KEEP A CLOSE WATCH ON THE BULLS

The market’s extreme gyrations these past few days prompted me to run the “pain index” calculation. This measures the fortunes of a legendary (but supremely unlucky) day-trader whose every purchase is made at the day’s high while every sale manages to set the day’s low. You will not be surprised to learn that the pain index is currently very very high. Short-term speculators who rely on volatility should be satisfied but alert!

At its worst, the all share index was almost 10% off its all-time high, set just ten days earlier. The biggest hit came on Monday when the daily range was nearly 4%. Investors should not be panicking though. The market is still better today that at almost anytime in the first quarter of the year. We have had an amazing run and things were getting overcooked. However, vigilance is always better than complacency. My analysis suggest that if the market were to return in the next 12 months to the sort of (good) value levels last available in early 2003, then this would require the index to decline something like 25%. Whether or not this will happen, no one knows, but it may be a useful figure to keep in the back of one’s mind. Key to this calculation is the assumption that earnings will continue to grow, but at around just 15% pa. This is considerably lower that what the companies have been enjoying in the last few years.

I am innocent of any knowledge of commercial law. However, I would have thought that the rule preventing companies from funding others to purchase their own shares was a necessary precaution and should not be struck from the statutes. Apparently, however, this is about to happen and will add yet another distortion to the efficient allocation of capital and resources all in the name of transformation. I was therefore pleased when Mr Khumalo, this week, struck a blow for those of us who believe that a willing buyer using his own money, who finds a willing seller who actually owns the asset, is the only way to operate an economy. He managed to stun some people who believed that his previously disadvantaged background would embarrass him from taking a tidy R70m profit in a rather audacious trade. Buying cheap and selling expensive is the way to go and sure beats trashing the streets outside parliament while striking for poverty. More evidence that governments are terrible at business, arrived with the R2bn loss reported by the state-owned arms manufacturer. To fail to sell guns when almost everyone on the planet is at war is not a sign of success.

Equally unsuccessful are the “13 national institutions that (have) anticorruption work as part of their mandate”. This report was juxtaposed with the news that the state is currently investigating 35 000 reported cases of alleged fraud in social grants. This number is, however, not all that large when you discover that the government this year has identified 11m poor people to whom it will distribute close to R60bn in aid. It’s surprising that the leakage is not worse. More worrying, though, is the realisation that the aid amounts to just R5 250 per poor person per year and comprises just 12% of total government revenue. This redistribution business is also not working is it?

We all hope of course that the bulls will distribute the ball to the wings efficiently tomorrow and crush the Crusaders. If they don’t then I expect dark mutterings from Sharks fans who probably still feel they were robbed of their trip to Christchurch.

Keep warm and safe please.             

James Greener

19^th May 2006

SELL IN MAY AND …….THEN WHAT?

There are several big stories from the markets this week. But I think the most interesting one is that it looks as if people are exiting our currency. We are all accustomed to watching the rand/dollar exchange rate. Indeed, there are illuminated displays alongside the freeway that allow travellers to keep in touch with the number. One such display alternates the rand/dollar rate with the ambient temperature, which in this recent cold spell has been causing more dismay than the currency.

But the complication is that the US dollar is fighting its own war and is sustaining some nasty looking wounds that may one day prove near fatal. While the rand’s decline versus the USD is attracting attention, it is against other mega money such as Yen, Pound etc. where some alarming action is starting to unfold. A need to understand relativity is not confined to cosmologists.

In fact, action is unfolding all over the globe. In the US, the scheduled meeting provided the expected hike in interest rates and the accompanying statement provided the usual rich pickings for economists to squabble over. This time it seems the excitement hangs on the appearance of the word “yet” in some otherwise insignificant paragraph. The gold price has soared through the $700 and $725 levels without pause and the copper price is now so high that the threat from cable theft to our phone conversations and data transmissions is also increasing.

Folk who find fascination in round numbers will have noted that the All Share index is having trouble clinging to the 22 000 level. “Is this the beginning of the end?” the cry goes up. Chartists have drawn my attention to the fact that the JSE has recently been rising at a rate last enjoyed just before the 1987 melt-down event. My own work on this phenomenon was to see what it looked like in real terms (i.e. after correcting for inflation) and an even more dramatic picture emerged. The present bull market is actually more similar to the one that preceded the decade-long bear market that began in the late 1960s. But of course, each time it is different. The market will eventually, pause or decline or perhaps even crash. But when and why is unknown.

Soon after I joined the young and exciting team here at Watermark I was introduced to the alliterative phrase “Turnaround Tuesday” In the past ten dozen Tuesdays us bears in the office have chanted these words while shuffling around the trading room. So far it has not worked. Perhaps next Tuesday is the ONE?

Readers may have noticed a number of developments among the shares listed in the property sector. Investors are being invited to request a copy of the prospectus for Madison, and at last, ApexHi have decided what to make of their new “C” units. While I am agnostic about the Madison business idea and listing, the Apex C units seem to me to be unlikely to be paying any distributions until the end of 2007 at the earliest – and that is based on a generous growth model. The sole slightly good news is that of all the C units that will be issued to current holders of the As and Bs, 30% will be bought off them at 200cps by the BEE partner. This partner is presumably not concerned at the potential lack of return for the next few years.

Crunch time in the Super 14 and will a German win the Spanish GP in an Italian car?

James Greener

12^th May 2006

NO STICKY WICKET FOR THE BULLS

Down the road at the Wanderers this week they pitched a tent over the cricket pitch on which today’s test match has begun. Heaters inside the tent were being employed to convince the grass that it was still summertime and not just 6 weeks to midwinter. The groundsman promised a “result pitch”. Seeing how many wickets have fallen already, he was dead right and the scepticism that many of us have had about cricket in May seems justified. It’s cold and it gets dark so early that there’s no time to have a beer before the game ends.

Artificial heat has not, however, been necessary to keep the bulls all pumped up and rampaging through the markets. The letters that make up the words “all-time high” are getting quite worn out on key boards. And the thesaurus is running out of similes for soaring and breakout.  Some astonishing volumes have been going through the markets and it is clear that greed has out-gunned fear and that prices are out-pacing earnings. All very satisfactory, but it becomes ever more important to keep vigilant and watch for individual holdings that could be getting significantly overweight.

Goldmine quarterly reports began appearing this week and despite the gold price going ever higher, very few companies have managed to report a profit, yet the gold mining index is up 25% in the past 2 months. Mystifying. That’s why I prefer to ride this bull run aboard the NewGold ETF; I don’t need to worry about whether anyone’s hedge book is making or losing money. And if it all does go bear-shaped I can (supposedly) ask for the certificates to be exchanged for actual ingots of the yellow stuff. Pop a few of those in the pocket and run?

It’s not that I have a particularly apocalyptic view of the future, but for some time now an enthusiastic young man at the traffic light has been pressing me to take a leaflet that invites me to learn to speak Spanish. While I would have thought that the second language of the future was probably Chinese, perhaps the idea of a bolt hole in Central or South America has some appeal. Europe itself is awfully close to too much enriched uranium in the hands of intellectually impoverished dictators on both sides of the pond. The Pacific Islands were racked by another huge earthquake this week and as a keen surf fisherman, the prospect of facing a tsunami while reeling in supper is not enticing.

It has gone rather quiet on the interest rate front. The UK and Europe kept theirs unchanged and local talk seems to be generally agreed that there’s not any need to tamper with our repo rate at this stage either. Cars and houses are selling like hot boerie rolls. And while some retailers are making the obligatory warning noises, no signs of actual penury are evident. `Business Day this morning submerged readers with an enormous ultra-glossy magazine that insisted that in order to keep up with the man who runs the monopoly that we are obliged to support, I must have a platinum and gold bangle. And a R22 000 lampshade.

With the prospect of power cuts looming in this early-starting winter I think that woolly blankets and paraffin lamps are more my style while we listen to the rugby and the GP on the windup radio.

Have a fine weekend.

James Greener

5^th May 2006

FREEDOM FROM WORK?

One could get used to these four-day weeks. All we need to do now is to get the same amount of business to flow during the days that we do stumble into the office. And to ensure that the rest of the world refrains from making market-moving announcements when we are supping long cool ones next to the braai. Many of our public holidays seem to stimulate the waffle gene that lurks near the surface in most politicians. So it is wise therefore on these days to stay away from the TV. Should you make the mistake of switching on just to see if the US economy has cratered or the Chinese have decided to stop buying stuff, you are in danger of flapping jaws, wagging fingers and mangled grammar. However, the complimentary t-shirted rent-a-crowd in the audience provide some relief, because they will be dancing and singing.

So when we switched on the dealing screens this morning, the stories were waiting to slap us in the face. Governor Bernanke was hinting that he might do something to US interest rates – or perhaps he might not. And a panic had erupted over the idea that the Chinese have reached for the handbrake. Freedom Day had liberated the bears and the market obliged by shaving nearly 2% off the main indices. Most of the damage has been inflicted by the mining houses and platinums.

It is of course month-end and despite the current carnage we could still see the All Share index delivering a very acceptable 4% or so for April which would put the year to date (now one-third gone!) performance not very far short of 20%. Anyone complaining about that, probably also thinks that there will be two SA sides in the Super 14 semis.

Like many other businesses, this one is obliged to take the Post Office in as a partner in order to fulfil our service to our clients. Service and clients are two words that are rapidly disappearing from that organisation’s dictionary. Speed vanished long ago. So I am dubious about the crowd-pulling power of Minister Matsepe-Casaburri’s invited address to a conference in Switzerland where she will talk on “The Future of National Posts” I think the chocolates and gluhwein in the refectory will be a much better bet for the delegates. They should refrain from send post-cards home, however.

The ABSA preference share private-placing behaved as we suspected and failed to deliver any stagging profit for its many applicants, who appear now to be keen sellers in considerable quantities. This supply means that on the secondary market the share now offers the highest dividend yield of any of the big bank issues and is only slightly better rated than some of the second tier operators. In my view, it has two drawbacks. Firstly, it comes in R1000 nominal units (which makes for an unwieldy six-digit share price in cents). And secondly, it has a dividend calendar very similar to the others and so missed the opportunity to fill the demand for cash flow at other times.

In the wake of a number of appalling events that grievously and fatally harmed friends and neighbours in the last few days, our president’s threat that criminals “must know that they will not succeed to terrorise and intimidate the government and the nation by resorting to crime” rings hollow and offers me no comfort. We are in serious trouble.

So once again, I shall ask you please to keep safe this Worker’s Day weekend.

James Greener

28^th April 2006

IT SHOULD GO UP AND THEN IT WILL GO DOWN

What a wonderful week for illustrating the arrogance and futility of trying to predict economic variables. At the very moment that I was perusing an article where some poor sap had gone all bullish on the gold price, over on the screen, the darn stuff was plummeting like a falling piano. The only certain reason for this impressive decline by the yellow metal is that all the buyers had gone out to lunch just as all the sellers decided to take profits. The result was a pretty impressive swan dive, but us long-term (unrepentant?) gold bulls are grasping at the straws of today’s modest recovery. Let’s hope it not just one of those “dead-cat bounces”.

That’s the essence of it all, isn’t it? Using cute, smart and faintly ridiculous phrases, terms and jargon to describe the market’s behaviour, we disguise our fallibility. And this is necessitated by the cruel fact that human behaviour as distilled and concentrated into buyers and sellers, consumers and producers is inherently impossible to model. The present situation is always described as “particularly difficult” but we are sure that “once things settle down” then a trend will emerge.

Actually, I think that a trend has emerged. I think that the world is showing strong signs that its long admiration for and trust in things American, is waning. There is a rather useful so-called “dollar index” which is designed to track the strength of greenback versus a basket of other currencies. From a peak level in 2001, this index has been falling and today is 25% below that high point. Whether or not this weakness was triggered by the terrible events of 9/11 is for historians to argue about, but many contemporary commentators are now writing about the decline of the American Empire. The parallels with the Roman, Ottoman and British ones are instructive.

It’s all fascinating stuff and of course, I have few ideas about where one should be placing one’s money to benefit from this trend – I just wouldn’t want to own too many US dollars right now. But that makes the whole “rand hedge” idea quite difficult to fathom. Does anyone know which local companies earn in Yen or Rupees?

According to the newspaper this morning the SABC has decided to review this whole matter of actually earning money by selling a service – namely flighting advertisements — that currently provides 85% of their income. I am tickled by the notion that they wish to “wean (themselves) off revenue from adverts”. With their sole other sources of revenue being tax of one kind or another, their plans for a new “funding mix” will have most of us sitting firmly on our wallets.

Joburg ratepayers will also be alarmed by the call for tenders to “suppl(y) … package support for Corporate gifts…”. Now what on earth is going on here? Is the successful bidder going to provide sticky tape, shiny paper, satiny bows and stylish bags so the city worthies can adequately disguise the presents that they hand out to nonentities like passing politicians and dodgy diplomats? I must have missed the call for tenders to supply the gifts themselves. I wonder what they are. Mayoral busts? Framed illuminated scrolls listing the councillors? Hand drawn maps showing the locations of the last 100 power failures?

Please keep safe this weekend.

James Greener

21^st April 2006

ALOUETTE, GENTILLE ALOUETTE*

Among the numerous and unnecessary laws that are dreamt up by bureaucrats and politicians who don’t trust us to do anything on our own, is one labelled, magnificently, The Space Affairs Act. This week’s news is that in accordance with the Act, The Space Affairs Council is being appointed. However, it seems they will not concern themselves with serious matters like which child’s turn it is to have the space next to the window or whether your blue-horned helmet is obscuring the view of the man behind you at Loftus. Bafflingly, it will offer advice to the Minister on how the nation ought to handle matters out there, above the clouds. Indeed a long way above the clouds. It “includes meeting SA’s international commitments for the peaceful use of outer space.” For a nation that has yet to meet its domestic commitments for ensuring the peaceful use of air, land and water, these words seem rather grand.

A long time ago, I spent two years scratching through data collected by one of the world’s earliest artificial satellites. Built and operated by Canada, and launched by the USA, the satellite could not avoid passing overhead South Africa from time to time. While there, it diligently counted and measured and probed chunks of outer space above this southern tip. Then, with one expectant eye on the Nobel Physics Prize committee, I arranged the numbers in neat tables and graphs. Understandably, these caused not a flicker of interest in Stockholm. The good news I suppose was that all this happened well before 1993 when the Act was signed into law. Doubtless, today I would have to appear before the panel of pointy-eared, silver-garbed councillors with my ID and utility bill to collect the permits required before having an affair with the nation’s ionosphere.

ABSA are coming to the preference share market with a R3bn issue. The initial offering will not be available to the public, but this may not be a bad thing. If we have interpreted the listing document details correctly, the all-important “percentage of prime-rate” dividend level will be set by ABSA only after the issue is placed. Sounds a bit mean, but it will be nice to have all this extra liquidity in the secondary market at the end of the month.

From these irrelevant passages, you will have gathered that there is not much happening in the markets as we go into the four-day long-weekend. Those of us sad enough still to be at work are just killing time until Governor Mboweni lets us in the secret that he and the MPC have been hatching for two days. Incidentally, why does it take so long? Does anyone at the meeting change their mind in these two days of tea and biscuits around the long polished table on the 31^st floor?

So that’s it. No change to the repo rate, although the ante-penultimate sentence was pretty hawkish and had dealers scrambling for the “Sell” button. Equity market indices seem relieved and are trudging back upwards after a day when they dribbled lower.

Please take care this weekend.

James Greener

13^th April 2006

[* The satellite was named Alouette]

ICE AND FIRE AND TAXES AND TAXIS

There have been a number of crises in the markets and in due course each one is given a catchy name such as “emerging market crisis” or “Asian tiger crisis”. Apparently, we are in danger of sliding into something that may become known as the “Icelandic crisis”. Aside from allegedly being home to energetic geology, important drinking, breathtaking women and legendary fishing, some of us are surprised to learn that they have a currency and a stock market and that both are in difficulties. The island’s stories are moving from the Discovery Channel to CNBC.

South African cricket, on the other hand is in danger of appearing on the Cartoon Network.

Against the background of the news that the trades unions are unhappy with the idea of a luxury metro train service linking the airport to Joburg and Pretoria, came the headline that thousands of minibus taxis are about to be scrapped. No one has explained how the largest groups of commuters are expected to get to work. I am certainly not bullish at the prospect of having fleets of 18-seater busses flitting through the traffic.

The All Share index is piling on the points and is within striking distance of 21 000. I have no idea when this bull market will end. All my previous attempts to call it have ended up with my face covered in omelette.

Last year the government spent R407bn. This money came of course from you and me, either in the form of taxes, duties, imposts or loans. For the same period, the nation’s Gross Domestic Product was R1 523bn. Divide the first number by the second and you get 27% as the state’s share of GDP. That’s the highest it has been this century and in my view, way too much.

Good news of a kind can be found in the fact that for the fiscal year just ended, it looks as if government spending will be matched by its income. In other words, no deficit! So in theory they should not have any need to borrow money so then the price of money, i.e. interest rates, ought to go down rather than up. This is another reason why many of us are puzzled by the Reserve Bank’s stated intention to hike interest rates soon.

But as all we market players know, it is pretty well impossible consistently to predict accurately the future levels of any price or statistic. Who, for example, believed that the rand could go better than 6 to the USD in 2006? I forecast a rush by locals to the travel agents to book up overseas holidays at all-time low prices. The other side of that coin is that all those game lodges and resorts will be whistling for foreign tourists and there might be some bargains on offer. This means that the main concern this year would seem to be planning and taking holidays and staying away from the office as much as possible.

And that’s sort of why this week’s Tidemarks is a bit early. I am going away. Again. This time I shall be wearing a suit and another one of those silly grins as I attend my daughter’s graduation with an Honours degree. I forecast celebration.

That’s one call that should be correct.

James Greener

5^th April 2006