THE BATTLE OF MIDWAY

Tomorrow the Earth passes through an equinox when we will be half way between the shortest and the longest day. For the JSE, however, the longest day ever occurred yesterday when it processed a record massive R19.8bn worth of turnover. This was caused of course by the September closeout event. At one stage almost R100 million’s worth of deals were going through the exchange every minute. That’s huge. Also huge is the bull that has been stampeding through the equity market, taking the All Share index to just 1.5% of its all time high.

This beast has, I think, been stung into action by the equally large bear that has been tearing our poor currency to shreds. So far this month the rand has fallen more than 6% against all the major money units. There are probably quite a few reasons for this dreadful sight and they will include the falling commodity prices; the intemperate remarks from the trade unions’ conference about how they would run the economy; the re-appearance from legal limbo of a man who is keen to be the next president and some more disappointing economic numbers.

Another disappointment was felt by some of the more adventurous investors who have been enjoying the Over The Counter (OTC) market in unlisted shares. This is not a market that is used by novice or uninformed folk, but nevertheless the regulators waded in to close it down, waving platitudes about investor protection. Certainly the settlement procedures are primitive, with actual cheques and certificates changing hands and no big brother with deep pockets promising to step in if something goes awry. However, many of the companies that trade OTC have businesses that are far less risky and much more transparent than some of the gems that appear on the JSE boards. Where was nanny when investors in the JSE-listed JCI group companies went all wobbly?

Then there is another politician telling us all very gravely that it is “difficult to predict the economy on a day to day basis”. Really? And what is her record on any other time scale? About the same as mine, I’ll bet. Unimpressive. Consider that the current dire and deteriorating measures of the health of the US economy were not widely predicted by any of last year’s forecasters.

Today’s discussions are suddenly all about hard versus soft landings. This has nothing to do with the space shuttle, which fortunately enjoyed a soft one, particularly after the scare that bits might have fallen off it and were drifting about in space. What a hard landing economy will look like I have no idea, but apparently, there are a few hedge fund managers who could get the conversation started, having very swiftly just lost several billion dollars in bets on the price of gas. However, even this has failed to worry the Wall Street punters. That market is surging ahead, as the Fed quietly left interest rates unchanged. Our own Governor is more exuberant and has been doing plenty of talking and finger-pointing at various gatherings in recent days. So far, however, he has failed to fulfil my forecast of an unscheduled rate rise.

It is a long weekend here in SA and I am going fishing. I forecast many large fish coming to the net and several bottles opened. Soft landings all round.

James Greener

22^nd September 2006

LISTEN CAREFULLY PEOPLE. IS THAT A BEAR I SEE?

It has been a special week for those whom we have entrusted with the running of the nation. They have not shirked from their duty to tell us how it is. At a stroke, those citizens who choose price before provenance when purchasing clothes were branded as traitors. Painful punishment was promised for anyone stocking and selling too many t-shirts turned out by the Asian Tigers. There was the clock-watching magistrate who released all the baddies that she had not had time to see. In similar petulant mood the Department of Labour published a list of all those companies which it claimed hadn’t properly or timeously filled in the forms that detail the racial mix of their staff. Sadly, no one responded that in the last dozen years they had lost their old South African talent for seeing this difference.

The good news came in the form of an undertaking from the fellows cutting down the trees that are growing too close to intended route of Gautrain. (I thought it was an underground train?) They promise to plant three young trees for every one chopped down. However, why many of the saplings will be located miles away from the newly ravaged suburbs was not explained. The head honcho of the body tasked with overseeing the woefully inadequate supply of bandwidth in the country returned to work after a 10-month suspension. The industry has developed at a fair clip while she was away tending her roses; I trust she gets herself and her staff up to speed quickly. We can afford no further delays in joining the wired world. And then there’s this rather strange concept of “number portability”. I thought that was exactly what a cell phone provided.

The Governor repaid the folk who bought him breakfast on Thursday by warning them that they were buying too many cars and DVDs. This is his way of telling them that they can expect a hefty interest rate rise quite soon.  He also felt that the rand might be a little “out of balance”. Before the coffee in front of his audience got cold, the bond market swooned and the currency plunged. I hope it wasn’t that he got a bad egg.

While normally this would have been good news for the commodity stocks, the dollar prices of many of the commodities themselves are also falling fast. The market’s weaker moments this week have therefore tended to have the mining shares leading at the front. It also did not help that some analysts managed to scratch through Sasol’s results, which were published during the week, and find things to fret over. However,  the end of the world is not yet clearly visible  and the all-share index seemed reluctant to remain below 21 000 for very long. Next week we experience the quarterly futures closeout event.  Sometimes nothing much more than eye-wateringly large volumes go through the market on these occasions, although there is always the potential for fireworks in the prices as well. The market does have a sort of “lull before the storm” feel to it.

Of course, the week was also filled with the inevitable news of squabbles, stupidity and stubbornness on the part of the administrators of the sports we all care so much about. What a dreadful mess. I doubt that the forthcoming trip to Germany by Premier Shilowa and his retinue with the purpose of learning how to run a World Cup will result in anything more than fond memories of beer and wurst.

James Greener

15^th September 2006

A STING IN THE GOVERNOR’S TAIL ?

The two most recent meetings of the monetary policy committee have ended with   Governor Mboweni gliding up to the microphone and chanting the sacred phrase: “Raise the repo rate by 50 basis points.” Now I thought that this is what was happening. I assumed that the committee, after two days of deep deliberation, wise discussion and frequent comfort and refreshment breaks, had set the precisely perfect price of money for the nation at that moment. However,  Minister Manual told us this week that the Governor was merely “in the signalling phase” and that unless we note, understand and obey his signals, we consumers can expect soon to be “beaten into submission”. Given that most of the population fails to note, understand and obey  even the more obvious signals, such as red traffic lights, we obviously did not appreciate that the large perspiring man in the TV lights and the striped tie was actually waving a grubby red flag. Just what is it that we have to stop doing in order to avoid this threatened beating?  Perhaps they wish us to stop buying imported goods. Or, at the very least, to stop borrowing money to do so. But will that not threaten the growth rate and our transformation? Please tell us. The beating that we get from the taxman already has me submitting and I don’t want any more.

Actually, the rand is already putting the brakes on some spending anyway. A number of items have given the currency a beating of its own. These included the report that we are not as a country as competitive as we used to be or as we need to be. Far too many of our resources are engaged in telling others what to do and how to do it and not actually doing anything productive themselves.

Mind you, it is not always perfect in the free market either. I am assuming that decision by the beverage industry to move to the small 330 ml can, is their own and not some bureaucratically imposed standardisation. I am unimpressed by the claim that the reduced neck diameter will produce a “smoother, more polished finish”. The old 375ml “pint” bottle has also disappeared from the shelves. My glass really is half-empty. This is a very serious matter, and the only way I can think of to counter the problem is to open two cans at once and buy some more SAB Miller shares.

It was another week when the JSE pushed the All Share to a new high, but the effort to do so, has exhausted the bull and a modest correction is taking place as we approach the weekend and the Ellis Park test. The eternal question about whether or not this is the final top will of course remain unanswered for some time. What I do know is that, as always, this time it is different, so to seek guidance from previous times when the market allegedly behaved like this is probably unhelpful. I shall bore and exasperate loyal readers by repeating my view that I think that the most important catalyst for the JSE will be Wall Street. The return to average or lower than average valuations in the US markets could occur at any time,  although these days I tend towards thinking that the correction might not be as steep or severe as some of us would like to see.

What with civil servants threatening to beat us, beer portions getting smaller and our currency weakening, the one point victory over the All Blacks was a highlight. Give us a larger margin of victory tomorrow over the Wallabies please lads. We need a ray of sunshine, especially as our guests will be trying to avoid them. Rays, that is.

James Greener

8^th September 2006

INTEREST RATE INCREMENTS?

The bull is pumped up with all the joys of Spring Day. The market is flirting with record highs. Almost every company is reporting record profits. The new national soccer coach has landed a deal where the pay slip program will need adjusting to accommodate extra zeros, some of which will go at the end of the salary line and just one will be needed for the tax deducted line. His arrival must not be confused with the appearance of The Lion King on a Joburg stage or with the launch of Neotel. Both will be hoping to make money as much money as he will. Neotel is the name of the new Telkom competitor. During the doubtless lavish launch ceremony they announced that among their customers they are proud to have Cell-C (the mobile phone company that has yet to make a profit), and Telkom itself. Bizarre. Am I alone in wondering about the origin of the name? Might it have something to do with the news that modern day man has some Neanderthal genes coiled up in his DNA?

But us old bears who root through the news for something to worry about have been hitting pay dirt this week and it is all pretty scary. Every economic number published these last few days has led me to wonder if Governor Mboweni might not surprise us with an unscheduled increase of the repo rate. He has told us that he is a keen observer of the inflation numbers and he will not have missed that PPI is above 8% (a three year high). In addition, how about those figures that suggest that the nation has 25% more cash to play with now than it did a year ago? There is no mystery about where the money is going. Imports in the last 12 months have totalled almost R400bn. This is a record, but more worrying, it is about R50bn more than we earned from exports in the same period, despite the record high prices of the commodities we sell. Other upward pressures on the price of money are seeping into the system from the news that Eskom is going to start its long overdue building of a few power stations for which it plans to borrow R3bn.

I have not enjoyed any overseas holidays for a while nor have I needed to add to my fishing rod and reel collections or even to my single malts so my own impression and experience of the current bout of rand weakness was that it was not so far particularly savage. I was therefore astonished to see that against sterling and the euro our currency has in just a few weeks given up more than half the recovery it struggled to compile over the four years following its collapse in the closing weeks of 2001. Although Finance Minister Manual has been telling students that “engineering is more fun than banking”, I would think that any banker on the currency desk would disagree. But someone will soon begin to grumble about building barriers to stop the currency leaking away and so there’s another reason to expect higher interest rates.

Now the theory is that when interest rates go up, the stock market goes down. However, so far that theory is getting a thorough pasting. The All Share index returned 5.4% total return in August with some rate-sensitive sectors, like property, doing particularly well. Bonds, on the other hand did not perform at all in August so it looks as if someone is alert to the looming problems.

Do not panic yet, but it looks as if commodity prices (expect for gold) are on the way down. And the All Blacks have called up the A team to deliver the coup de grace in Rustenburg tomorrow. Is there any good news? Oh yes. It’s Spring Day and summer is a’coming in.

James Greener

1^st September 2006

GETTING REVVED UP

The Top 40 index this week came within a whisker of topping the record of 20 260 that it set on 11^th May. Whether or not it will soon  actually break out into new territory and whether or not that will be significant I shall leave for real analysts to say. My observation is that this bull seems to be quite determined to erase the memory of the meandering trip of the last few months that took him to the edge of the bear-filled abyss. My view is that he may not yet be able to do that.

With probably indecent delight I comb the media for stories about how the US consumer is starting to feel the pinch. Apparently the future of the world’s economic  growth depends to a very large extent on that fellow spending money. However, for a few years now, most of the money he and she has been spending has been borrowed and not earned. Moreover, it is seems that the US housing market has been the supplier of the credit. But now that market is showing signs of melt-down with all those statistics like “housing starts’ and “new home sales” and “existing homes inventory”, changing direction rapidly and emphatically.

Now the connection between the Top 40 index and the plight of the man in Michigan with a monster mortgage is not obvious. But this bear believes that it exists and involves links such as Wall Street, inflation, commodity prices and indebtedness. I expect, however, that I shall need a bit more patience to see if my belief is true.

In the meantime, I can think about our own statistics like the second quarter GDP growth of 4.9% pa. Total GDP in the last 12 months was R1 606bn. Government expenditure in the same period was R434 bn or 27% of the GDP. At present rates of growth of both these figures, the ratio could be at 28% by the end of this year. Three years ago, this ratio was 24%. The trend is clear and alarming. Government’s share of the economy is getting far too large. Isn’t this another negative for the Top 40?

I believe it is; especially when they spend our money on lunatic ideas like holding an “International (!) Conference to Address Gender Equity in Transport Policies and Planning”. Billed to last three days and boasting a dubiously incorrect logo of a male astride a hermaphrodite bicycle, this is a clear piece of nonsense. It makes about as much sense as declaring that Pluto is not a planet when we all know it is Mickey’s dog. It will be more distressing than usual to send in the provisional tax payment next week knowing that some of it will be used to support “rural freight logistic interventions”.

However, a proper analyst should be focussing instead on all the company reports filling the pages of the paper each morning. Most businesses are steaming along very nicely with earnings and dividend growth in double figure. One of the more interesting facts to catch my eye is that BHP Billiton’s earnings are running at R27.3bn for a pe ratio of 12.2. Anglo American, which is 44% larger by market cap, earned just R25.6bn for a pe of 18.7.  The price of the latter has been running as the result of whispers that a deal may soon take place – but that difference still seems too wide.

I am looking forward to a pleasant day at Loftus tomorrow, provided my hosts allow me to stay at the bar in the marquee and not force me to watch the rugby. And there’s the Instanbul GP on Sunday. I wonder what Mr Ecclestone would have to say about gender equity in Formula 1?

James Greener

25^th August 2006

OUTSIDE INFORMATION

Loyal readers will have realised that I carefully avoid making any call on a specific share in these notes. The reason for this is that I could not bear having to append a four and half page disclaimer that states what people should already suspect: that in all probability the recommendation is wrong and is potentially dangerous to their wealth. A few analysts do have an excellent knowledge and understanding of various industries and companies and their research is often interesting and revealing. However, I also firmly believe that this insight will never reliably result in an accurate prediction of earnings, dividends or share price behaviour.  Obviously, the idea of tacking a disclaimer on to items of investment research has grown out of an acknowledgement of this chronic unreliability. If we were always right we would not have to say “sorry” and we would also probably not be peddling shares but negotiating to buy another island paradise with his and hers harbours.

Therefore, I shall not mention the name of the bank that has recently published its interim report with which I spent a few minutes and a calculator. I was interested to see that the traditional business of borrowing money at a low interest rate and lending it at a higher one contributes less than a fifth of the bank’s income.  Furthermore, the lending side has proved to be rather dodgy. The bank felt it prudent to set aside well over a billion rand in case the borrowers should prove forgetful about their obligations to repay. This “just-in-case” money is given the wonderfully coy name of an “impairment charge”. Recall, as well, that government a few months ago fretted in public about the spread between these two interest rates and it is little wonder that the bank’s most lucrative arm is the one that does “investment management and life insurance activities”.

I rarely attend those presentations given for the fraternity of proper analysts. However, one company always hosts their affair at a rather grand watering hole high up on the Westcliff ridge. If the weather is fine it is a good opportunity to see the progress of the spring blossom across the suburbs and to hear how the shipping business is doing. Very well, is the answer, but the CEO is puzzled that the investors do not share his optimism and is frustrated that the share suffers a low rating. Maybe we are just not a seafaring nation and prefer buying shares in holes in the ground.

And not just deep holes. The construction sector index has been flying (up more than 10% this month already) as the country pours money into bricks and mortar. One of the shipping company’s busiest routes is bringing cement from China to SA. But have you noticed that the squabble about where the Gautrain money will come from is still going on? In fact minor battles are breaking out all over the place. Eskom appears to be disputing just how dark and cold it was in Cape Town this winter. Telkom is unmoved by complaints about lack of bandwidth. South Africa’s display of beetroot, garlic and African potatoes (what are these?) at the Aids conference in Toronto has raised tempers. And the oil companies are pointing out the age-old fact that if you want less of something you just have to tax it.

Perhaps we need to tax All Black and Wallaby tries. Enjoy the weekend and keep an eye on that currency. It looks skittish.

James Greener

18^th August 2006

BOWLING FOR ANOTHER TIME

The financial and commodity markets seem to have decided that the great successes achieved by the world’s policemen in foiling what would have been an appalling act of terror is a good thing. Perhaps only the travel business will see any drop in turnover. Since your laptop may now not accompany you to the executive lounge and will likely end up making a different journey than your own, business trips become even more unappealing. Moreover, spending much of your beach holiday on the shores of the airport terminal will discourage the other kind of travellers as well. Petrol at north of seven rand per litre has one reaching for the bicycle pump. But then, I suppose, someone will want to test you for steroids. Oh dear. Best stay at home and look for shares to buy and sell.

In the last few days, central bankers in England and South Africa have raised interest rates while in the US they decided that the price of money was just right and did nothing. Even if these remote decisions are an important factor in driving share prices, turnover on the JSE has reflected a four-day week and the start of some school holidays. Excitement and involvement levels are modest as the market extends the current spell of low volatility.

Despite the attraction of keynote speaker Minister Stofile at the Esselen Park Conference Centre next week, I am afraid I shall not be applying to the National Heritage Council for my opportunity “to contribute to the heritage plan of football in preparation for the 2010 World cup Soccer legacy”. Whatever this nonsense might mean; it is another clear example of plans to board the gravy train. However, I have now at last seen a credible way in which the ordinary citizens of South Africa are likely to benefit from the boondoggle that the 2010 FIFA world cup is threatening to become. In recognition of the fact that seat prices at the event in Germany this year were way out of the price range of the average local football fan, a plan is being hatched. Very cheap or even free tickets will be offered here on the southern tip to “the poor” in four years time. What fantastic news. Without even needing the example set by the Namibian sports executive who sold his own free tickets this year at a very satisfactory mark-up, “the poor” will doubtless immediately spot the possibilities offered by this plan. Once again, the market mechanism will triumph and money will flow in the proper direction.

Similar trust in the efficacy of markets is not, however, evident in the creation of the Jali Inquiry. These worthies have the task of seeing how and why the banks make money and then presumably suggesting ways in which they could stop doing so. Before starting work, every member of the inquiry board should be required to use their own money to buy a portfolio of listed banking shares. Then they should offer the portfolio as collateral to raise a bank loan, the proceeds of which must be placed in a fixed deposit at another smaller bank. I can think of no better or faster way to learn about the banking business.

Do we really need to suffer the sight of the legendary seamer Shaun Pollock bowling off-breaks? Please let him go home to spend quality time with his new family. Thanks for all the pleasure you have given us in the past Polly.

James Greener

11^th August 2006