PREPARE THE BUNKER. IT’S TIME TO HIDE

It has been another one of those weeks when the black cloud of disappointment has blown in. It seemed as if everyone had a story of violent criminal events that had occurred close to themselves or someone they cared about. Exacerbating my fear and despair is the feeling I have that those who should be doing something about this are unconcerned that the folk of this country are being overwhelmed by lawlessness. At times, the official indifference verges on hostility as if it is the victim’s fault.

I think that some of the sudden severe collapse in the value of the currency is the result of people both local and offshore deciding that it is time for their money to depart the southern tip where the financial news of the region has deteriorated quite alarmingly recently. In addition to warding off the unofficial felons, businesses in SA are being assailed by regulators and legislators of every stripe. One of the newest targets in the crosshairs of the do-gooders are the pension funds who are supposed to have done their members ill when they indulged in the suddenly reprehensible yet legal practice of “bulking”. Just how the fund’s members and beneficiaries will benefit from having massive fines imposed on the fund has not been explained.

One example of the nonsense that these bureaucrats can dream up appears from time to time in this business when a corporate announcement appears with the stern and capitalised admonishment that the document is not to be published or distributed in a list of certain countries. Someone has decided that the investors in those places are of a far too delicate disposition to be able to cope with the news in the announcement. The irony is that theses items are distributed electronically – precisely the perfect medium for instantaneous and global dissemination. A similar idiocy can be found on the JSE’s own website where their much touted SENS news service appears with a five minute delay! SENS was created to ensure that all investors could get potentially market-moving company announcements simultaneously. Now it seems that only those who subscribe to one of the commercial news distribution services can be so privileged.  But anyone without an internet hook-up will need to wait for the morning newspaper to learn that the CEO of their favourite company has fled with the petty cash and his secretary.

Mind you, being close to the news flows and price feeds is not necessarily a boon. We have seen even more of the extreme see-sawing activity in he markets this week when almost every day provided a daily range for the all share index in excess of 500 points. In these times short-term traders are exciting but difficult people to share a trading-room with. Yet anyone looking at the daily closing levels will have seen quite modest moves of less than 2% and felt that the market was consolidating and firming a tad. This data also fails to reveal the great difference between the resources shares that have surged mightily in the wake of the weak rand and the banking sector which has swooned on the same news. Retailers have also had a bad time, which was not helped when the central bank released discouraging news about our current account deficit. The chief central banker fanned the flames during a parliamentary address with mutterings of further rate hikes.

It is all turning nasty remarkably quickly.

James Greener

23^rd June 2006

SUBSTITUTE: BEAR ON, BULL OFF

I have to say that I have tried pretty hard to see what’s so beautiful about this game. Admittedly, I have not remained glued to the TV for all of the 24 hours of play that has taken place in Germany this week so far. I have personally witnessed no more than half a dozen of the 40 goals scored. Some, I probably missed because I dozed off after being exhausted by the miraculous recoveries from the apparent limb-destroying injuries. I have enjoyed the grand theatre that attends the incidents of yellow-card waving, and I am appalled by the scenes of jersey-biting, leaping, sliding, mobbing and praying that follows one of the rare scoring events. I am however sympathetic towards the astonishing inaccuracy of the hugely acclaimed and remunerated stars. Here in the securities business we have exactly the same thing. Hoofing the ball over the cross-bar is identical to buying stocks just as the market begins to tank.

Since the bull went off in early May for his winter break, amazing and unprecedented intra-day volatility has tried to disguise the fact that actually we are now about 15% off the peak. Daily trading ranges in the All Share Index of 500 points or 3% have been common and investors calling for a chat in the morning have often been shocked when checking the closing levels in the evening.

Obviously, a correction of this magnitude has pushed some shares into the limelight of “possibly reasonable valuation” and bargain hunters are starting to get excited. However, I don’t think that this bear is in any way finished with us yet and would prefer to be using moments, such as today’s close-out, when the market is on the up, to ensure that one has taken profits in the overweight holdings and to thin-out the illiquid shares. There is no shame in earning more than 7% tax-free while waiting for the really mouth-watering valuations that I am sure will present themselves in due course.

Diligent readers may be familiar with the so-called BRIC emerging markets. These are Brazil, Russia, India and China and compared to the first three, South Africa’s market correction is an infant. India is more than 35% down from its peak.

For a number of reasons, which would take an article of their own to explain, I have become very suspicious of the figures that purport to show net foreign buying and selling of our share and bond markets. Once upon a time, I was a firm believer in these stats and produced clever charts to look for correlations. But I now think they are deeply compromised and corrupted. Because the financial rand mechanism is long dead and buried, the normal currency market is the sole indicator that we have for foreign investment. And it is in this market where we on the southern-tip have seen particularly large recent declines. In particular, the rand has taken a severe beating versus Sterling and a pint of warm beer will cost the South African tourist 20% more than it did at Christmas time. I reckon that non-residents have done some substantial selling of this market. And they are not yet finished.

Thank goodness for some test rugby to watch this long weekend. And the next time I write Tidemarks, the winter solstice will have passed and we will be on the way to summer. Fantastic.

James Greener

15^th June 2006

PUMPING IRONY

If this letter were to be any use at all, it would list the shares which will next week go up as well as those which will go down. Last Friday I ran out of space before advising you sell Billiton, Sasol and Anglo and put the money into Richemont, Standard Bank and Impala. I hope in this letter that I remember to insert my calls before the 550 words are up.

The market was more placid these last few days, with the largest daily range in the All Share index occurring on Wednesday when there appeared to be some month-end manipulation being attempted. No clear trend has yet emerged, however, and there is a furious tussle for control of the market taking place between the bull and the bear. There are opportunities popping up here and there (witness the list in the previous paragraph) but success is granted only to those with nimble fingers, great vigilance and excellent market intelligence. Physical fitness and stamina will be useful as well.

If, like me, you find these last two hard to achieve than you will also be interested in the search being undertaken by the Gauteng Local Government for someone who can “provide Comprehensive Health & Fitness to the Members of the GSSC”. Presumably, these “members” are the same people who have allowed outstanding rates and taxes in the province to now reach R17.5 bn. But tax payers who object to stumping up for the bureaucrats to burn off some of the calories ingested at the never ending round of receptions and report-backs are just being miserly. Probably these same folk are also moaning about the official contingent of 150 people who are off to Germany to get ideas on how to run a World Cup. Hopefully the party will include at least one person who will learn how to get the national side into the tournament.

The National Credit Regulator opened his doors yesterday, but his job is not to see that the government doesn’t borrow too much money but rather that private sector lenders and borrowers understand and love each other. This sounds to be a dubious proposition and I wonder about phrases like “credit providers have to ensure they have documentary proof that the consumer can afford the loan at the time of application.” Once again, the state is calling for an avalanche of paperwork, not one page of which will make it cheaper and simpler for the age-old wheels of finance and commerce to turn. The irony behind much of this rush to establish each other’s identity, parentage and place of residence is that the requested verifying documents are increasingly being produced neither accurately nor timeously by the same organs of the state that are demanding them. What’s the delay for a new passport these days?

Investors looking for something to fret about will have noted that we are approaching the season for interest rate meetings both here and in the US. June also sees the arrival of a futures close-out event on the JSE. Whether any financial event will have any impact as June unfolds is doubtful. Employers world-wide are accepting that productivity will plummet as the workforce settles down in front of the TV. Pizza and beer suppliers are my pick for the month. Go short the gyms. And watch for Telkom’s results. Monopolies rule OK.

James Greener

2^nd June 2006

SPEEDING THROUGH CASINO SQUARE

There has been quite a lot of suffering “...the slings and arrows of outrageous fortune,” in the market these last few days, but I doubt if anyone feels  “nobler in the mind” for the experience. The simple statement that the all share index has today set the week’s high almost 1000 points above the week’s low, which was achieved on Monday completely disguises the extreme anguish in between. Most days posted daily ranges well in excess of 300 points. Sometimes the action was in one direction, on others it was both up and down, a long way, several times! This has taken the twinkle from the eye of even the keenest trader. Everyone is hoping that things will be much smoother on Monday when both the US and the UK markets will be closed to celebrate the arrival of the sun or some other quaint ritual.

Of course, we still don’t know if this is the end of the bull market or the start of the bear market (although readers will not be surprised that my own feeling is biased towards the latter). Or perhaps it is something else altogether. Like the end of the world as we know it.

Just as long as it doesn’t happen immediately or else we shall miss the sumptuous 2010: Corporate Banquet to be held by the drearily-named Institute for Local Government, at some glamorous gambling facility near the airport. From the advertisement, it seems that the mass munchies are planned as the highlight and main attraction of the 2010: The Role of Local Government Conference that starts this weekend at the same venue. “Limited seats are still available!!” but I shall not go.

Bureaucrats obviously sheltered in their offices during the cold spell and used the time to come up with a bonanza of strange ideas. Like the requirement that cell phone companies compile FICA-like records of ID and addresses of all their customers. At least one company has quoted some interesting statistics about the number of people within our borders who have neither, but do enjoy their cell phones. And then the state-owned and taxpayer-supported airline was “slapped with a fine” of R55m by the (state-run) Competition Commission for stifling competition through some dodgy deals about two years ago. Just whose wallet will get raided for this one? And a neighbouring country proudly announced the issue of inflation-linked bonds that will offer a yield of 2% above inflation. But with inflation through 1000%pa and rising, I am not sure these will be popular.

Meanwhile in the real world, companies have been continuing to report very pleasing results and it seems that the consumer and his (or her) credit card are going great guns. One bank grumbled about this profligacy a bit, but since it is they who issue the cards and set the limits it seemed a trifle pious. But we should all take their point. The bull has been fuelled by massive money supply growth everywhere – particularly in the US and, not insignificantly, right here as well. The US housing bubble has definitely burst and mortgage defaults are rising swiftly. Roosting chickens have been sighted.

But neither trade and budget deficits nor rising debt will be given a single thought in Monaco this weekend when the (very) rich and (improbably) famous gather on the poop decks of their yachts to throw champagne corks at the GP cars. As my boat has not yet come in, I’ll just sit in front of the TV with a Castle.

James Greener

26^th May 2006

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