seem never to go to those who were disadvantaged by the alleged crimes.

 Talking of substantial sums brings us to the R2.5million fee required of each firm lodging an application to run the National Lottery. This comes after those firms have already paid R50 000 each for a copy of the Request for Proposals and attended a two-day briefing session. The justification for such outrageous amounts lies presumably in the declaration that the winning bidder gets a contract worth R40 billion. This is shocking and appalling. While no one will begrudge the operator a reasonable profit, any monies over and above that should surely go into the Lotto beneficiary’s fund.  And don’t even go into the fine print about how the National Lottery is guaranteed freedom from competition and the right to operate a monopoly. Again I am reminded why I try never to buy a Lotto ticket and instead just take the vastly better odds of picking winning shares.

Adding to the mining sector’s woes is a rather nasty bear market in the dollar price of gold. Even after reducing this fall by looking at it through the lens of the rand dollar exchange rate it is starting to get worrisome. Isn’t it odd how people all over the world after years of choosing a hard asset over holding a currency have now suddenly with no obvious trigger incident or reason changed their minds? One of the biggest bears of the season can be seen in our SA bond market, where investors using pounds will have taken losses as large as 25% only half of which can be attributed to the currency. It will take lot to persuade them to come back one day.

It is one of those winter weekends when the TV couch is going to take a beating and the remote-pressing thumb will need constant refreshment. Super Rugby returns to Kings Park but fans are more concerned by the way the management are still unable to solve the beer ban yet were able swiftly to hand the coach  a shabby dismissal. At Wimbledon we watch to see who will next manage to trip over the finely mown grass and from Corsica there is the start of the race to find out whose pharmacological team can travel the furthest round France on a bicycle without detection. The Silverstone GP is always fun and not just because the corners have names not numbers.

James Greener

28^th June 2013

FOR WHOM THE TOLLS TOLL

So just how much deeper could this bear drag the market?  Well the answer is a mighty long way. The declines suffered so far are really not yet at all severe when expressed in terms of valuation measures such as the price to earnings (PE) ratio. This bear has not yet destroyed even a half of the gains that the All Share index achieved since the little hiccup and low point in the middle of April, a mere two months ago. That index has so far scored a maximum decline of just 6.4% from its peak above 42 200 on the last day of May. Self respecting bears can do far more damage than that. At the low of the 2008/9 market correction, investors were paying an average of just R9.00 for R1.00 worth of historic earnings (that is the PE ratio was 9). Currently the cost of the same amount of earnings is about R16.00 (PE ratio now 16).  So if the market were to return to that lower PE ratio, prices would need to fall at least 40% from current levels. And that’s not the end of the gloomy news. Thanks mainly to the unfolding calamities and tragedies in the mining businesses listed on the JSE, average earnings of the overall market have been falling steeply. If this were to continue, average prices would also need to fall just to maintain the present PE ratio.

Even when using an index such as the Financial & Industrial, which excludes the mostly dismal mining and resource shares, the picture is equally concerning. While growth in the average earnings of these sectors has slowed a little, it is still satisfactorily positive but the index itself has outpaced that growth in the past few years. Therefore, to return to the PE ratios experienced in 2008/9, current prices in that index would need to pull back more than 50%. And then only a particularly bearish analyst will also point out that economic conditions are such that even the financial and industrial sectors might also soon begin to report negative earnings growth.

And that’s what has happened at Telkom where earnings apparently are down almost 75% despite holding a near monopoly on fixed line infrastructure and a stranglehold on almost all internet traffic for which they charge exorbitantly. The attitudes of the politicians who allegedly are in charge of our communications these days are an echo of a previous government who also felt no good would come of letting South Africans enjoy what the rest of the world had. On that occasion we were denied television. Now we are denied cheap and plentiful bandwidth.

Remember that fearsome price collapses like that suggested by these calculations do not take place overnight. Indeed they can take months and years to unwind and before they end many investors will have grown bored and gone to find something else to do. That is of course when we must all remember to buy.

There’s a nice little side-battle taking shape at the edge of the big one about the tolls on the lovely new roads around Joburg. The company that was responsible for installing the fancy kit that will scan the passing traffic and calculate the tolls due is based in Austria. It has been explaining to their shareholders there how things work in Africa. Despite having installed and tested the gear more than a year ago no actual money has yet been collected and everyone must wait for the dancing and singing to stop. Reportedly the company hopes that their share of the income will be some 50 million euros per year. Sanral, the local operator, however, would appear to have other ideas. They are telling everyone that no money from the tolls will leave the country. This could be fun, as long as you are not Austrian.

The roads around the bowling club are being cordoned off in preparation for a car show starring some alleged celebrities from the BBC. Huge excitement is promised and large crowds are expected. Hopefully, however, the Metro Police will stick to their promise and go on strike over this weekend. Without the clueless cops messing up the traffic it might still be possible to get there for a beer. Hopefully the rugby deprived folk of Nelspruit will turn out in better numbers than we managed at Kings Park last weekend for the back to back tests. It must be pretty dispiriting for two national sides both playing an away game to appear in a near empty stadium.  

Remember that Monday is a holiday. It’s when we celebrate being young again.

James Greener

14^th June 2013

BEAR BAITING

This bear is starting to grow up. It is now a week since the All Share set a record high and since then every day has seen a bit of value shaved off the market. Some days as much as 2% has been lost The major indices suggest that the declines have been more or less similar across the market with no area doing worse than another. Perhaps, however, prices of the mining shares will get a little extra battering now as a consequence of the very recent promulgation of yet another piece of legislation that will smear more layers of restrictions and costs on the already reeling industry. One executive in that business has publicly stated that the new laws will cause most mines to go “ex-growth”. Reaction from the Marxists who run the country but have never run a spaza shop has been predictably nil.

SARB Governor Marcus has revealed that she also is deeply concerned that the government is rapidly making matters worse. Her pointed reference to the lack of leadership from the top will almost certainly earn her a slew of hysterical and stinging rebukes from the various idiots and talking heads who feel the president is unable to speak for himself. It will be interesting to see if she manages to keep her job.

The insistence of our leaders that a socialist program WILL be the only one permitted is terrifying and of course assured of failure. The reasons why this bear might turn into the real deal with claws capable of tearing 25% or more out of this market are starting to gather out in the open at the evacuation assembly points.  Parts of this nation’s structure are now burning fiercely.

But the conflagration has not been spotted by everybody. This week brought news that the effects of a law passed 100 years ago are to be investigated. Reportedly that legislation, like so many today alas, proposed a political allocation of assets – in that case, land. Probably, like the ones that are being crammed into the statute books today, it was bad law. But there are much more pressing problems to which the state should direct its very limited resources than something that the market is now free to sort out on its own. Today there is no barrier to any citizen owning any piece land – except for the tens of thousands of hectares owned by the state which, in some places, are entrusted to the care and whim of unelected traditional leaders. Now that’s a problem in need of a solution. Just imagine the mobilisation of capital that would result if true owners were granted freehold and so able to raise mortgages.

The rand recovered a little as earnest talking heads declared that its collapse had been over done. The problem when a true bear market arrives is that sellers get jammed in the exit doors each offering to sell their bit for less than the previous offer. The actual true value – if indeed there is such a thing – is nothing more that a number  scribbled on a scrap of paper pinned to a notice board in a draughty corridor. No one pays much attention. The sole price is the one just agreed. This is true in all free markets.

The rather unusual event of a double header test match program takes place at Kings Park this weekend. For the price of a single ticket fans will get the opportunity to watch a test between  Scotland and Samoa before the Springboks take on Italy. Leaving aside  the fact that the current state of school geography will have many of the younger fans utterly baffled by the origins of two nations where the men don skirts as formal wear,  the real pre-match interest will again be focussed on the demonstrated inability of the stadium organisers to provide a pilsner in a parking lot.. A belated attempt to apply liquor licensing laws that for decades have been far more breached than observed has resulted in large numbers of unhappy and thirsty fans. Confusion about who can drink what where is widespread. It will be even worse if Italy manage the unthinkable. Much as India did to our bowlers.

James Greener

7^th June 2013

GEYSER ABOUT TO BLOW?

The Nenana River in Alaska freezes over every winter. As the spring thaw approaches the gamblers of the area erect a large wooden tripod structure on the ice in the middle of the river and then place bets on the date and time when the structure will collapse and be swept away by the resumption of the river’s flow. This year the ice broke up only on 20^th May (thereby apparently breaking a 97 year old record). Some thing similar is staring to happen in the markets. Stuff which has been steady for sometime is beginning to crack apart and people are falling into pretty cold water.

Our poor runt has lost more than 7% this week against the Yen and the Swiss Franc. Against the other majors the damage is above 6%. Blame for this has been placed on non-resident sellers of our bonds because that market has also been taking a pasting with yields soaring and prices plunging. The President called people over to listen to a speech which presumably was supposed to allay the widespread fears that his government had no clue what was happening or what they could do about it.  Unfortunately his words were taken to confirm exactly those concerns and the prices of bonds and the currency tanked even further. Now concepts such as interest rates and foreign exchange rates baffle even us pundits so it is little wonder, especially in view of who our pres. chooses as his financial advisors, that he too is all at sea.

In the USA the yield on the 10 year bond has popped sharply above 2%, and this has caused an outbreak of jargon-speak. If indeed there is a bear market beginning there too it is going to annoy and disappoint many officials  who were sure than programs such as Quantitative Easing, Sequesters, Fiscal Cliffs and dropping dollars from helicopters would ensure that things kept going smoothly.

At home the JSE share market may or may not be witnessing the death throes of a bull market. Prices have been swinging wildly up and down with the All Share index daily range rarely recording less than 500 points while daily highs and lows through the week have been fairly similar. Traders are engaged in a large and gruesome tussle and the volatility will be providing some hair-raising war stories about gains and losses. Investors should be content to sit wide-eyed in the grandstands and wait for the blood and dust to settle.

Total return of the All Share index in May is going to come out above 7%. This is an exceptionally high performance especially as there has been little in the overall economic landscape which normally might be expected to drive such optimism and excitement. Indeed first quarter GDP growth was announced this week at a measly 0.9%.

Despite yesterday being International No Smoking Day our largest listed share, British American Tobacco tops the week’s list of value gained through share price appreciation. Biggest loser on this list is First National Bank. I trust has more to do with the boss retiring than my application to them for a credit card.

The back cover of one of the those large glossy so-called life-style magazines that fall out of the morning paper from time to time, carries an advertisement from Eskom in which the power utility implicitly admits to failing in their task to supply the nation with sufficient electricity. The ad requests consumers to reduce energy demand by switching off hot-water geysers every evening. The odd thing about this undoubtedly expensive message is that it appears to be delivered by someone dressed to look like a geyser sitting on a smart leather couch. The rest of the surroundings also hint of comfort, but the effect is compromised by an untidy pile of exam scripts awaiting marking on the table within reach of Mr. (or it may be Mrs.) Geyser. Very strange. (No, its not a boiler suit.)

James Greener

South Africa’s 103^rd Birthday