TIME TO TAKE SOME EGGS OUT OF THE BASKET

Have you ever had a good look at one of those “Withdrawal of Cautionary” Announcements”? Usually there is a bit of cryptic waffle, the gist of which is that whatever it was that was troubling management will no longer do so. And then there is that little gem of a phrase along the lines of “…caution is no longer required to be exercised by shareholders when dealing in …”.  Now I am all for disclosure of every little snippet of news about the companies whose shares I might own or buy and I have no wish to decry the Cautionary Notice system but the legal wording is a little misleading if not quite cynical. It implies that as long as a company is not “under cautionary” then life for the shareholder is a breeze.

In my view you had better exercise caution WHENEVER you contemplate a share transaction. The problem is that the unexpected price jump (or so called “black swan event”) is just as likely to be caused by developments that occur well beyond the company’s own control or knowledge. And very often by something that is never identified. All it takes is for there to be more buyers than sellers (or vice versa) and bingo – a price move.

This week the US Federal Reserve did exactly what everyone in the market predicted and expected and raised rates 25 basis points. However, the rate announcement was accompanied by some faintly gloomy observations about inflation. Apparently this was not in the script and suddenly people are starting to ask; “The oil price is HOW high?”.  This is not the only item that is attracting long overdue attention. There are many other indicators and numbers that us bears and doom-mongers have been fretting over for several months already. This seems to have unsettled further the US markets, and the next thing there were bucket loads of caution being needed by investors.

Our own Top 40 index is nosing about just beneath the 12 000 level after a high of 12 500 odd just before that close-out shindig I told you about last week. I also told you that neither I nor anyone else know if this is the beginning of the end but I do know that it marks the end of the beginning that started at the 9 000 level in July last year. So there’s no need to be shy about taking a few profits and pushing the portfolio liquidity levels up. Do remember that I regard the banking sector preference shares as near-cash instruments and their price should not move much at all even if ordinary shares take a thrashing.

These short weeks are undoubtedly making it harder to remain focussed and to keep in touch with news from overseas markets, which are not taking off quite as much time as we are.  Usually this four day Paschal break is one of my favourites and I give no thought of prices and portfolios. However, this time I might even be tempted to seize control of the TV remote from time to time to see what Wall Street is doing. Just “exercising caution” you see.

Please have a happy and peaceful long weekend.

James Greener

24^th March 2005

IS THAT A BEAR IN THE EASTER BUNNY SUIT?

Now that was a pretty hectic week. On St Patrick’s Day the market endured one of those quarterly futures close-out events. This means that share prices dance to the tune on the fiddles of leprechaun-like derivatives traders. Normally these fellows keep away from the rest of us and lurk in dark places muttering about “the greeks”.  I am not ever going to try and explain what these are, except to assure you that there is nothing in the least xenophobic about it. But for a few days ahead of close out and on the day itself, market moves were being described as “irrational” – which is code for “no longer going straight up”. In fact some shares – notably the rand hedge ones – were reasonably strong, while many other market favourites were a bit wobbly. Which also describes the condition of some of the dealers who even now are just returning from the infamous close-out party.  Just as well there are only four per year.

Sasol continued to run and run as shareholders failed to join in the government’s concern about the company’s promotion policy. I have yet to see any report from the US that Washington is disappointed that Disney’s new CEO isn’t Mickey Mouse.

In addition to an oil price setting lifetime highs almost every day, the rand has been leaking a bit and is trying on a new big figure coat in the dollar department (i.e. it’s over 6 to the USD!) and looking quite stylish.

Remember that if you would like to take a simple position on a weak rand and strong gold price, then the Exchange Traded Fund (ETF) called New Gold is listed on the JSE and trades just like a share. Its theoretical price is 1/100^th of the gold price in rands and this month has run from 2550 cps to 2725cps. Another ETF, called New Rand (and also TrackHedge)  is a basket of shares with rand hedge characteristics has run from 940 cps to 1000 cps in the same period.

The usual question is being asked with slightly more urgency these days. Is the bull market over? No one knows of course. It sounds clever, until you think about it, to say that the end is definitely getting closer. I am intrigued to hear just how many traders have been getting short (code for selling) or buying protection (put options).

For a reason that I haven’t worked out yet – and probably won’t bother to – the number of short weeks and long weekends at this time of year seems a bit fewer than in the past. Nevertheless, I am going to take some days off here and there. I have a graduation in Grahamstown to go to and a tent trip in the bush to try out. I shall not be taking a fishing rod on either excursion. I will take a cell phone though. I am worried that in the confusion created by the close-out and these holidays, the bear might just sneak in and set up camp. And he could cause more unhappiness than even the prospect of having to watch four South African sides competing for the wooden spoon in the Super 12. Fortunately there’s a Grand Prix early on Sunday.

Have a safe and happy long weekend.

James Greener

18^th March 2005

ONE PLUS I TO THE POWER OF N*

It was reported this week that the President of Nigeria has expressed the opinion that compound interest is “the worst thing in the world”. People like me who are fans of that everlasting market commentator, Richard Russell, will know his view that the compound interest tables are just about the best reading one could wish for. One of these gentlemen is a borrower, the other is an investor. Tax free compounding is the only simple and certain way to grow wealthy from investing, which is why I tediously harp on about dividend yields. One really should take every advantage possible from these tax exempt morsels that the tax man throws to us under his table.

Of course buying cheap and selling expensive is also a certain route to investment satisfaction, but it is hard to do properly. It does look and feel easy when much of the market is seized by a bull of the size and longevity of the one that I believe is now tiring. And to quote an old friend, “never confuse genius with a bull market”.

Whether or not it was the threat from Nigeria to default on its USD 34bn foreign debt that caused our own bond yields to rise quite sharply this week, one can’t be sure. There has been some net foreign selling of the bonds; not big amounts, but I suppose the rising yields tell you that locals were not in any hurry to soak up the supply that was appearing from across the water. Yields in fact seem to be on the up in many other places as well; most critically the US, where higher interest rates must be alarming for the world’s largest borrower. So far there have been no significant reactions in the equity markets to these developments. But we need to watch them carefully.

This month the majority of the bigger sector indices are up. However, the really big sector, Other Mining, where both Anglo and Billiton reside (the latter now less than 3% behind the former in size) is down about 4%. This cancels out the nice gains in Richemont, Sasol and SABMiller and the All Share index is pretty flat on the month. The banking sector index is also unchanged despite stellar results from Standard Bank and others. My valuation toy suggests that RMB Holdings and FirstRand are the pick of that bunch. If you fancy a stab at the exporters then Anglo itself seems to me to have done too little for too long and Metorex looks as if it produces many of the minerals that the Chinese need! A slug of rand weakness will do neither of these any harm at all.

The rand is one of the worst performing currencies so far this month, losing almost 0.5% against the USD. This is small stuff, however, compared to the greenback itself which has crumbled almost 1.5% against the Euro and 0.8% against the Swissie in the same period. No wonder Bush took his own kit, fuel and food along with him when he popped over to Euroland to say “Bonjour” recently. I reckon he might also be muttering about the evils of compound interest in Japanese and Mandarin some day soon. It is the kind folk who speak those languages that have lent the States so much money these last few years.

I shall be at Ellis Park tomorrow to see for myself if my hope for the Cats has any foundation. May your weekend be more fun.

James Greener

11^th March 2005

 *The basic compound interest formula in words.

THE BEAR’S PLAN FOR UNITY

Some politico offered his opinion, reported earlier this week, that “Winning wasn’t everything … (and that a) united SA was a more important goal”. He was, sadly, talking about sport, a topic that is clearly not his speciality. If he really wanted to unite South Africans he should ensure that our teams beat everyone in sight. He could come and ask the fund management industry who will show him how even just a short record of superior performance will attract new money like bees to the aging grapes that are now hanging off the vine on my patio. Nothing catches attention like the sweet and sticky aura of success and the chance that if you hang around you might just get lucky yourself.

Why did the Reserve Bank think it necessary to spend almost R6m to advertise the new series of bank notes? For very much less than that they could have rented a few choppers and hovered over the people dropping samples of the new folding money and achieved instant recognition and delight and a great deal of free publicity. But I suppose those old killjoys over at the tax department would have said “No.”

The market has continued to power ahead. So much so that the dividend yield of the Top 40 index is now at 2.4% -- a level last maintained briefly in early 2001, shortly before the rand really started to slide. The smaller shares are better with the mid-cap dividend yield at 3.23%. Folk who are not perma-bears like me, will cite the Top 40 index’s p.e. ratio at just 15 as a mitigating factor. This is not an all time high, but it is also not that common, so I’ll resume my gentle siren of warning that this market is getting fully priced again and selling rather than buying should be the action of choice.

I know that many of us have a few bets on the possibility (inevitability?) of the rand sliding quite substantially and providing some fun in the resource shares. But a simple comparison of the JSE mining index with the price of krugerrands (a useful rand denominated proxy for commodities) shows that mining shares are at their relatively most expensive level in at least ten years. An increase in the price of krugers (arising from a decline in the rand) would make the relative price of the shares even higher and the situation would be exacerbated if the shares themselves rose as well. So on a historic basis, our bets might not pay off as much we might wish even if the rand does tank. But it is hard to sell one’s gold and platinum shares.

One reason that I am starting to hear for this market’s strength is that investors have nowhere else to put their money. This is an old and entirely discredited excuse and its reappearance makes me fret. Given the massive and apparently surprising surge in the credit growth numbers published recently could I suggest that paying off the debts could also be a place to put money? Real interest rates in SA are still jolly high.

And to return to that politician’s view. Can you just imagine the excitement and unity that will happen when SA fields teams that soundly and repeatedly thrash the Aussies at cricket? Or the All Blacks at rugby. And the world at every other sport (except of course baseball, since we don’t want to attract America’s attention).  But it will never happen while the politicians select the sides.

The Cats for the Super 12!

James Greener

4^th March 2005

ROTTEN FISHING

Since I the last edition of Tidemarks there have been quite a few interesting events, some of which deserve comment. Top of the list might be Minister Manuel’s budget speech, or perhaps the economic statistics suggesting slowing economies in Europe and the Far East. Then there was Joburg City’s call for tenders to supply a Human Capital Satisfaction Measurement Survey, and the news of the sale of a downtown city block for just R5.5m. This might sound low but would, in my view, far exceed the total value of the whole of the city (?) of Luanda, capital of Angola; a country from which I have just returned after trying to catch fish in the majestic waters of the Atlantic ocean.

The sea was almost the sole familiar thing about the whole visit. The rest of the place is wholly appalling, but nonetheless interesting. There is an explanation but no longer an excuse for the apparently deepening squalor and dilapidation. Many of us in South Africa are all too painfully aware that this land has suffered some of the continent’s most dreadful strife and bloodshed. But still the oil and natural wealth is failing to create any affluence for anyone outside of a very exclusive elite. The disintegrating and filthy airport is thronged with characters straight from the script of a bad movie about dirty deals and blatant corruption. I thought that the crumpled, sweat-stained linen jacket and crushed panama hat had died with the Graham Greene novel. The only hint that the times had changed was the cellphone jammed against the ear.

The crumbling roads are lined with the remains of horrific accidents involving totally unroadworthy vehicles. The minibus taxi that provided the three hour transfer to the fishing lodge had seats which were not fixed to the floor and a driver who never stopped drinking beer. Potholes in the tar stretch for hundreds of meters – and are almost as deep. Ironically for an oil producing nation, fuel is often difficult to find.

As in most places where the people have no expectation of anything from anyone – especially their government, there is an incredible flowering of commercial activity. The miles long traffic jams and absence of traffic lights have encouraged huge growth in the career of street vending. The only thing not on display for sale from the crush of humanity on both sides of every traffic lane, were stocks and shares. Actually, also missing, was any form of handiwork or craft – maybe because there is not yet any real tourist market in Angola. Nor is there likely to be.

The fishing lodge was fantastically located on an island in the middle of a deep and fast river that, just before it enters the sea, flows parallel to the surf line for several kms, separated from the ocean by a very narrow sand bar. Giant Tarpon infest the waters. The juveniles roll in the fresh water at one’s chalet door and the 60kg adults lurk in the deep sea crashing on to the beach just a hundred meters beyond.

But in five days I never caught a single one of them, so my human capital satisfaction measurement result is pretty low. But while I prepare my fishing kit for sale this weekend I will at least be able to watch the start of the Super 12 rugby season. And it’s one of those weekends when we are certain that at least two of the SA sides can’t lose.

It’s nice to be home.

James Greener

25^th February 2005

DRESSED FOR EXTINCTION

On my way into the supermarket to fetch a cheese and ham roll for lunch I encountered a cheerful sunburned fellow in complicated boots, green epaulettes and snug khaki shorts. He was soliciting support for the cause of wildlife conservation. This got me thinking about the appropriate uniform for the time when I will have to take up station at the door of Pick ‘n Pay, shaking the slotted tin for donations to save an equally endangered species –  the South African Stockbroker. In ten years we have gone from being a large number of qualified and experienced professionals, mostly respected, who owned both their own firms and also the Exchange itself, to being an almost invisible and unrecognised coterie of greying grumblers generally griping about the way things have turned out.

Unlike the riverine rabbit or the blue swallow, I know that few will lament the drying up of this particular gene pool. Public perception of the stockbroker was usually dominated by stories of spectacular fraudsters and pricey automobiles. However, in this age of international investment banks, CDOs cubed (don’t ask!), hedge funds and the rest of the sophisticated and modern money business, I am always coming across bewildered investors anxious for the service that a professional stockbroker used to provide. That service would include a brief economic scene setting, basic tax information, reasonable and appropriate portfolio advice and very importantly, knowledge of the paths through the jungles of administration and record keeping.

Now I know that I am being nostalgic and romantic to think that the modern investing environment has any place for the amateur investor. Despite its claims to the contrary, the JSE Securities Exchange is neither accessible nor affordable for the man with even as much as R100 000 to invest. I think that this is unfortunate and sad; especially when the suggested home for these funds – the unit trust – has in my opinion, a very poor record. The irony is that there are now more unit trusts than listed shares, so the investment decision for the “small” investor is in fact made harder.

I of course acknowledge that the current stock exchange system is much safer and perhaps a bit fairer and more efficient than what we had ten years ago. Many investors, particularly the computer-literate ones, are delighted with the ease of on-line trading and the access to information, two jealously guarded privileges of the old broking firms, now made public. However, it has been the nature of this technological revolution that the expected cost reductions did not materialise. Some of the extra costs arise from regulatory and administrative burdens imposed by the bureaucrats who realise that with the genie now out of the bottle, the task of policeman just got much larger!

But, back to the problem of the uniform. Dark suit, black shoes, white double cuff shirt, ostentatious cufflinks, old boys tie?  Sounds OK, but the problem is that ever since I came to work with these old fashioned stockbrokers at Watermark I haven’t really needed a suit. I find my friends and clients are more interested in my time and ideas than in my clothes.

Have a great weekend

James Greener

18^th February 2005

PEOPLE POWER

The other day a fax arrived on our machine here in the office that, I think, was not intended for us. But I read it anyway. It was an invitation to attend the 50^th birthday party of Joburg’s illustrious mayor. But what caught my eye was the last line, after the bits about when and where the festivities would be held, which stated: “Presents are Welcome”.  How refreshing to leave the guest in no doubt about the host’s expectations. Imagine an investment report that ended with the words. “Orders are Welcome”. Instead we drop hints that one should think about accumulating on weakness or sell into strength or similar weak-kneed non-committal phrases. When what we really mean is that we hope that you are impressed by all the work we have done in compiling the report and will reward us accordingly.

The Governor’s decision this week not to change interest rates has also been labelled a cop-out by several sections of the market, especially those who had put together nice little positions that would have scored from a rate cut. Probably the most important reaction has been seen in the rand which may be trying to reverse the softening that it began in the final days of last month. The share market seems unconcerned with what the Reserve Bank is up to, and the All Share index has already scored better this month than it managed in the whole of January. However, the dispersion of performance is very wide with the service sectors taking a bit of a hammering. Resources and goods are doing OK. There’s nothing special happening to financials.

I have just spent a week in the E Cape, where the papers wisely devote little space to financial and business matters beyond the price of pineapples and the outlook for ostrich products. Big news was the fire that destroyed a chunk of Grahamstown’s Church Square. Other impressions gained from a leisurely return trip along the back roads of the country were mainly of population pressures. It is astonishing to see how many new small housing units have popped up in huge sprawling townships alongside the old ones outside every dorp and town. There is clearly a massive shift of people from the country to the town and this must be a significant source of the consumer boom being experienced. Also noteworthy were the number of fresh graves visible in the cemeteries. I am certain that we are not getting true or accurate data about just exactly what is happening to this country’s demographics.

Back home with the Biz Day newspaper my anxiety was deepened by the number of stories that show the rapid encroachment of government’s market-unfriendly and   interventionist pronouncements and actions. I was particularly alarmed by the notion that pension funds should not make achieving a high return their top priority. Rather they should support worthy causes, or at least causes deemed worthy by someone else. I was thinking about the reaction of a pensioner on being told that the fund had dried up but not to worry because his cash had been used to “invest” in community projects. Now there’s a fellow for whom presents will most definitely be welcome.

It may almost be time to talk about cricket again.

Keep Well

James Greener

11^th February 2005