WHAT A DIFFERENCE A “NAY” MAKES

Pretty well everyone thought that Governor Bernanke would change US interest rates this week. But he declined to do so. He and his advisors clearly felt that American money is priced just right and there was no need to make it either cheaper or dearer. The bulls, who were anxious that rates might go up, were delighted with the news and charged up Wall Street dragging most of the world in their wake. All concerns about the effects and consequences flowing from the rapidly growing mess in the housing finance market appear to be forgotten or at least dismissed. The business comedy channel on TV found a US government official who assured the viewers that all was well and that there was no contamination of other credit markets by the hollowing out of the so-called sub-prime mortgage industry. Did they really believe he could tell the world that things were getting mighty smelly and that the US housing market is already experiencing major price falls?

In Joburg the All Share index joined the excitement and surged to within just a few hundred points of its peak. As far as we know there is no similar credit market debacle lurking in the wings here at home for us to dismiss. But we did see some rather dreadful economic data published the day after we had all stayed at home to polish up our human rights. So we ignored those instead.

The  news was that the current account deficit rose to 7.8% of GDP in the last quarter of 2006. This has caused an epidemic of hand-wringing and forehead-dabbing among the talking heads. Despite being told not to panic, we amateurs are left in no doubt that this number is bad news. A gloomy future threatens with a falling currency, higher interest rates, and coming last in the Tri Nations. Regular readers will be painfully aware that I am devoid of any economic learning and that my pronouncements and interpretations are usually naive and embarrassing. My observation is that the share market cared nothing for the news but I do wonder how a mineral-exporting nation in a time of high prices and a weak currency can earn less from its exports than it spends on importing iPods and Cadillacs. We must be paying ourselves much more than we are really worth. This complaint, as ever, leads my eye over towards all those politicians, bureaucrats and legislators who produce nothing but words, virtually none of which have any worth.

For example, I could raise little enthusiasm for the excited report that Eskom have chosen the names for the six new power stations that they plan to build just as soon as they get the money, the permission, the plans and the time. I have no doubt that the announcement was made at a well-catered little ceremony for two or three hundred guest and dignitaries.  Contrast this story with the report that every year China adds twice as much generating capacity to its electricity network as we here in SA actually have right now (and for some time to come). But I’ll bet the Chinese power stations have boring old plant numbers and not even names.

Once again, a criminal event casts a pall over us as we go into the weekend. There is no comfort that this time it took place on the other side of the world. Bob Woolmer was an important figure for all local sports lovers and his links to South Africa were strong. He would be thrilled to see us beat the Aussies on Saturday.

James Greener

23^rd March 2007

UNGUARDED COMMENTS

I was too young and lucky to be balloted to spend nine months in the army. Those of my friends who were selected to don the khaki, told of the endless hours of boredom standing guard in places like Kimberley or Oodtshoorn or Heidelburg. But now we have an all-volunteer army whose employees apparently feel no need to list guard duty as one of their skills. It is far preferable to get the tax-payer to fork out for a private security company to send along their finest to make sure that our troops are safe in their beds at night. One wonders if these fellows will also outsource the other unpleasant and inconvenient bits of the job like handling noisy and dangerous guns or defending the country from an enemy.

The Gauteng Department of Agriculture, Conservation and Environment (GDACE to its friends) appears to have already outsourced all of its proper work. Why else would they have taken space in the paper to tell us that they are awaiting proposals for the “Development of Agriculture Plan” also known by the nifty nickname “The A-Plan”? I assume that the GDACE staff is already fully stretched with the C-Plan. That’s the one where they decide on the catering contracts for the canteen and conferences.

Back here in the markets, rumours have again emerged about the existence in the US of a Plunge Protection Team. These fellows are alleged to hide out in some underground dealing room and use government money to buy up a market whenever it shows signs of tottering. Believers in this P-Plan can cite the experience of the last few days when certainly the Dow turned back from what could have been a precipice. I am very sceptical that any such buyer-of-last resort could remain clandestine before the market sniffed out that there really was someone who was prepared to buy anything on offer. And once discovered, this mysterious super-bull would very quickly get submerged in a blizzard of paper that would overwhelm even the cash that Governor Bernanke once threatened to drop from helicopters.

The JSE action this week was influenced by another of those close-out events. Yes, can you believe it? It is already three months since the last one. Now, a day after the event, it seems as if close-out activity prevented prices from falling. Things are feeling a bit weak today.

Governor Mboweni has scared people a little and bank shares a lot with a speech that threatened that even though he did not push the up-button last time, he did know where it was and could easily give it a tap in April when the Monetary Policy Committee next meet. This is not the only reason that I remain a reluctant buyer of shares. I remain certain that the rapidly deteriorating situations in the housing and credit markets in the US are having a growing negative impact on market conditions and sentiment. The USD has resumed its slide against the euro and the yen, and the “recession” word is being used by people other than retired Fed governors.

I am sure that share markets have not yet reached their 2007 lows. The All Share Index could collapse by 25% (a remote possibility) and still not breach the 2006 low!

Time to go and watch the Proteas open their World Cup campaign. And it is GP season again. Scant SA presence there though. It’s time we sent Mr Ecclestone a taxi driver or two. Just imagine an F1 car with white wall tyres.

Keep happy and safe.

James Greener

16^th March 2006

BANG OFF TARGET; THANK GOODNESS

Early on Wednesday evening the police called me and asked if I could come to my good friend’s home around the corner and assist him. On arrival, I was shattered to learn that he had been shot during a tussle with armed intruders who had found a way into his home. He was fully conscious and his legendary sense of humour and cynicism was running at full speed. Police and paramedics were being treated to a commentary on the state of the nation and the perception of crime. It was something of a relief to see him disappear in the ambulance to the trauma unit where it was found that he had been incredibly lucky and that the bullet had missed anything vital. This very good news together with the impressive and competent professionalism of all the officials that we dealt with that night helped a little to allay the anger and fear that the incident provoked. However, I was very aware that the detectives, the policemen, and the trauma room staff also shared my own sense of frustration and despair that crimes like this will be repeated over and over again. Their efforts were mostly about providing immediate assistance and support with little prospect of being able to convict and punish the perpetrators.

The next morning, the news wires offered the story that the SA cabinet had decided to “contribute” R26 million to help Liberia with its unpaid debt to the African Development Bank. The fact that many of the people who had helped us the previous evening were unpaid volunteers and reservists, threw this latest piece of government stupidity into stark relief. Also this week I read that Interpol are delighted with the contribution being made to their operations by our very own National Police Commissioner Selebi. I wonder if their delight could possibly extend to finding a full-time job for him. With an office in Brussels or Beijing please.

Federal Reserve Governor Bernanke in Washington must also be hoping that someone in a remote location will make his predecessor, Sir Alan, an offer he could not refuse. The retired knight keeps on tottering up to microphones to announce that in his view there’s a jolly good chance that there is a recession is on the way. This sure isn’t making it any easier for the Fed to assert that the US economy is doing just fine. They will also be trying not to notice yet more bad news from the mortgage markets, the rising oil price and the rate increase announced by the European Central Bank.

Back home, the JSE, which early at the start of the week was off almost 8% from the all-time high achieved just days earlier, has been clawing its way back up. It is reported that about USD9 billion was withdrawn from emerging market funds by investors last week. This represents nearly 3% of the total assets in these funds, so I suppose the JSE survived quite well in the face of such an exit.

Reporting season on the JSE is slacking off a bit now but it revealed that late 2006 was a very profitable time for most companies. The All Share earnings base is now showing growth of 31%pa which, coupled with the price declines, has pushed the price-earnings ratio down to 15.4. In my view, this is definitely still not bargain territory and I can see very few attractive buying opportunities. Please just be patient.

There’s a slew of sport happening this weekend and many folk, particularly cyclists, will feel sore when it’s over. But not as sore as my friend who did nothing more strenuous than defend himself and his wife from the scourge of our new national sport.

Keep safe and alert and angry.

James Greener

9^th March 2007

BEARING SOUTH

I received a surprising number of comments from readers who wondered if they had been dropped from the mailing list when Tidemarks failed to arrive a few weeks ago. Now most of the recipients are folk who are not or ever will be clients so I had a brief but wicked thought about whether I shouldn’t consider a subscription fee. The idea soon vanished. If people actually paid to read this nonsense, they would then start to expect it to be regular, useful and accurate and then none of us would be happy. This weekend I shall be celebrating my younger daughter’s majority and I am about to depart for the land of the giant pineapple. In view of the way this week is panning out, I offer you this early comment and expect to receive no more complaints.

Naturally, the sole question is whether we have at last arrived at the beginning of the end of the long and powerful bull market. Of course, no one knows the answer to that question yet but some rather interesting parts of the plan are starting to come together. Firstly, on Monday the all share index set an all time record high within a whisker of 27 000. Since that moment, it has been falling almost vertically and at its worst was 5.6% lower.

Several triggers for this swoon have been identified, with one of the most popular, but to my mind inapt, being a story that the government is thinking about extending the so-called “windfall tax” to all resource companies and not just the oil suppliers. Given the facts that a.) They haven’t yet managed to decide how to squeeze the oil companies; and b.) It will be a nightmare of accounting to extend the idea to miners; and c.) The ministry concerned, denied the story; I don’t see this as being important enough to cause a huge collapse across the boards.

I am much more anxious about the contagion from the weakness being experienced in other emerging markets, especially China where in the second half of 2006 they enjoyed a bull on steroids. And then my old favourite suspect, the USA, has been releasing all manner of data which does not take much imagination to convert into good solid bear food. The poor-credit sector of the mortgage market has all but slipped into oblivion. Hordes of families who should never have been granted a mortgage in the first place, let alone ones with frills that obscured the fact that they required repayment, are handing their house keys to the bank and walked away. Many business indictors have recently turned amber and Sir Alan even mumbled a speech that contained the word “recession”.

Returning to the local markets, I note the large number of small investors who have decided just to sell because after all they do mostly have excellent profits to pocket. It is ironic that the selling so far has been happening in the dying moments of the current tax year. It is only from tomorrow that the welcome clarity of a definition for a capital gains event will come into effect! Perhaps new sellers will appear then. Other news this week included the amazing 4^th quarter 2006 growth figure of 5.6%pa for SA. The JSE market has utterly ignored this news.

I shall be tuned to Radio Oranje for much of the journey tomorrow. They punctuate their unique offering of wrinkly rock music with announcements of the rand and the gold price. Obviously maize farmers battling the drought –  there’s another piece of bear news for inflation – have little need for the share market index. I shall be in the dark about the market. Maybe I ought to leave it like that until I return to the office on Monday.

James Greener

The last day of the 2006/7 tax year.

CROUCH, TAX, PAUSE, EVADE

I am still trying to cope with one of the shock announcements in Minister Manuel’s budget on Wednesday. Can you believe that certain game rangers have not been collecting VAT from their game viewing clients? In future, for the added value of bouncing on a hot canvas seat, out of earshot of the guide’s mumbled commentary, and ingesting quantities of Bushveld insect life, tourists will now need to open their dusty wallets and extract a further 14% for the taxman. One can only hope that they actually see some buffalo in addition to feeling that they have been charged like a wounded one.

And then of course there’s the matter of amending the manner and amount of tax to be collected from dividends and other similar company distributions. This has deposited not only a cat but the aforementioned buffalo into the pigeons. Especially in respect of the preference share market, where prices took a severe battering after the budget speech. I am not certain that this panic is justified. In my view, companies that pay dividends (on both ordinary and preference shares) will now need to do some thinking about their distribution policies. Shareholders will expect to see some benefit from the 250 bp drop in the applicable tax rate. In addition, preference share issuers’ will want to ensure that these instruments continue to offer sufficiently attractive after-tax rewards that will attract investors. Fortunately, most companies were smart enough, when originating these variable rate preference shares, to recognize that future legislative changes might shift the goal posts and to make provision for such events. I fully expect in due course to see soothing and welcome announcements of the adjustments that will restore the status quo for income-hungry and tax-averse investors.

Naturally, the All Share is setting record highs even as I write this letter. The background noise of the bears whimpering and whining their warnings is getting ever more plaintive and faint. By the time the end arrives, they will have all disappeared and there will be no one around to say: “I told you so.”

Now why does the SA Rugby Union think that it would be a good idea to co-opt two women on to its “previously all-male president’s council”? The Union is delighted that two prominent Joburg female business personalities have consented to join them. This decision is on a par with the idea of getting the two front rows to touch each other before crunching together. Cries of amazement, incredulity, and amusement have greeted the sight of this weird ritual being enacted on the field. One grizzled commentator asked whether anyone at the IRB had ever been a front row forward or whether anyone had bothered to ask one what they thought of the plan. It certainly hasn’t decreased the infringements nor the potential for injury in what is actually already a contact sport without the need for a quick touch before engagement. I can’t imagine what changes the women will want to suggest. Open toed shoes in place of boots? Gloves and hats at all times? Eish.

Methinks the Aussies are playing mind games ahead of the World Cup. Whitewash defeats and key players crocked beyond repair? Oh please. Don’t forget their fine history of adjusting the betting odds. Now will someone please tell our captain not to fall for it and shoot his mouth off at the press conference.

James Greener

23^rd February 2007

NO MORE BETS PLEASE

If you ever need evidence that no one knows what the future will bring, just glance at last few years’ results from the country’s largest gold mining company. If anyone should have inside knowledge about the gold market and the gold price, it must surely be these guys? Well, not really. They are still suffering mightily from the consequences of taking some large bets a few years ago that the price would not go up anything like as much as it has. They placed their bets using a portfolio of various derivative instruments. Unfortunately, for them their view was wrong and for a year or more, the losses incurred in that portfolio have totally swamped any benefits that the recent high gold price could have delivered.

Readers of Tidemarks are already well acquainted with incorrect forecasts. Just as soon as I saw governor Mboweni beaming out at the world resplendent in a blue tie, I knew that my call for a 50bp rise in rates was doomed. He and his wise men and women decided that the price of money at the moment is just right and left the repo interest rate unchanged. Immediately the pundits began to suggest that we may have reached the peak of the interest rate cycle and the All Share index promptly raced to a new high. This leaves the bears feeling ever more foolish and lonely.

Some small consolation has come this morning from the news this morning that a shortage of green bottle glass is causing a drought for drinkers of the more exotic and expensive brews. This long-time Castle drinker faces no such problems as he settles down to cheer the Lions to victory. Brown glass rules.

The Gauteng health department has taken space in the papers to call for proposals from pie suppliers. Presumably, the present supplier is not up to scratch. Judging from the particularly seedy look on the face of national health minister while addressing a press conference recently, she may well have lunched on one or more such offending items. No doubt, the matter will be elevated up the priority lists to somewhere near level of the campaign to do something about the perceived crimes.

I spent last weekend on a journey to Grahamstown and back. The number of heavy transport vehicles on the roads is astonishing. Stuff is on the move. Wherever possible I used minor roads but even there one can find signs that economic growth is affecting nearly every one. Almost every little dorpie now boats a “China City” where cheap goods are flying off the shelves. During one refuelling stop, the wire windmill vendor’s pitch to me was somewhat ruined by his having to break off to take a call on his cell phone. While poverty is undoubtedly still widespread, one does have to wonder at the statistic that cell phone networks now have connections to almost 80% of the total population. We certainly seem to have lots to say to each other. Now please will someone prise Telkom’s grasp off the data lines and let us enjoy a similar widespread access to the internet?

For a brief while in the Mountain Zebra National Park, I was blissfully out of reach of any network. Not just for this reason but for the animals and the facilities I recommend the park should you find yourself near Cradock one day. Not a bear in sight.

I am glad that cold front has moved off now. Enjoy the weekend.

James Greener

16^th February 2007

WE ARE DEALING WITH MOUNTAINS NOT MOLEHILLS

Well, we should waste very little time in recording that as usual the All Share index set a new record high this week and that the 26 000 level is under severe threat. The cause of the bull fever this week is that the rand has gone … let’s see now … ah yes, stronger and the gold price is soaring and SA Football Association has opened its shiny new headquarters. And then, don’t forget, the government has assured us that everything is under control and that it’s merely our perceptions that make us concerned about crime.

The men with binoculars have been scanning the plains north of Joburg and report that it looks as if the governor is no longer shuffling down the trail leading towards higher interest rates. Indeed, they report ever larger herds of bureaucrats, politicians, cronies, crooks and as well as the game rangers are gathering at the water holes which are filled with cooling money from the purse of the taxpayer. All are drinking deeply and are mostly at peace with each other. None are aware of the growing dissatisfaction amongst us lesser beasts clamouring for our elected leaders and paid protectors to get away from the troughs and deliver on their promises and obligations. Night is falling and already far too many predators are about.

Today, I saw for the first time the impressive announcement about the African Information Ethics Conference that begins on Monday in Pretoria No fewer than eight taxpayer-supported outfits are proud to co-host this rubbish, where, we are assured, “quality of information will also feature prominently”. Given that the advert appears just 48 hours before the starting gun, they have already reneged on that promise. This ultra-short notice disappoints me, because undoubtedly I have long been a supplier of African Information of probably doubtful ethics. I should have been there in the front row with my sharpened pencil and notebook. And I bet the lunches will be terrific.

Just what is the purpose of all the red tape and regulation that tangles and submerges our industry? This morning the smiling (why?) face of a regulator beams out at me from a story about how a “Cape-based asset manager” had misappropriated hundreds of millions of client money. This was not the same “financial group” that has allegedly been supplementing the income of the Cape Judge President. There’s definitely something dodgy in the air down there and the mountain certainly has distracted the regulator from his duty.

I received invitations to attend both the rugby and the cricket match in the city this evening. The cricket one was quite easy to decline as I am not fond of the Twenty-20 format. Every wicket and boundary is celebrated by formations of skimply dressed young women leaping onto platforms positioned around the boundary rope and dancing wildly to loud music. I don’t like this. My seats are too far from any of the dancers to permit me to get the full impact of their energy so it is better I don’t go. The rugby heralds the start of 17 weeks of the Super 14 tournament that seems to be designed to tire and humiliate our players before the tri-nations and the world cup. There is a lot of scrumming and kicking and rucking to come this year so I don’t think I should start as early as the 2^nd of February. Actually, the weather is building up very ominously around the office now and it is very likely that Wanderers (which is just down the road) will get washed out.

Keep safe please.

James Greener

2^nd February 2007